Peer Influence in Online Social Games: Understanding its Effect on Willingness to <i>Play</i> and Willingness to <i>Pay</i>

Abstract

An increasingly popular trend in online businesses is the adoption of freemium model, in which premium features are provided along with free features. By providing free features to a large fraction of users and by managing social networks allowing users to making friends and interact with each other, suppliers leverage the power of social influence to encourage payment for premium features. We study whether and how social influence affects infrequent consumption level decisions of users over time in a freemium environment. Using data from a famous online social game in China, we propose a fixed effects type II Tobit model with instrumental variables to verify the impact of peer consumption on two types of consumption behaviors of players: play time (free features) and payment for premium features. We find evidence of positive social influence, and uncover an interesting pattern that social influence via playing behavior is much stronger, compared to that via paying behavior. Additional analysis indicates that high/low-pay players are differently influenced by peer consumption, implying heterogeneous social influence in social network. This study confirms the value of free users in operations of online businesses with freemium model, and suggests several promotional strategies that leverage consumption of free and premium features of users in such environments.