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Article: Loot box pricing and design

TitleLoot box pricing and design
Authors
KeywordsBundling
E-commerce
Loot boxes
Probabilistic selling
Video games
Issue Date2021
Citation
Management Science, 2021, v. 67, n. 8, p. 4809-4825 How to Cite?
AbstractIn the online video game industry, a significant portion of the revenue is generated from microtransactions, where a small amount of real-world currency is exchanged for virtual items to be used in the game. One popular way to conduct microtransactions is via a loot box, which is a random allocation of virtual items whose contents are not revealed until after purchase. In this work, we consider how to optimally price and design loot boxes from the perspective of a revenue-maximizing video game company and analyze customer surplus under such selling strategies. Our paper provides the first formal treatment of loot boxes, with the aim to provide customers, companies, and regulatory bodies with insights into this popular selling strategy. We consider two types of loot boxes: A traditional one where customers can receive (unwanted) duplicates and a unique one where customers are guaranteed to never receive duplicates. We show that as the number of virtual items grows large, the unique box strategy is asymptotically optimal among all possible strategies, whereas the traditional box strategy only garners 36.7% of the optimal revenue. On the other hand, the unique box strategy leaves almost zero customer surplus, whereas the traditional box strategy leaves positive surplus. Further, when designing traditional and unique loot boxes, we show it is asymptotically optimal to allocate the items uniformly, even when the item valuation distributions are heterogeneous. We also show that, when the seller purposely misrepresents the allocation probabilities, their revenue may increase significantly, and thus, strict regulation is needed. Finally,we show that, even if the seller allows customers to salvage unwanted items, then the customer surplus can only increase by at most 1.4%.
Persistent Identifierhttp://hdl.handle.net/10722/322060
ISSN
2021 Impact Factor: 6.172
2020 SCImago Journal Rankings: 4.954

 

DC FieldValueLanguage
dc.contributor.authorChen, Ningyuan-
dc.contributor.authorElmachtoub, Adam N.-
dc.contributor.authorHamilton, Michael L.-
dc.contributor.authorLei, Xiao-
dc.date.accessioned2022-11-03T02:23:20Z-
dc.date.available2022-11-03T02:23:20Z-
dc.date.issued2021-
dc.identifier.citationManagement Science, 2021, v. 67, n. 8, p. 4809-4825-
dc.identifier.issn0025-1909-
dc.identifier.urihttp://hdl.handle.net/10722/322060-
dc.description.abstractIn the online video game industry, a significant portion of the revenue is generated from microtransactions, where a small amount of real-world currency is exchanged for virtual items to be used in the game. One popular way to conduct microtransactions is via a loot box, which is a random allocation of virtual items whose contents are not revealed until after purchase. In this work, we consider how to optimally price and design loot boxes from the perspective of a revenue-maximizing video game company and analyze customer surplus under such selling strategies. Our paper provides the first formal treatment of loot boxes, with the aim to provide customers, companies, and regulatory bodies with insights into this popular selling strategy. We consider two types of loot boxes: A traditional one where customers can receive (unwanted) duplicates and a unique one where customers are guaranteed to never receive duplicates. We show that as the number of virtual items grows large, the unique box strategy is asymptotically optimal among all possible strategies, whereas the traditional box strategy only garners 36.7% of the optimal revenue. On the other hand, the unique box strategy leaves almost zero customer surplus, whereas the traditional box strategy leaves positive surplus. Further, when designing traditional and unique loot boxes, we show it is asymptotically optimal to allocate the items uniformly, even when the item valuation distributions are heterogeneous. We also show that, when the seller purposely misrepresents the allocation probabilities, their revenue may increase significantly, and thus, strict regulation is needed. Finally,we show that, even if the seller allows customers to salvage unwanted items, then the customer surplus can only increase by at most 1.4%.-
dc.languageeng-
dc.relation.ispartofManagement Science-
dc.subjectBundling-
dc.subjectE-commerce-
dc.subjectLoot boxes-
dc.subjectProbabilistic selling-
dc.subjectVideo games-
dc.titleLoot box pricing and design-
dc.typeArticle-
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1287/mnsc.2020.3748-
dc.identifier.scopuseid_2-s2.0-85112131257-
dc.identifier.volume67-
dc.identifier.issue8-
dc.identifier.spage4809-
dc.identifier.epage4825-
dc.identifier.eissn1526-5501-

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