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Note: I've had these thoughts percolating in my brain for quite some time and this thread is my farting my brain into one relatively concise location. The main intent of this thread is to create a foundation that I will rely upon later to analyze the GSL. This is amatuer economics at its finest (or worst, depending on your POV) so feel free to critique or correct any errors in my argument.
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Prize Money as a Reflection of Spectator Demand
Let's start with a model, a very basic one.
Let's say there's two PC Bangs of similar quality and are located across the street from one another. Both want to hold Starcraft Tournaments and happen to have the unfortunate circumstance of holding it on the same day. This makes the two tournaments competitors against each other, and they strategize in kind. One tournament announces a prize pool of 500 dollars, while the other posts a 250 dollar prize.
The day of the tournament comes and, surprise surprise, everyone goes to the 500 dollar prize tourney. Not only does it draw more players, but it draws more spectators as well. The PC Bang is able to recoup its expenses in snacks sold and peripheral games players, along with the implicit gains in publicity and advertising. The 250 dollar prize PC Bang does poorly, but is able to take solace in the fact that its expenses were low and its losses were low, so though slightly damaged it will be able to maintain business at a high level.
Other PC Bangs notice the amount of interest the 500 dollar tourney gained and want similar results for their pc bang. The next month we have 4 different PC Bangs who host tourneys, all again with the unfortunate happenstance of hosting it on the same day. One PC Bang trumps all the others and offers a 20,000 dollar tournament. The other 3 pc bangs, more cognizant of their finances, realize that such a prize money equates to the death of their business. Instead, they post prize rewards that reflect the amount their business can sustain, all at 500 dollars.
The day of the tournaments comes and, to no surprise, everyone is at the 20,000 dollars tournament. The other 3 attract meager competitors and audiences, though there are a few players who could have competed at the 20,000 dollar tournament but choose the 500 dollar tournament instead. What we will soon find is that these players are displaying an economic behavioral trait called adverse selection, because to them something is fishy about the 20,000 dollar tournament and would rather take the safer 500 dollars. But because the money is so maddeningly great, most players ignore the moral hazard of participating in the 20,000 tourney, namely: how is the PC Bang going to make its payouts?
The 20,000 dollar tournament ends and a victor is named. Disappointingly, the prize is to be a deferred series of payments that consists of several years of payments as well as in-store credits. After several months of payment, the PC Bang closes and declares bankruptcy. The winner is left with a few hundred dollars of winnings, about the same that the other 3 tournament winners won. THe other 3 pc bangs, however, did not go out of business and hummed along splendidly, their respective tournaments providing a modest boost to their revenues over the long run.
Each month, a new batch of PC Bangs decide to join the competitive fray. Their prize moneys reflect the amount of confidence they have in drawing player and spectator demand to recoup their expenses; in other words, estimated demand constrains the amount of prize money they can offer. However, they don't want to be left in the dust by other tournments who draw all the best players by offering high prize pools, so they modestly raise theirs as well. The owners are constantly balancing their desire to attract the best players and the big audiences such players attract with the constraint of their own finances. Tournaments start looking for outward sponsors to help boost their prize totals, which compels other PC bang owners to do the same.
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Player's perspective
We'll get back to the attraction of sponsors in just a second. But for now, let's look at it from the player's perspective. What had once been a common form of leisure has suddenly become a decent mode of generating revenue. However, it won't supplant a yearly salary, so potential players who have well-paying jobs won't invest their hours into playing starcraft, at least not strictly for the money. Those who do play more starcraft do it cuz they love the game. The moderate revenue opportunities thus serves as a quality control mechanism by only attracting players who love to play the game. Profit seeking individuals understand that tournament starcraft requires an investment of time that detracts from their more immediate source of income, and choose to stay in their respective fields. But for those who already were playing starcraft, or were inclined to play such a game, the prospect of making money off of a game is hugely magnetic and increases the player base. The increasing player base coupled with the increasing tournaments creates a self-propagating mechanism and their numbers multiply greatly.
However, there is one more aspect to consider. Because prize pools are still low, a player's "honor" is still a factor. If such "honor" was dwarfed by a prize pool of huge sums, then honor doesn't hold as much of a draw. But with low prize pools, players play more honorably. There are more "love of the game" type players and strategies that don't care as much about the money, or at least are willing to sacrifice some money to maintain their prestige.
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Sponsors
K so tournaments are in the process of attracting sponsors to help them lift the constraints of their budget and thereby create a more attractive prize pool. Now, a sponsor is only going to get involved 1.) if they're convinced their involvement will leave a good impression on the particpants, thereby leading to more revenues, and 2.) if there's enough of an audience to make it worth their while. The audience doesn't necessarily have to be strictly the particpants, or even the physical audience at the PC bang; it also counts those who hear about the tournament and hear of their involvement. These sponsors have to make a cost/benefit analysis for themselves, constrained by their budget but reaching for greater audiences.
Eventually, the audiences become so huge that there's no need to be restrained to PC Bangs anymore. In fact, doing so is actually detrimental to the amount of viewers that can be drawn. And so the sponsors now have an incentive to get the game out onto the media. If there's proof of enough viewers, perhaps you can even get on TV.
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Lessons
Now that we've reached the end of this story, we can make some general conclusions about prize money:
1. In the nascent stages of a competitive game, tournament prize moneys represent the "juggling" between the particpants demand and the budget restraint of the tournament holder.
2. When multiple tourneys are held, prize moneys also represent competition between tournament holders. Tournament organizers have to balance their desire to compete against other tournaments while restrained by their budgets.
3. In the nascent stages of a game, prizes that are exorbiantly high often represent a miscalculation of the tournament organizer of their own budget constraint, unless they've found a sponsor.
4. For sponsors, prize moneys reflect a similar Demand vs Budget Restraint juggling, but for them their budget restraints are much more forgiving.
5. For players, prize money represents an incentive to play the game, thereby attracting more players.
6. However, prize money also serves as a quality control mechanism in that low prize pools deter purely profit-seeking individuals and maintains a highly dedicated, love-of-the-game type of players.
7. Low prize pools also allow honor to be a more relevant factor in a player's playstyle and strategies.
8. Prize moneys only increase when sponsors feel there is enough spectator demand to warrant such an increase
8. Once sponsors find the tournament to attract enough viewers to meet their goals, the feasibility of using popular media to broadcast tournaments becomes more likely.
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I'll end here for now. The next thread I make will reflect upon these "lessons" and apply them to an analysis of the GSL. It is my opinion that the GSL is being run incorrectly and a lot of it starts from the prize money. On the other hand, I feel there is quite a lot of promise in the Western system of small, more inclusive tournaments that are popping up everywhere and that, with enough momentum, perhaps a Western professional SC2 scene can take place. Who knows. NExt time.
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5003 Posts
The day of the tournament comes and, surprise surprise, everyone goes to the 500 dollar prize tourney. Not only does it draw more players, but it draws more spectators as well. The PC Bang is able to recoup its expenses in snacks sold and peripheral games players, along with the implicit gains in publicity and advertising. The 250 dollar prize PC Bang does poorly, but is able to take solace in the fact that its expenses were low and its losses were low, so though slightly damaged it will be able to maintain business at a high level.
This doesn't actually happen -- this won't be an equilibrium. To imagine this, think of it this way -- if everyone is at the 500 dollar tournament, then I, as a lower ranked player can just switch to the 250 dollar tournament and win 250 dollars immediately without bothering to compete. Then, players who think they can beat me reasonably will enter the 250 dollar tournament. There's no reason to say that the 250 dollar prize PC Bang tournament does poorly, ASSUMING all else equal about the tournament (ie, prestige of winning the tournament is equal, same spectators). Players will simply spread to maximize their chances of earnings.
This kinda shoots down the rest of your post 
Another thing you should realize is that the assumption that tournaments run on the same day is a poor one -- this is again not at equilibrium -- there is a lot of incentive for tournament organizers to dodge the dates of the big tournaments.
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Gom did reduce the prize money for the regular seasons this year, so I think that's great  Still offering a ton of money to players, but a more reasonable amount for them/sponsors. That with all the code A stuff I think is good for getting player interest. If only they could really push SC2 to korean public that would be great. If MBC/OGN and Gom/blizz played nice they could have SC2 on TV and all would be good in the world :\
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On February 01 2011 12:13 Milkis wrote:Show nested quote +The day of the tournament comes and, surprise surprise, everyone goes to the 500 dollar prize tourney. Not only does it draw more players, but it draws more spectators as well. The PC Bang is able to recoup its expenses in snacks sold and peripheral games players, along with the implicit gains in publicity and advertising. The 250 dollar prize PC Bang does poorly, but is able to take solace in the fact that its expenses were low and its losses were low, so though slightly damaged it will be able to maintain business at a high level. This doesn't actually happen -- this won't be an equilibrium. To imagine this, think of it this way -- if everyone is at the 500 dollar tournament, then I, as a lower ranked player can just switch to the 250 dollar tournament and win 250 dollars immediately without bothering to compete. Then, players who think they can beat me reasonably will enter the 250 dollar tournament. There's no reason to say that the 250 dollar prize PC Bang tournament does poorly, ASSUMING all else equal about the tournament (ie, prestige of winning the tournament is equal, same spectators). Players will simply spread to maximize their chances of earnings. This kinda shoots down the rest of your post Another thing you should realize is that the assumption that tournaments run on the same day is a poor one -- this is again not at equilibrium -- there is a lot of incentive for tournament organizers to dodge the dates of the big tournaments.
well i never say that 250 dollar tournament doesn't draw. They do draw. The important thing though is that they don't draw the best players, and since expenses are recouped through spectator activites, the fewer spectators lead to the 250 tourney doing less poorly.
also, this is a model and not reality. Of course tourneys don't run on the same day. But once you factor in a multitude of tournaments and logistical difficulties, you could argue that two big tournaments that are placed a week or month apart are similar to two small tournaments spaced within the same day.
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5003 Posts
On February 01 2011 12:19 d_so wrote:Show nested quote +On February 01 2011 12:13 Milkis wrote:The day of the tournament comes and, surprise surprise, everyone goes to the 500 dollar prize tourney. Not only does it draw more players, but it draws more spectators as well. The PC Bang is able to recoup its expenses in snacks sold and peripheral games players, along with the implicit gains in publicity and advertising. The 250 dollar prize PC Bang does poorly, but is able to take solace in the fact that its expenses were low and its losses were low, so though slightly damaged it will be able to maintain business at a high level. This doesn't actually happen -- this won't be an equilibrium. To imagine this, think of it this way -- if everyone is at the 500 dollar tournament, then I, as a lower ranked player can just switch to the 250 dollar tournament and win 250 dollars immediately without bothering to compete. Then, players who think they can beat me reasonably will enter the 250 dollar tournament. There's no reason to say that the 250 dollar prize PC Bang tournament does poorly, ASSUMING all else equal about the tournament (ie, prestige of winning the tournament is equal, same spectators). Players will simply spread to maximize their chances of earnings. This kinda shoots down the rest of your post Another thing you should realize is that the assumption that tournaments run on the same day is a poor one -- this is again not at equilibrium -- there is a lot of incentive for tournament organizers to dodge the dates of the big tournaments. well i never say that 250 dollar tournament doesn't draw. They do draw. The important thing though is that they don't draw the best players, and since expenses are recouped through spectator activites, the fewer spectators lead to the 250 tourney doing less poorly.
Why wouldn't it draw the best players? As long as the best players believe in maximizing income, best players will be present in both tournaments. Secondly, you can't talk about "spectator activities" and "fewer spectators" when you assume identical situations -- once you start talking about these terms then it's not 100% monetary but also prestige that gets people to join tournaments. In which case, then your analysis may hold -- assuming of course, tournament organizes are dumb enough to hold tournaments on the same day ;p
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On February 01 2011 12:23 Milkis wrote:Show nested quote +On February 01 2011 12:19 d_so wrote:On February 01 2011 12:13 Milkis wrote:The day of the tournament comes and, surprise surprise, everyone goes to the 500 dollar prize tourney. Not only does it draw more players, but it draws more spectators as well. The PC Bang is able to recoup its expenses in snacks sold and peripheral games players, along with the implicit gains in publicity and advertising. The 250 dollar prize PC Bang does poorly, but is able to take solace in the fact that its expenses were low and its losses were low, so though slightly damaged it will be able to maintain business at a high level. This doesn't actually happen -- this won't be an equilibrium. To imagine this, think of it this way -- if everyone is at the 500 dollar tournament, then I, as a lower ranked player can just switch to the 250 dollar tournament and win 250 dollars immediately without bothering to compete. Then, players who think they can beat me reasonably will enter the 250 dollar tournament. There's no reason to say that the 250 dollar prize PC Bang tournament does poorly, ASSUMING all else equal about the tournament (ie, prestige of winning the tournament is equal, same spectators). Players will simply spread to maximize their chances of earnings. This kinda shoots down the rest of your post Another thing you should realize is that the assumption that tournaments run on the same day is a poor one -- this is again not at equilibrium -- there is a lot of incentive for tournament organizers to dodge the dates of the big tournaments. well i never say that 250 dollar tournament doesn't draw. They do draw. The important thing though is that they don't draw the best players, and since expenses are recouped through spectator activites, the fewer spectators lead to the 250 tourney doing less poorly. Why wouldn't it draw the best players? As long as the best players believe in maximizing income, best players will be present in both tournaments. Secondly, you can't talk about "spectator activities" and "fewer spectators" when you assume identical situations -- once you start talking about these terms then it's not 100% monetary but also prestige that gets people to join tournaments. In which case, then your analysis may hold -- assuming of course, tournament organizes are dumb enough to hold tournaments on the same day ;p
HAPPY BIRTHDAY! And I love you for shooting down these posts. No offense to the OP, but usually, as Milkis pointed out, these "amateur econ" ideas don't have the rigor that's needed behind them.
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this thread would have been a lot more fun if i hadnt been banned immediately after writing it (not related to this thread)
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EPT
