Pricing and Design of Pay-to-Win Add-Ons

In player-versus-player video games, players’ natural desire to win and avoid losing has created an opportunity for game developers to sell “pay-to-win” add-ons, digital items that give buyers a competitive advantage against other players. In this paper, we investigate the pricing and design of a pay-to-win add-on, its effect on the base game, and profit implications for the developer. When a large share of the players are less price sensitive and highly willing to buy the pay-to-win add-on, we find that, surprisingly, the developer may prefer not to introduce it. Further, when it is optimal to sell the add-on, the developer designs it to be less (more) powerful in games where players are highly (moderately) sensitive to losing. In practice, the developer may design rewards or penalties in the game to influence players’ sensitivities to winning and losing, respectively. Our findings suggest that when selling a pay-to-win add-on, the developer ideally prefers players’ loss sensitivity to be neither too high nor too low, whereas high win sensitivity tends to benefit the developer. The introduction of a pay-to-win add-on influences the optimal pricing and design of the base game. In particular, the developer decreases the base game price and may even sell it as a freemium. Despite the price reduction, investment in game quality may actually increase. From the players’ perspective, our analysis shows that the introduction of a pay-to-win add-on can actually improve player surplus. In an extension of our core model, we show that the developer may prefer to customize player-to-player matching probabilities based on ownership of the pay-to-win add-on, making players who own it more likely to be matched against nonowners. However, such customization is not always optimal, and under some market conditions, the developer may optimally abstain from customizing matching probabilities. In another extension, we show that the developer may benefit from setting a negative price for the base game; counterintuitively, player surplus does not increase from negative pricing.