Digital Hotelling
Have you ever driven by an intersection and noticed a different gas station on each corner? You might think, “Wouldn’t it make more sense if they spread out?” For consumers, the answer might be yes- if you don’t care which brand you get your gas from. But for the companies, it’s a completely different story.
In 1929, an economist and statistician named Harold Hotelling introduced a model that helps explain this phenomenon. According to the Hotelling model, the total cost to consumers includes not only the price they pay for a product, but also frictional costs- like time, effort, or inconvenience.
To attract the largest possible customer base, companies aim to minimize frictional costs relative to their competitors. This competition drives them to cluster together, ultimately reaching an equilibrium where their frictional costs are nearly identical. When they gather in the same place, it’s less about convenience for the consumer and more about ensuring no one gains a competitive edge based on location.
The Hotelling model isn’t just about gas stations, though. It applies to many areas, from political candidates to competing brands offering near-identical smartphone designs. As the video game industry grows and experiments with new monetization strategies, this model offers insight into how consumer decisions are shaped by both cost and convenience.
Digital Real Estate
The days of buying a game disc to play are largely behind us. Physical discs have been replaced by digital downloads, and in some cases, even the "buying" is deferred. Many modern games adopt a free-to-play model, where the base game is free, and players can optionally pay for in-game content.
Take Call of Duty: Warzone, for example. It’s a popular free-to-play title. While its monetary price is $0, I’d say the real cost lies elsewhere: hard-drive space. Warzone demands over 200 gigabytes- a chunk of storage you could otherwise use for three average-sized games, 30 to 40 hours of HD video, or around 200,000 PDF pages. And that’s before factoring in the hours it might take some players to download such a massive file.
Gravity
When you think about it, 200 gigabytes is a steep price to pay. But at a monetary cost of $0, how could you possibly say no? You spend hours downloading the game, and finally, you’re ready to play Warzone with your friends. Maybe you even spend $5 or $10 on optional in-game content- it was free, after all.
Fast forward a month, and your friends have moved on to a new game. You decide to join them, but as you try to download it, you realize your hard drive is full. What now? Do you delete Warzone? You already spent hours downloading it! And what if your friends decide to revisit it next week? You’d have to re-download the 200 gigabytes all over again- and might miss out on a night of fun in the process.
This situation highlights a concept economists call switching costs- the friction involved in moving from one “ecosystem” to another. By demanding significant storage and time, Warzone creates a gravitational pull that keeps you tethered to it. For free-to-play games, this kind of lock-in is crucial: by increasing the cost of leaving their ecosystem, they keep players engaged- and spending- while reducing the likelihood of losing them to competitors.
The Bigger Picture
This is in no way an accusation of bloated file sizes or an indictment of free-to-play models. Instead, it’s an exploration of how these conditions can shape consumer behavior. The file sizes and switching costs are not inherently good or bad- they’re strategic tools that companies use to compete in an increasingly crowded market.
What’s fascinating is how timeless economic principles, like those in the Hotelling model, continue to apply in modern contexts. Whether it’s gas stations or video games, the interplay of frictional costs and consumer decisions reveals the underlying strategies businesses use to thrive.
Ultimately, these insights remind us that economic models are not just academic theories- they’re living frameworks that evolve alongside the industries they describe.
