The Free-to-Play Game Economy: Selling Pixels for Billions

The video game industry is a multi-billion dollar market, totaling almost $200 billion by 2022.  However, consumer spending is now becoming part of the games themselves, as opposed to simply purchasing the games in hard copy or download.  Players of online games can purchase additional game features and access, as well as compete financially within the game through avatars (first-person characters).  In-game economies have become measures of players’ success, with the goal being to accumulate digital tokens and resources.

History of In-Game Economies

In-game economies were pioneered around the turn of the century with the rise of online gaming.  Prior to this, video games were one-time purchases, either at an arcade in the late 1970s and 1980s or as game cartridges and disks in the late 1980s and 1990s.  Games that simulated real-world environments in the early 2000s, such as the Grand Theft Auto series, allowed players to attain virtual currency within the game that could be exchanged for tools, weapons, health, etc.  

2009 saw the emergence of in-app purchases during gameplay, allowing players to use a linked payment account in real time to buy additional features.  This led to growing markets for desirable game features, such as rare tools, “skins” (character appearance packages), or player abilities.  As of 2024, a strong majority of online gamers reported having made at least one in-game purchase, with more than 3 in 5 adults playing online video games at least occasionally.  These games range from simple games within social media platforms, such as the popular Candy Crush, to more advanced online games with thousands of simultaneous players like Clash of Clans.

Behavioral Economics and In-Game Economies

Game designers use many tools to capitalize on human psychology and influence gamers’ desire to make in-game purchases.  The use of psychological principles and biases to influence consumption or production is known as behavioral economics.  As in the real world, sellers use behavioral economics tools when marketing purchase options within video games to encourage desired purchases.  These are often behavioral nudges to subtly influence a consumer to pick a certain option.

Behavioral Nudges Explained

A behavioral nudge involves manipulating the surrounding environment to direct a consumer to complete a desired behavior.  This can involve making desired purchases easier to see, such as placing certain items at eye level in a store.  Another common tactic is price anchoring, where sellers influence buyers to purchase a larger size by making smaller sizes almost the same price.  If the small size is not much cheaper, why not get the regular size?  Sellers can do this as effectively within a video game as in real life.  

Repetitive reminders of paid options and offering limited-time free trials of paid features are a common tactic of behavioral nudges within online games or apps.  Showing features that are available with a paid subscription, but making them inaccessible to non-payers, is another example.  The goal is that consumers will get tired of seeing a desirable feature they cannot access in the free version and eventually upgrade to the paid version.  Games and apps can also try to use the bandwagon effect to convince users that a majority of their peers are joining the paid version to access more features, regularly showing statistics and alleged user testimonies to that effect.

In-Game Economics Examples of Behavioral Nudges

Games often use bar graphs to measure the remaining life, money, or other features of players’ relative success.  When the bar drops below a certain point, various alerts can be used to heighten players’ anxiety and urge them to make an in-game purchase of whatever is dwindling.  Similarly, times that count down toward zero, at which point the player will lose something, can be used to encourage players to make purchases to reset the timer.  This hearkens back to arcade games where players needed to insert more quarters or tokens to reset the timer and keep gameplay flowing.  

In-game purchase options can be advertised as rare or limited-time-only to encourage players to purchase quickly.  This is similar to companies offering sale items to online customers on a random basis, making them feel that they must purchase immediately to capitalize on the deal.  In reality, the sales and limited-time deals may be more common than is perceived, with sellers using psychological biases to manipulate consumers’ perceptions of supply.  Another tool is a loot box, or unknown trove of items that may contain especially desirable pieces.  Gamers may purchase loot boxes in hopes that a low-price purchase will reward them with a rare and valuable tool.  Here, the perceptions of supply are reversed: consumers may mistakenly believe that the chance of getting a valuable treasure is more likely than it actually is.

Online Gaming as Third-Party Entertainment

Today, millions of people watch others play video games as part of either the streaming entertainment or esports industries.  Viewers on esports platforms like Twitch can even subscribe to watch popular esports players, who can monetize their profiles to make money similar to content creators on YouTube.  Therefore, people not only pay to play video games on their own, but also pay to watch others play these games in an entertaining fashion.  As video games have gotten more visually complex and similar to real-life action, many viewers may feel that watching them is similar to watching a Hollywood action movie.

Some gamers may spend substantial amounts of money on in-game purchases in hopes of becoming the next Twitch star.  Top Twitch streamers, after all, can net over a hundred thousand dollars per month, allowing them to compete in esports as a full-time career.  Trying to become a top Twitch streamer through in-game purchases to elevate gameplay is a very risky investment, as there are many competitive gamers vying for stardom and factors other than game success are important in becoming a popular Twitch streamer.  Thus, some amateur gamers may spend large amounts of money on in-game purchases and never achieve streaming success, resulting in a financial loss. 

Should Behavioral Nudges in Online Gaming be Regulated?

Many people are critical of the use of behavioral nudges in online gaming, arguing that they are similar to “dark nudges” in gambling that influence people to take greater risks.  These dark nudges work in both brick-and-mortar and online gambling to distract the gambler from the true amount of risk they face.  Thus, gambling has often been considered a negative externality because it incurs social costs to third parties when gamblers lose money that would have otherwise gone to the benefit of those parties (i.e., the monthly rent or mortgage payment).

With online gaming, behavioral nudges can increase the risk of users, especially young people, developing Internet addictions.  While Internet addiction is hard to measure, as it encompasses many forms of Internet use, one study estimates that close to 15 percent of all Internet users qualify for one form of addiction or other, ranging from social media addiction to gaming addiction to pornography addiction.  Proponents of limiting Internet use want governments to regulate the use of behavioral nudges in online gaming that entice players to spend money within the games and/or spend more time playing. Similar to gambling addiction, Internet and online gaming addictions have high social costs by limiting addicts' abilities to help their families or participate productively within society.