Group for Research in Decision Analysis

The video games industry: Pay-to-play vs. free-to-play

Peter M. Kort Tiburg University, Netherlands

The global video-game market is more than twice the size of the recorded-music industry, nearly a quarter more than the magazine business and about three-fifths the size of the film industry, counting DVD sales as well as box-office receipts. PwC predicts that video games will be the fastest-growing form of media over the next few years, with sales rising to $82 billion by 2015. The industry is becoming increasingly fragmented as its markets become more differentiated. This implies firms active in this industry have not much to deal with competition. Instead, what is important is developing brand image, which makes it especially suitable for optimal control modeling.

We design a model where in Stage 1 we have a subscription business model, whereas in Stage 2 we have a microtransaction business model. In the subscriptions model everybody spent a small per month subscription amount, while in the microtransaction mode a small portion of the user base pays, which are the ones that are extremely enthusiastic about spending a lot of money on it. The firm decides about the optimal time to switch, and the diverse pricing and advertising strategies.

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