Two-part tariffs in the online gaming industry: The role of creative destruction and network externalities

Playing computer games online is a fast growing, billion dollar industry which has received little academic attention. The industry exhibits a number of interesting economic features. The industry structure is determined by creative destruction as in Aghion and Howitt (1992) [Aghion, P., Howitt, P. 1992. A model of growth through creative destruction, Econometrica, 60(2), 323-351], with game makers experiencing market power within a genre until the game is superceded. Furthermore, the attractiveness of playing a game online depends on the existence of opponents (positive network externalities) while technical and reputational problems eventually arise (negative network externalities). We model the choice of two-part tariffs by a monopolist under creative destruction and network externalities and derive conditions for the multiple equilibria which currently exist in the industry.