The world of PC video games is currently ruled by Valve, through their digital game store Steam, which boasts some 40 million users. Part of their success can be credited to their practice of providing heavy discounts on games that are a few months or a year old.
Rival company EA claims that this practice helps intermediaries like Steam while hurting the game developers who have invested a lot of resources into making quality products. David DeMartini, head of Origin, EA’s alternative to Steam, claims that such discounts “cheapen the intellectual property.” He then suggests that the system creates perverse incentives:
One criticism some have labelled at Steam is that its heavy discounts damage video game brands because gamers hold off on buying new releases at launch in anticipation of a future sale.
DeMartini agreed with this position: “What Steam does might be teaching the customer, ‘I might not want it in the first month, but if I look at it in four or five months, I’ll get one of those weekend sales and I’ll buy it at that time at 75 per cent off.’
Valve responded that DeMartini’s claim does not match the facts. Business development chief Jason Holtman first points out that, as game developers themselves, they eat their own dogfood.
We do it with our own games. If we thought having a 75 per cent sale on Portal 2 would cheapen Portal 2, we wouldn’t do it. We know there are all kinds of ways customers consume things, get value, come back, build franchises. We think lots of those things strengthen it.
In order to understand why a discount later might not impact sales today, you need only two simple concepts: time preference, and what I’ve called fanboyism and Jonathan Haidt calls “groupishness”.
The Value of the Now
I am continually impressed by the firm grasp of economic theory that public facing representatives of Valve always seem to have–even before they brought on an actual economist. In this case, Holtman clearly gets time preference.
For instance, if all that were true, nobody would ever pre-purchase a game ever on Steam, ever again. You just wouldn’t. You would in the back of your mind be like, okay, in six months to a year, maybe it’ll be 50 per cent off on a day or a weekend or during one of our seasonal promotions. Probably true. But our pre-orders are bigger than they used to be. Tonnes of people, right? And our day one sales are bigger than they used to be. Our first week, second week, third week, all those are bigger.
When asked to comment on why Steam customers are behaving the opposite of how we would expect them to, given the incentives, Holtman states “the trade-off they’re making is a time trade-off.”
Time preference is the term economists use to describe the phenomenon whereby individuals are willing to pay more for something in the present than they would be at a later date. There are a lot of reasons why something might be more valuable sooner rather than later. There’s always an element of uncertainty–you know they’ll discount any apples the store has left tomorrow, but what if they run out entirely before that? You know Valve will discount a game by a huge amount in a few months, but what if Valve goes out of business before then? What if you lose your hands before then and are unable to play video games ever again?
There are other reasons as well, which are more idiosyncratic. In an era before refrigeration or pasteurization, a bottle of milk worth five dollars today might be worth zero dollars in a week. But it wouldn’t make any sense to wait a week in order to get five dollars off, because it will have spoiled by then.
It is not intuitive on the face of it that video games should have steep discount functions. After all, video games do not spoil, and the uncertainties surrounding their future purchase aren’t much different than a lot of goods with less dramatic discount functions. So what’s going on here?
Following that argument, nobody would ever go to a first run movie ever again. Even now, as DVDs come out even faster, you’d just be like, heck, I’ll just wait and get the DVD and me and 10 friends will watch it. But people still like to go to theatres because they want to see it first, or they want to consume it first. And that’s even more true with games.
In The Righteous Mind, moral psychologist Jonathan Haidt describes how human beings are inherently group-oriented. A lot of things that we like to think we prefer because of some inherent property we actually like because of how it connects us with other people.
For simplicity’s sake, let’s say that a consumer’s valuation of a given good can be split cleanly into two parts–the value they gain from it as an individual, and its prosocial value.
In video games, the individual value would come from most of the obvious things–how fun it is to play, how challenging it is, how good the art is and how well the story is written.
The prosocial value would come from having it as a topic of conversation with all the other people who are currently playing it or only recently finished it. Anyone who bought any of the Harry Potter books near launch day knows what this is like; everyone wanted to get and read the latest book as soon as it came out so that they could immediately turn around and talk to their friends about it.
In video games there is also the added prosocial value of being able to play with other people at parties or online, and being able to connect with new people in the game.
I would argue that the individual value of a game for practical purposes never changes. To the extent that it is driven down by an increase in substitutes over time, it decreases much more slowly than the prosocial value. Much of the prosocial value is created by the fact that everyone expects everyone else to jump at a game when it is brand new; this doesn’t last long as the group then moves on to the next new thing.
So how much of the value that most consumers get from a game is prosocial, and how much is for the inherent joy of playing the video game itself?
Well, if Valve is to be believed, then the prosocial value makes up as much as 50 or 75 percent of consumer’s valuation of most games. That is an enormous fraction, and I have to wonder how much it is representative of consumer valuation more broadly.
Holtman does seem to indicate that at least some of the value is individual:
Now you can do things like say, I never did own XCOM. Maybe I should buy that for $2 or $5 and pick it up. Or I didn’t get that triple-A game from three years ago, maybe I’ll pick that up on a promotion. And that’s making people happier.
But even here there’s a prosocial element–he states that the ability to get something late for cheap is actually “making them more willing to even buy the first time release.” In other words, if you didn’t get in on Portal 1 when it came out, but had a bunch of friends who were, you can “catch up” now for cheap, and then when Portal 2 comes along you’re more likely to pay the premium to be part of the group.
A lot of people in behavioral economics and moral psychology take their findings to be at odds with standard economic models. But I have always seen them as complementary; as giving us a much better idea of how subjective values are arrived at in the real world. I also share Yanis Varoufakis’ optimism that digital systems like Steam will provide even more insight into human nature than traditional social science experiments or data mining ever could.
In short, it’s a very exciting time to be interested in social science. Also, an exciting time to be a gamer!