Lottery Premium in Video Gaming Environment

• Název práce v češtině: Loterijní prémie v prostředí videoher
• Název v anglickém jazyce: Lottery Premium in Video Gaming Environment
• Klíčová slova anglicky: Lottery premium, Video game industry, Loot box, Risk preferences, Utility in gambling, Willingness to pay, Decision-making process
• Akademický rok vypsání: 2018/2019
• Typ práce: bakalářská práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: Mgr. Michal Šoltés, M.A., Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 14.05.2019
• Datum zadání: 14.05.2019
• Datum a čas obhajoby: 09.06.2021 09:00
• Datum odevzdání elektronické podoby: 04.05.2021
• Datum proběhlé obhajoby: 09.06.2021
• Oponenti: Mgr. Barbara Pertold-Gebicka, M.A., Ph.D.

Seznam odborné literatury

C. Faustino, Horácio & João Kaiseler, Maria & Marques, Rafael. (2009). Why Do People Buy Lottery Products?.

Chateauneuf, A. & Cohen, M. J Risk Uncertainty (1994) 9: 77. https://doi.org/10.1007/BF01073404

Thaler, Richard & Johnson, Eric. (1990). Gambling With the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice. Management Science. 36. 643-660. 10.1287/mnsc.36.6.643.

Ng, Yew-Kwang. (1965). Why do People Buy Lottery Tickets? Choices Involving Risk and the Indivisibility of Expenditure. Journal of Political Economy. 73. 530-530. 10.1086/259077.

Conlisk, J. J Risk Uncertainty (1993) 6: 255. https://doi.org/10.1007/BF01072614

Gul, Faruk. “A Theory of Disappointment Aversion.” Econometrica, vol. 59, no. 3, 1991, pp. 667–686. JSTOR, www.jstor.org/stable/2938223.

O'Donoghue, Ted, and Jason Somerville. 2018. "Modeling Risk Aversion in Economics." Journal of Economic Perspectives, 32 (2): 91-114, https://pubs.aeaweb.org/doi/pdf/10.1257/jep.32.2.91.

Předběžná náplň práce v anglickém jazyce

Research question and motivation

The main research question of this thesis is to test whether risk-seeking behaviour of customers is sufficient to justify participating in video-gaming industry gambling, when an alternative of purchasing same reward in a risk-free way for fixed price exists. Alternatively, I hypothesize presence of lottery premium suggesting that consumers derive utility not only from the lottery outcome itself, but also from playing the lottery. I suppose that video-gaming environment; in which subjects (arguably) derive utility from playing is a proper environment to study such behaviour. Understanding if and when players pay to play may help us understand why some individuals spend significant amount of money playing lottery despite a negligible chance of winning and potentially mimic negative externalities and internalities of their behaviour.

Loot boxes (loot crates) are nowadays known as virtual consumable items generating randomized virtual content of different value (quality), often purchasable only via real money. A concept of loot boxes (known since 1800s) experienced great boom in the 90s with CCG (e.g. basketball cards, Magic: the Gathering and Pokémon). Some of those yielded revenue over 1 billion USD per year (Jamieson 2011). An implementation into video game industry began in 2004, but a real expansion across all platforms and games happened in 2016. Earnings from loot crates are 30 billion USD worldwide per year. It is estimated that by 2022 the amount will be 50 billion USD per year and further rise in future (Juniper Research 2018).
A controversy of the loot boxes is that some authorities consider them to be a form of gambling aimed at children and adolescents, therefore it lies in a grey zone between gambling and gaming.

My hypothesis states that in this market exists a variable representing the lottery premium which causes that the customers are willing to participate in the gambling although the expected value is lower, even after a correction for the risk-seeking behaviour, than value of the risk-free purchase of a specific item and that the variable is significant with respect to the price that people are willing to pay for the loot boxes. In other words, the players are willing to pay more money for the random process with an unsure result than for the same sure one. Once shown that this premium exists, I plan to study significant factors influencing the volume of the premium. Once we understand the motivation behind participating/not participating in gambling in the market we can use the findings to elicit decision-making process of the individuals in this environment.

The importance of this research lies in providing us with essential information to perform further studies, namely impact evaluation focused on regulations levied on loot boxes and finding the optimal one. Furthermore, despite relatively low external validity, my results may help us to understand gambling behaviour.


Contribution

Although governments pass laws that radically influence this environment (bans, age restrictions) there has been no economic evaluation written on this specific market so far. There exist several psychological papers such as: Is the buying of loot boxes in videogames a form of gambling or gaming?, written by Professor Mark D. Griffiths, but from the perspective of economics this issue remains underexplored. I aim to contribute to behavioural economic research at the field of gambling and extend it to video-gaming industry, which is going through a transformation of shifting used to be model of pay-to-play into pay-to-win scheme. The development in virtual reality promises a great future to the industry, whose market value is estimated to growth from 135 billion USD value today up to 160 billion USD by 2022 (Juniper research 2018). To be able to create valid economic predictions and models that can help find the middle ground among regulators, distributors, and customers we must understand the risk preferences and other motivators of gambling participation of the customers, therefore it is important to develop economic research at this field and its monetization now.

Methodology

At first I will use already existing knowledge on decision-making process, risk preferences (Gul 1991, Kwang 1965), utility
in gambling (Conlisk 1993), and data collected through a survey to develop a utility function capturing the risk aversion/risk seeking behaviour (O´Donoghue and Somerville 2018). From there I will be able to create a linear regression model. Using OLS method and with the knowledge of willingness to pay (from the survey) I will be able to firstly estimate a lottery premium and confirm whether it is significant variable regarding the willingness to pay or not and secondly the influence of other variables in terms of the premium volume.

As there is a game heterogeneity (existence of inner market, ability to purchase the specific good directly without risk, quantity of monthly active players, initial purchase of game, etc.), whose omission would cause bias at game level analysis, in which they can be replaced by a fixed effects model. If the lottery premium appears to be significantly higher in a specific game, we can use so far omitted variables to help us understand why it is so.

I will work with the data collected through the survey that will help me understand the decision-making process at the customer level. I will be performing survey during 8 months period starting in August 2019 and finishing in March 2020 on monthly basis through different communities of players on live streams, forums, fan pages and YouTube channels and game channels to gain data from as heterogeneous sample as possible to validly represent the whole population of players. To cover most often types of loot boxes I will gather the data on the 4-6 most popular games from which each one represents a specific type of loot box.

The data that I will collect consist of: age, sex, nationality, education (including current study), time played per week, monthly income, source of income spent in-game on loot boxes (monthly), the way of purchase (credit card, Paysafecard, Pay Pal), purchases on regular basis or increased during special events, number of friends playing with the subjects regularly (at least once a week), watching streaming platforms featuring the game (YouTube/twitch.tv) and more. To elicit willingness to pay in systems without inner market, I will include questions regarding the price for which they would sell their unopened loot box.

Outline

Abstract
Introduction
a) Brief history and current situation
b) Specifications of the market
c) Specification of research questions
Literature review
a) Literature on utility in gambling environment
b) Literature on risk preferences
c) Knowledge so far on this subject
d) Specifying the hypothesis to be tested
e) Justifying the hypothesis
Methodology
a) Description of data
b) Relevance of data
c) Utility function
d) Willingness to pay elicitation
e) OLS
Results
a) Rejecting/not rejecting the hypothesis
b) Showing significance/ no significance
c) Justifying different results (if exist) for different games
Conclusion
a) Interpretation of results and their impact
b) Further research