Standard Price for Video Games

I read an interesting article on IGN the other day (link here) about the pricing system in place for video games. The idea presented is that because different games present the player with varying degrees of value, the price of video games should be set based on the content to players, instead of simply using the standard $60 price tag.

There are a few problems with this idea. First, and most importantly, is determination of the inherent market value of any given video game. The author is clearly mixing up the concepts of ex ante data and ex post data. The concept is pretty simple. Basically, the final verdict (reviews, message board feedback, etc.) on the quality of a video game doesn't come out until after the game is released. Therefore, data regarding the value of a game is ex post data, being released after pricing decisions are already made. The decision to set a certain price for the game, however,  is made before the game is released. The data available at the time pricing decisions are made are called ex ante data, or data that forecasts into the future. In other words, from the perspective of the developer, it's rather difficult to gauge the quality of a game and to set the price accordingly without empirical data  about the game's quality which only becomes available after the game is released.

I realize that at this point, people will argue that developers are, in fact,  able to gauge the quality of any said game, due to the fact that they are the ones who made it. However, it is exactly this that creates the problem. Most developers spend so much time with the games that they are creating and become so accustomed its ebbs and flows that any apparent flaws in the game probably go unnoticed. I realize that there are play testers and beta phase tests, but the people in these tests are usually experienced gamers themselves, likely able to automatically adjust to the most unintuitive ideas. That said, I wouldn't be surprised if developers of most of the shovelware out there believe that the games they have created are actually quite superb.

Another problem with this model of value-based price setting is the fact that in many cases, value does not reflect sales. There are many good games that have flopped (see: Okami). On the opposite side of the coin, there have also been a number of not-so-good games that have sold extremely well (see: Wii Music, Wii Play). In these cases, the success of a game depended not on quality, but rather on marketing, something the author fails to take into account. In this way, video games are very similar to movies (and I might note that you don't really see a huge price differential in the DVD price or ticket price of a good movie and a bad one).

The final problem with the author's analysis of video game pricing lies in the role of price in signaling. Let's assume, for a minute, that there are only two classes of game: good games and bad games. Good games are priced at $100, and bad games are priced at $50. Do you see the problem? If price becomes an indicator of the quality of a game, what is stopping the developer of a bad game to up their price to $100 in an attempt to make their game look like a good game? It is true that in the age of the internet, the role of price in signaling is decreased. There are now much more credible ways of finding out the quality of any given video game, through internet reviews and such. However, pricing undoubtedly does act as a signal, and will have at least some effect on the pricing decisions of game makers.

So while in theory the concept of pricing games based on quality is a good one, it is a bit impractical in the real world. It may work for guaranteed hits like Fallout or Call of Duty, but for the rest of the gang, the status quo is probably a much safer option.