Freemium Pricing in Digital Games with Virtual Currency

Abstract

Providers of free-to-play games often gain revenue by monetizing players’ playtime, for example, through in-game advertising and by selling premium modules of the game. One emerging strategy to sell the premium module, known as the virtual selling strategy, is to set the module price based on an amount of virtual currency that players can either spend on playtime to earn or use real currency to buy. In this paper, we examine how the virtual selling strategy leads to different market outcomes than the traditional real selling strategy where players can purchase the premium module using real currency only. We focus on the differences caused by one specific feature—players can pay for the module indirectly using their playtime in the virtual selling strategy. We show that when the provider’s efficiency of monetizing players’ playtime, that is, the time revenue rate, is above a threshold, the virtual selling strategy will benefit the provider and hurt the overall consumer surplus compared with the real selling strategy, even though players in the virtual selling strategy have one additional way, that is, using their playtime, to pay for the module. We identify an undocumented overcompensation effect that causes the profit augmentation and the surplus reduction. The overcompensation effect also results in a U-shaped relationship between the equilibrium module price and the time revenue rate in the virtual selling strategy when the module only provides a small number of new gaming stages. It contradicts the traditional result from the real selling strategy that the provider shall reduce the module price when she becomes more efficient in monetizing players’ playtime.