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Nested Network Effects in Online Free Games with Accessory Selling

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  • Wu, Chi-Cheng
  • Chen, Ying-Ju
  • Cho, Yung-Jan

Abstract

We analyze the innovative business model of free online games in which game players do not pay subscription fees and the firms generate their revenue by selling accessories—namely, virtual items within the games. The online game market is modeled as a nested network, with the segment of accessorized buyers embedded within that of game players. Both segments exhibit local network effects within the segments, and they impose crossed network effects on each other. We demonstrate that offering free games emerges as the revenue-maximizing strategy when the positive network effect of the game is high and the negative network effect of the accessory is low. We distinguish between two major types of accessories—namely, weaponries and decoratives—via their network effects. The weaponries impose a threat on the game players and subsequently confine the growth of the game; this negative effect is absent for the decoratives, which can thus be priced higher. We also generalize our findings related to online games to cope with other types of network-based free services, ranging from social networks to various kinds of information intermediaries.

Suggested Citation

  • Wu, Chi-Cheng & Chen, Ying-Ju & Cho, Yung-Jan, 2013. "Nested Network Effects in Online Free Games with Accessory Selling," Journal of Interactive Marketing, Elsevier, vol. 27(3), pages 158-171.
    • Handle: RePEc:eee:joinma:v:27:y:2013:i:3:p:158-171
    DOI: 10.1016/j.intmar.2013.04.001
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    4. Shaheer, Noman & Chen, Liang & Yi, Jingtao & Li, Sali & Su, Huiwen, 2024. "Network effects, word of mouth, and entry performance: A study of digital freemium products," Journal of World Business, Elsevier, vol. 59(6).
    5. Marchand, André & Hennig-Thurau, Thorsten, 2013. "Value Creation in the Video Game Industry: Industry Economics, Consumer Benefits, and Research Opportunities," Journal of Interactive Marketing, Elsevier, vol. 27(3), pages 141-157.
    6. Jang, Seongsoo & Chung, Jaihak, 2021. "What drives add-on sales in mobile games? The role of inter-price relationship and product popularity," Journal of Business Research, Elsevier, vol. 124(C), pages 59-68.
    7. Rong, Ke & Ren, Qun & Shi, Xianwei, 2018. "The determinants of network effects: Evidence from online games business ecosystems," Technological Forecasting and Social Change, Elsevier, vol. 134(C), pages 45-60.
    8. Mäntymäki, Matti & Salo, Jari, 2015. "Why do teens spend real money in virtual worlds? A consumption values and developmental psychology perspective on virtual consumption," International Journal of Information Management, Elsevier, vol. 35(1), pages 124-134.
    9. Irfan Kanat & T. S. Raghu & Ajay Vinzé, 2020. "Heads or Tails? Network Effects on Game Purchase Behavior in The Long Tail Market," Information Systems Frontiers, Springer, vol. 22(4), pages 803-814, August.
    10. Xiaohan Shen & Jhony Choon Yeong Ng & Xin Tan, 2016. "An Empirical Study on the Antecedents to College Student Online Game Addiction in China," Indian Journal of Commerce and Management Studies, Educational Research Multimedia & Publications,India, vol. 7(1), pages 08-11, January.
    11. Hamari, Juho & Hanner, Nicolai & Koivisto, Jonna, 2017. "Service quality explains why people use freemium services but not if they go premium: An empirical study in free-to-play games," International Journal of Information Management, Elsevier, vol. 37(1), pages 1449-1459.
    12. Yan Huang & Stefanus Jasin & Puneet Manchanda, 2019. "“Level Up”: Leveraging Skill and Engagement to Maximize Player Game-Play in Online Video Games," Information Systems Research, INFORMS, vol. 30(3), pages 927-947, September.
    13. Wang, Dianwen & Yang, Zhilin & Ding, Zhihua, 2019. "Is Sociability or Interactivity more Effective for Enhancing Performance? Findings from a Massively Multiplayer Online Role-Playing Game," Journal of Interactive Marketing, Elsevier, vol. 48(C), pages 106-119.

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