2nd_P_discriminationPrice Discrimination is a well-known concept in microeconomics. The basic idea is quite simple. In a competitive market, firms have to accept an equilibrium price. This is because competition, in theory, should drive prices down to somewhere close to marginal cost (the cost of producing one extra good).

However, quite often in real life, a firm has some market power that enables them to set prices independently of other firms. This is possible for a number of reasons e.g. monopoly/oligopoly, patents, branding & product differentiation, etc. If a firm can separate segments of its customers, then it can get away with charging different prices to each segment. This is known as price discrimination, and it allows a firm to increase its profits.

For example, suppose there are 10 customers for your product. The first customer is willing to pay up to £1, the second up to £2, the third up to £3, and so on. In a competitive case, the price of the good is fixed at £5.50. This means that only the last 5 customers will buy your good. Your total revenue is 5*5.5 = £27.50.

But now suppose you have some additional information. The first 5 customers are all in one town where the income is low, and the last 5 are all in another town on the other end of the country, where the income is high. It is prohibitively expensive for people to travel between these towns, so we can assume there is no way of customers buying from your shop in the other town. Now, you can charge £1 in the poor town and £6 in the rich town. This way, everyone can afford to buy your good. Your revenue is now 5*1 = £5 in the poor town, and 5*6 = £30 in the rich town. Hence, by utilising price discrimination, your total revenue has increased by £7.50 to £35 in total.

We can see examples of this everywhere in real life. Most often, it is done by age for things like entertainment and transportation (child and OAP rates). Student discounts are another common method of attracting custom from those less willing to pay.

Steam

Games are becoming more and more popular, and digital purchasing of games is growing as internet connections become faster and more ubiquitous. The largest distribution system on the PC is Valve’s Steam, which aims to make the gaming experience on a computer as convenient as a games console, but still allows for the performance improvements and customisability options that are possible on a PC.

Steam as a platform is immensely interesting for an economist, but at the moment, remains more or less an untapped resource. Steam games are available in 30 different currencies, and the website SteamDB is an excellent resource for viewing in-depth statistics for each game. When a user makes an account on Steam, all their games are associated with that account. Obviously, when one signs up, one has to state their region. Although there are ways around it, such as creating multiple accounts, this is not authorised, and Valve aims to make this as difficult as possible. Since this is fixed, it allows for price discrimination based on region.

It is well-known that Steam game prices vary immensely depending on where you are in the world. For example, the current most played game is Counter-Strike: Global Offensive. The cheapest price (adjusted to US dollars) is $3.17 in Brazil, whereas the dearest is $8.91 in the UK. In other words, people in the UK are paying almost 3x the price of exactly the same product as people in Brazil. Of course, this could only ever work if the people in the regions with higher prices are willing to pay relatively more for the same product.

Data Analysis

Whilst it’s not a perfect measure of willingness to pay, GDP per capita gives us a natural starting point. To do this, I use data primarily from the World Bank, but also from the CIA and IMF where World Bank figures are not available. I first ranked the 28 Steam regions (27 countries plus the EU) based both on their nominal GDP per capita, and their PPP adjusted GDP per capita.

Next, I took the top 50 Steam games (as of today) from SteamDB, but skipping those that are not available to buy in all currencies (and obviously also those that are free to play). Each game has its own ranking of countries from the most to least expensive. From these, I averaged out the ranks and got an overall rank for each region in terms of how expensive Steam games are.1There are a couple of things to note. Firstly, I ignored the Commonwealth of Independent States, as these represent a variety of ex-Soviet countries. Secondly, Steam has two Eurozone currency regions which separate the richer from the poorer countries using the Euro. I averaged the rank of both of these to come up with an overall EU ranking.

The following table summarises the results:

Steam

The table is sorted by the difference between Steam rank and nominal GDP rank for each country. If we focus on these figures, we can see that only 10 out of the 28 regions have a Steam rank within two of their GDP rank (it’s even lower when we look at the PPP difference). This suggests that although income might be a decent proxy for willingness to pay, there must be other factors that complete the picture. One natural consideration is that demand for games is going to be different in different countries. This is likely to be due to things like the amount of people who own PCs capable of playing games, and the cultural popularity of video games. It could also be related to income inequality, which isn’t captured by raw GDP figures alone.

What we might say from this table is that countries who are lower down on the list (i.e. those where they are paying more for games than their income would warrant) seem to be willing to pay more on average for games than those higher up on the list. This is surprising, since Norway places fairly high up, and yet is a very rich country with presumably high interest in games. It also seems unlikely that the Philippines and Peru are stronger gaming markets than the EU or UK.

I do have one final thought about the high placing of Russia – who seem to very consistently be the cheapest region in Steam to buy games from. Russia is quite notable for its digital piracy, not just in games, but in other forms of media too. If the availability of free pirated games is high in Russia, then it makes complete sense to price Steam games very low in order to compete. This way, more people are likely to want to pay to get the additional benefits of owning a legitimate game (support, multiplayer options, free updates etc).

There you have it. Gamers in Singapore, Russia, Norway, Brazil, and Malaysia can rejoice at their cheap games. My condolences go to gamers in Peru, the Philippines, Europe, South Africa, and South Korea. Time for me to move to Norway…

Notes   [ + ]

1. There are a couple of things to note. Firstly, I ignored the Commonwealth of Independent States, as these represent a variety of ex-Soviet countries. Secondly, Steam has two Eurozone currency regions which separate the richer from the poorer countries using the Euro. I averaged the rank of both of these to come up with an overall EU ranking.