Distribution, Competition, and Antitrust / IP Law

If You Discount It, And They Don’t Come . . . .

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Researchers at my alma mater (including Steven Levitt of Freakonomics fame) recently reported the results of an interesting study: discounts offered on virtual goods (i.e., in-app purchases in connection with online video games) did not stimulate increased demand for the virtual goods.

Analysis of players’ responses to the discounts show that:

  • Quantity discounts had virtually no effect on the share of players making a purchase.
  • Customers who made small and infrequent purchases tended to spend more when offered the largest quantity discounts, while customers who were already large buyers tended to spend less. The net result was no impact on revenues or profit.
  • Data suggests some consumers who would have made small purchases were discouraged from doing so when faced with large quantity discounts.

These results are counter-intuitive and contrary to standard theory.  Is there something different about virtual goods that alters the shape of the demand curve?

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