-[Psychologist and gamer Jamie Madigan continues his new GameSetWatch column by discussing the pricing for Microsoft and Krome's Game Room for the Xbox 360, which launches this week, analyzing why seemingly illogical pricing can bring significant advantages if pitched correctly.]

Microsoft recently announced that they were augmenting their Xbox Live and Games for Windows services with something called "Game Room," which would allow you to buy and/or play classic arcade games like Centipede, Space Invaders, and the like.

Basically, it'll be just like when we used to hang out at the neighborhood arcade, only with fewer cigarette burns on the machines and no attendants pretending they can't hear you while they listen to their Walkman in the back office. Or maybe not; I've never been to your place.

What I thought was interesting, though, was the price structure for the games, which breaks down like this:

- 40 points - Play a game just once on one platform (either Xbox Live or Games for Windows), like dropping two quarters in.
- 240 points - Own the game on one platform but not the other.
- 400 points - Own the game on both platforms.

So if we rate those three options from 1 to 100 on an "Accessibility" metric and plot that with price, it look something like this:

game_room_graph1.jpg

I don't think it takes much insight to guess that Microsoft would rather you not take the first option (about $0.50), since it won't take long to figure out that playing like ONE game of Frogger is quite enough for you. They'd rather you spend the 240 points (about $3) to buy the game on one platform, or even better 400 points (about $5) to buy it on both. But I don't think these prices are optimal for that. I think there's a way for Microsoft to actually get more money out of people by raising their prices.

How? Well, I'll get to that. But first let's talk about magazine subscriptions. In his book, Predictably Irrational behavioral economist Dan Ariely describes seeing an ad for the periodical The Economist with the following annual subscription options:

- Economist.com website only: $59
- Print edition only: $125
- Print edition PLUS website access: $125

Bluh? Why would they try and charge $125 for just the print edition and then at the same time offer that PLUS the website access for exactly the same price? It make no sense.

Or does it? These people know economics. It's RIGHT THERE in the name of their publication! To test things out, Ariely showed The Economist ad to 100 MBA students and asked them which they'd choose. He got the following results:

- 16% chose the Economist.com website access for $59
- 0% chose the print edition only for $125
- 84% chose print edition PLUS website access for $125

Okay, no surprises there. But then he removed the "print edition only for $125" option and asked the SAME students again. Same people, same choices --the results should have been identical, right? Nope.

- 68% chose the Economist.com website access for $59
- 32% chose print edition PLUS website access for $125

What? They flipped their preference even though the two remaining choices were the same as before! Why? (Click here to read about all this in an excerpt from Ariely's excellent book, or better yet go buy it --it's a great read.)

The reason, as usual, is because of how our brains are wired. We simply aren't very good at evaluating things in absolute terms, like the value of having a subscription to a website versus a print magazine. Instead, we tend to compare things to other similar things, especially when trying to quantify something abstract like value or fun.

How good is this apartment for rent? Well, it's better than the last one you saw but worse than the first. How much fun is Game A? Well, it's more fun than Game B, but not as much as Game C. If you want to see this kind of thing in action, just ask any group of nerds to rank the Star Wars movies and then stand back.

Decision making requires more deliberation and data when our evaluation of the options are spread out, as in the graph of Game Room purchase options above. But when some of the options cluster together, our decision-making process tends to exclude or downplay the options outside the cluster because including them in our evaluations makes things pretty complicated.

For example, imagine you're trying to decide between three downtown restaurants for dinner after a movie. Two of them are nearby and one requires a bit of a walk. Let's assume your feet hurt and you're on a tight budget, so both distance and price are equally important. Most people will end up making their decision by going to the cheaper of the nearby places, despite the fact that the restaurant farther away may not only be cheaper than either, but enough so to warrant the walk.

Why? Because just using price to decide between the two otherwise most similar options is an easier decision to make than trying to figure out the relative value of proximity and price and combine those values in a precise weighted combination so as to come to a completely rational decision. People's brains tend to slide into the path of least resistance when making anything beyond the simplest of decisions (c.f., "Why We Love Genres So Much"). So savvy companies like The Economist try to frame and simplify their sales pitches so that you glide right to where they want you.

This is why I think Microsoft could alter their Game Room pricing to something like this:

- 40 points - Play a game just once on one platform
- 360 points - Own the game on one platform but not the other
- 360 points - Own the game on both platforms

Which we could graph like this:

game_room_graph2.jpg

Do those two options on the right jump out at you more so than before? They do me. And I'd bet that a lot fewer people would be interested in just dropping two 50 points for a one-time play. Or maybe you could bring the price of both the "own on one platform" and "own on both platforms" option down to 240 points. Your choice! And you could take this concept even further --how do you think a fledgling MMO could benefit from pitching prospective players on monthly, quarterly, or annual subscription packages?

[Jamie Madigan, Ph.D. is a psychologist and gamer who explores why players and developers do what they do by studying the overlap between psychology and video games at The Psychology of Games website. He can be reached at jamie@psychologyofgames.com.]