Stephen Kings Game of Horror

Joshua Gans University of Melbourne 1st August, 2000 When Stephen King does anything, it always makes for good headlines. When King offered to distribute his latest novel exclusively over the Internet bypassing publishers and printers altogether it was no different. From Publishers Nightmare Comes True to King delivers another horror; newspapers had a field day. This time, however, Stephen King is doing something that really is a threat and he is not shy about pointing it out. Here is his deal: You can download the first installment of Kings latest novel, The Plant, from his web site (www.stephenking.com of course). You can print it and give it to friends. All he asks is that you pay $1 (US) for the privilege (something you can do at his site or from amazon.com). But, here is the catch, the second installment and beyond will only be published if 75 percent of those who download the first one pay. As King says, Pay and the story rolls. Steal and the story folds. As an economist my first reaction was: hes crazy! Let me explain why. Consider a situation where 100 people have downloaded the first installment. Lets also, for arguments sake, assume that all those people want to read on. If 75 or more of those people pay, the installment proceeds. If this doesnt happen, everyone misses out. So there are three things that could happen: 75 or more other people pay, strictly less than 74 pay, or exactly 74 others pay. If you were one of the 100 fans, would you pay in any of these cases? Well, to an economist, and assuming you are self-interested, you wouldnt want to pay if strictly more than 74 pay. It doesnt change the likelihood of a second installment and you save $1. Similarly, if strictly less than 74 pay. Notice, under Kings deal, you do not get your money back. However, if exactly 74 pay, then by paying the installment goes ahead; you will likely pay in this case. In this case, you are what game theorists describe as pivotal; everything depends on the decision you make. It is only in this event, that you pay. But consider this: for this event to occur, 75 fans in total need to believe they are going to be pivotal. It is possible but it is highly improbable. Indeed, what makes it even less likely is that in reality not all the 100 readers will like the novel enough to continue on; especially if they have to pay for it. Based on this assessment, the outlook for a second installment is dim. King is aware of the difficulties. His site compensates by making appeals to readers honesty; going so far as to call non-payment, stealing. This is not necessarily pie in the sky thinking; after all, people vote despite it being highly unlikely that it will change anything. The greater the proportion of honest people, the more likely that a particular selfish fan will believe they could be pivotal. However, this does depend

on such fans knowing that others will be honest and, indeed, believing that it is highly unlikely more than 75 will be honest. But suppose there are 51 honest people in our example and only those pay. Will King really withhold the second installment when the majority has played his game? Everyone loses if he does. He loses the revenues from the second installment and beyond and his fans who have shown themselves to be honest will not find out what happens in the novel. Indeed, King always has the option to publish the rest of the book the old fashioned way. My hunch, therefore, is that the proportion of honest readers will have to be pretty low before King exacts his punishment. That is fortunate in some ways. Even an honest fan may be tempted to withhold payment if they believe that King might leave them without a second installment out of spite simply for not earning even more money. But, in a world with selfish fans, Kings inability to commit not to publish later installments in some form, makes it less likely such fans will pay up on the off chance they are pivotal. All this is, in fact, a dismal prospect for economists as well as writers. Kings premise is that publishers are not serving a useful function. They add costs and drive a wedge between a writers return and what readers ultimately pay. Any first-year undergraduate economics student can tell you what that means: not enough reading. Thus, Kings attempt to create value by removing an inefficient intermediary in the publishing chain should be applauded. However, it also focuses us on precisely what that intermediary does: they helps in creating a commodity out of the written word and allows writers to earn higher returns than they otherwise would. Nonetheless, one is tempted to ask whether King could have done better? Is there a deal he could have offered that might have worked? In my opinion, some simple game theory reveals a more enlightened path. Consider two small additions to Kings deal. First, add some insurance. That is, let fans get a refund if they pay and a second installment is not published. Second, add some more information. Let us all know how the paying count is going. With these two ingredients there is a dramatically improved chance the venture will succeed. To see this why one must first recognise a fact: some fans will desire a second installment more than others. Also, based on past experience (Stephen King has been around for a while) those fans will know who they are. Consider a selfish King fanatic under my scheme. If, close to the final date, fewer than 75 percent of people have signed up, real fans will face a choice between paying and not paying. They will face two outcomes: either the average will rise above 75 or it will not. If it does not, they have lost nothing by paying as they get a refund. So the key is whether they expect it to matter. A real fan will realise that they value a second installment more than others. This makes it less likely that others will pick up the slack. In the real fans minds, therefore, they will assess that payment by them is more likely to be pivotal. Moreover, as the average gets closer to the target, even lesser fans may make decisions in favour of payment. So any one fan will realise that their payment might indeed encourage others to pay-up; making paying an even more attractive choice.

In this respect, game theory predicts (Ive spared you the technicalities in this forum), that there will be a flow of payments starting with the most ardent fans first to the lesser ones and that ultimately 75 percent will pay. Without the insurance, fans wont take the risk. Without the information, fans arent able to assess how likely they are to be pivotal. Even if fans expect King to publish in any event, they realise that by paying now they get to read the novel sooner and ultimately end up paying less. So while it is not a given that this scheme will work, in the mind of a game theorist, it certainly has a greater chance of working than Kings original scheme. We could go further and consider even more elaborate changes. Why insist on 75 percent and not a fixed number of paying customers? Why not allow publishers the right to bid for the second installment and beyond? Why did King not wait until the final thrilling installment to try this out; reaming fans for a higher price, just when they are at their most desperate? For that matter, as you read this article, could you please send $1 to the editor of this journal? After all, Stephen King is not the only one who has to make a living! Joshua Gans is an Associate Professor in Economics at the Melbourne Business School where he teaches game theory and other topics to MBA students. He has a forthcoming book on the publishing process in economics and has co-written an introductory textbook with (the other) Stephen King, Robin Stonecash and Greg Mankiw, Principles of Economics, published by Harcourt-Australia. Books to look out for: Joshua S. Gans (ed.), Publishing Economics, Edward Elgar: Aldershot, October 2000. Joshua S. Gans, Stephen King, Gregory Mankiw and Robin Stonecash, Principles of Economics, Australasian Edition, Harcourt: Sydney, 2000. Robert Frank, Passions within Reason: The Strategic Role of Emotions, Norton: New York, 1989. (Explains why honesty may be an evolved trait in humans) Thomas Schelling, Micromotives and Macrobehavior, Norton: New York, 1978. (A classic on describing game theoretic problems just like the one described in this article)