Valve recently announced that developers and publishers will be able to set their own prices on PC games. This is the starting point for a race to the absolute bottom of PC game prices, says author Nicholas Lovell.
Lovell, author of “a growing list of books about making money in the games industry,” sets the stage by explaining marginal cost and the Bertrand paradox. The idea is that two competitors selling identical products will drive the cost down over time, undercutting each other, until they can’t cut it down anymore and continue operating. The competitors will eventually reach a point of equilibrium where they are selling their products at the same price.
He links this to the gaming world through the move to digital distribution.
In the world of digital, the marginal cost is zero, or as close to zero as makes no odds. On iOS and Android, the app stores swallow the distribution bandwidth costs, which means that the marginal cost is actually zero for many developers. In the world of PC, this is not yet true, but bandwidth costs keep falling, and the marginal cost, if not zero, is pretty small.
He says that the idea doesn’t apply one to one, because it excludes marketing, assumes identical products, and doesn’t factor in things like the cost of switching platforms, but that it shows how competition, rather than piracy, is what drives costs down.
With Steambox as a competitor to consoles and a preexisting distribution model for games, Valve is in a unique place to pull gamers in with lower prices. The price of a Steambox might be variable, but there will be hundreds or even thousands of free games for players to enjoy.
“What if Steam wants the PC market to go free because it will be a powerful competitive weapon as it battles console manufacturers?” Lovell asks.
While Lovell doesn’t expect Valve to stop supporting paid games, he sees them in a place where they can facilitate developer experimentation with both models in a way that benefits both consumers and businesses.
I’m hardly an economist, so I recommend reading Lovell’s full article on Gamesbrief. The article does a great job of highlighting the potential ramifications of Valve’s announcement.