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,” well, that $80 is the consumer surplus.

The game industry has been trying to close the consumer surplus gap for a while now with special editions and, to a degree, DLC.  But the truth has always been that many players spend $20-60 on a game (for a regular edition) and get between $0 and $infinity value from it. I’ve certainly received more than $100 of enjoyment from Doom 2, between replaying it over and over again and playing through many levels of user-created content.

And there are whole lot of games in my Steam library that I have received zero dollars of value from, because I’ve never even opened them yet!

F2P games take this equation and completely flip it on its head by making a gamble: If you give enough players the game for free, will enough of them find the game enjoyable enough to spend money proportional to the consumer surplus the game generates?

Now, you may have heard about the term “whale.” This is borrowed (unfortunately) from casinos, which watch and categorize players into different types, and will treat them accordingly. The whales are the big spenders, who get the personalized VIP treatment.

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 a million dollars worth. And they’re willing to spend that money, because they can afford it and, most importantly, because the game is making them happy.

This is dependent, of course, on the game being designed to facilitate spending that much money. Not all games are, and that kind of design may or may not be appropriate for any given game. Many skill-based games that focus on cosmetic items only are making a deliberate choice to limit the amount of money that can be spent on the game, whereas “loot box” games can manipulate the item odds so that it can take a nearly-infinite amount of money to obtain the most desirable items.

To wrap it up, there are a few important dimensions 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 or marketing and even ethics, but those are all topics for another time.

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