The Economics of Microtransactions: Consumer Surplus And Whales

In order to understand why so many players are willing to spend money on microtransactions in games, one must understand a key economic concept: Consumer surplus.

Consumer surplus is the amount of value the consumer receives from a product above what they paid for it. If you’ve ever eaten a $20 steak and said aloud “That steak was so good I would have paid $100 for it,” those eighty extra dollars are the consumer surplus.

Of course, it’s much more difficult to measure the value of a game. When players buy a retail game, they get between 0 dollars and infinity dollars of value from it. Think about the millions of players who have sunk hundreds, even thousands of hours into Skyrim, having spent just $60. How much money is that time really worth to them?

F2P games take this equation and completely flip it on its head by making a gamble: If you give away the game for free, will some players spend money equal to the consumer surplus it generates for them personally? And will that money be enough to offset all the players who spend no money at all?

Now, you may have heard the term “whale” to describe people who spend a lot of money on games with microtransactions. This term is borrowed (unfortunately) from casinos, which watch and categorize players into different types and then treat them accordingly. “Whales” are the big spenders who get the personalized VIP treatment with lots of “free” stuff like meal vouchers and room upgrades, because they tend to spend (i.e. lose) a lot of money gambling.

Just as casinos sort players by monitoring their behavior closely, the modern age of game analytics has enabled a similar level of observation and adjustment in treatment for gamers, and the revelation that f2p games subsist mostly on whales the same way casinos do.

For these players, the amount of value the game is generating to them is massive, worth from thousands, to tens of thousands, to hundreds of thousands, to possibly even millions of dollars worth. And they’re willing to spend that money, because they have determined that that’s what the game is worth to them.

To wrap it up, there are a few important factors to consider:

  1. How much has the player paid for the game initially?
  2. How much value are they getting from the game after that initial investment? That’s the consumer surplus.
  3. How much additional money can they spend in the game to close the gap between 1 and 2?

Of course, there are myriad game design questions to answer as well, plus questions of marketing and even ethics, but those are all topics for another time.

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