Player-vs.-Player Game Design and Pricing: A Tournament Design Perspective

Player-versus-player (PvP) games often allow users to purchase superior virtual gears to increase their winning odds in battles against others. This game design, known as “pay to win,” generates substantial revenues from paying players, but it may also adversely affect the gaming experience of nonpaying players and lead to a decline in the game’s popularity. Game developers thus need to strike a balance between revenue and player participation. This paper develops a model to analyze optimal versioning and pricing strategies for PvP games. Building on the classic product line design framework with network effects, we allow a monopolistic game developer to strategically manipulate gameplay (dis-)advantages across different versions, which we refer to as tournament design, and this generates version-specific network effects. We characterize the developer’s optimal strategy and obtain the following insights. First, tournament design improves the developer’s flexibility in pricing and versioning, and it effectively mitigates the extent of product cannibalization. Second, tournament design enables the developer to monetize free players’ participation by offering multiple free versions, and a “freemium” strategy (i.e., the combination of a free-to-play model and a pay-to-win system) can arise in the optimum. Third, tournament design is particularly effective in increasing the developer’s profit when players are willing to play the game but are reluctant to pay. Fourth, tournament design leads to a Pareto improvement for both the developer and all players. The practical implications of these findings are also discussed.