Play It Again, Sam? Versioning in the Market for Second-hand Video Game Software

Information goods are characterised by high fixed costs and low marginal costs of production. A potentially effective strategy that can be adopted by firms operating in such markets is versioning, whereby various features are added or subtracted from a number of distinct versions of the good. This effectively serves as a means of second-degree price discrimination designed to extract prices closer to the maximum willingness to pay from different groups of consumers. This study tests the effectiveness of versioning as a means of exploiting differences in willingness to pay in second-hand markets for information goods by undertaking the first hedonic price analysis of video gaming software. The empirical evidence presented in this paper is based on the analysis of an extensive cross-sectional dataset consisting of over 5000 observations of pre-owned video game prices in the USA. Controls are introduced for a variety of other observable characteristics, including the quality of the game-play experience, the publisher, genre and theme of the game. The results are consistent with theoretical expectations and demonstrate that significant variations in willingness to pay can be exploited through the strategic use of versioning. The practice is therefore argued to represent an effective means by which firms in these markets can enhance revenues.