Applying the concept of economic scarcity to F2P

I respect the current models designed to monetise free-to-play games. They use that ol’ chestnut concept of ‘opportunity cost’ to encourage players to internalise the value of their time, and convert that into revenue for the publisher – that is if their time is worth more than the price set for goods and services in game, they’ll plonk down some cash and be on their way.  It is a system that obviously works so well that it has become the industry norm.   But diminishing returns are setting in, some of the bigger free-to-play developers and publishers are struggling to reach the heights of profit they have in the past, and players are using free-to-play as just that.  Something that is absolutely free.

It’s time for a change.  Opportunity cost has run its course, and so its time to employ another one of those brilliant economic concepts to try and get the money flowing again.

The problem with these free game economies is that they aren’t closed.  They are effectively infinite in supply of goods, as long as demand for those goods keeps coming.  This means that prices for those goods don’t shift even if there is a great shock in demand.  ‘Resources’ and the goods therein are, whether it be loot drops, resources required to tend to crops or lives are all in infinite supply and largely only restricted by arbitrary rules placed on the player.  This leads to a situation whereby most players won’t convert into revenue unless the condition whereby their time or progress in the game is worth more than their valuation of the cost to purchase those commodities, and outside of this there is no real disadvantage to staying ‘free’.  This may only be a small proportion and for those with ample time, or low value of progress in the game, there is never an incentive to move away from the notion of free entertainment.

Having a model that eliminates this endless supply would be a decent way to remove this constraint.  We have grown accustomed as players to in-game economies that are not reflective of how markets work in the real world.  But what if a free-to-play video game economy was entirely closed and subjected to resource and item scarcity?  That is that the in-game economy including items and factors of production, are bound by the same rules and restrictions that face markets in real life.  New in game progress can only be ‘produced’ if the factors of production are available, and as the number of players participating in the game increases, so too does scarcity.  Free suddenly becomes more expensive.

So how do you monetise that?  Well the simplest way would be to follow a pretty standard model of providing benefits by way of greater ‘efficiency’ or ‘productivity’.  In the real world the Cobb Douglas production function in its simplest form includes a variable that embodies increases in production not related to capital or labor inputs – defined as total factor productivity.  Generally it is taken as a proxy for innovation, technological change or advancements, or other measures of increased efficiency. By playing with this concept it may be possible to provide the incentive to pay in order to increase a player’s overall personal ‘economy’.   Whether that incentive is a permanent increase in the player’s in-game efficiency, a temporary advantage, or giving players access to a new and unconstrained market in order to ‘import’ goods to sell in the the free-to-play arena.  The aim though is always the same – giving players a way to be comparatively more efficient within a constrained environment.  If well-designed and compelling that efficiency gain will drive progress, the game’s equivalent of revenue.

By imposing scarcity into a closed in-game economy you can remove some of the problems that are starting to plague free to play developers.  Falling revenues and low conversion are likely to continue to be the biggest risk facing developers and finding a new way to price F2P will become an increasing focus for many looking to provide a greater return to investors.  I am a firm believer that a game must be appealing, fun, to a consumer in order to get them playing – spending after all is a function of demand, which is a function of consumer preferences.  A game can’t change a player’s preference, but it can appeal to it. And this should always be the aim of monetization.  While the above idea is abstract, inconsistent and absolutely incomplete, it does point of some of the flaws of current free to play models, and attempts to address them by applying real world economics.  Something needs to change for the industry to remain sustainable, and a scarcity-based model is as good a place as any to start.

Sir Gaulian is an economist by trade and has a serious thing for auction and pricing theory.  Follow him on twitter @oldgaulian and keep the discussion going below.