My old friend Billy at Game Informer just posted a rumor that we could see a Halo 3 demo by mid 2007. I wouldn’t be the least bit surprised if that were the case, but I’d guess Q3 if it were me. But the more interesting part is that this could be the first demo to come with a price tag.

Pop Quiz: What’s the best way to raise the price for a game beyond the acceptable mass-market threshold without actually raising the price?

Answer…Hide the upcharge in something else that the customers will buy without a second thought. In this case, a chance to play a stripped down, early version of the game (probably multiplayer only) a few months early. My gut instinct is that Microsoft could charge 800 points ($10) for the demo and fans would pay it. That would effectively make the price for the full game $70.

Unfortunately, this would set a terrible precedent for companies like EA and *cough* Q Entertainment that we can be suckered into buying anything, either through clever marketing of a product in high demand, selling the ability to get unlockables without the work, or simply lying about how much functionality you get if you don’t buy the extras. Once Microsoft can successfully sell a demo, moving the demo away from marketing and into an additional revenue stream, other companies will jump on the bandwagon, looking to monetize what was formerly goodwill and marketing. We’ve already seen the genesis of this in the sale of gamer pictures and themes, but those were smaller purchases that could be considered “impulse” buys in another context. What we’re dealing with now is a whole different ball of wax…Microsoft will have raised the prices of their games.

As a business major, I’m torn. If Microsoft does this, they WILL make money, but in the process, they’ll forever taint the Xbox Live Marketplace as nothing more than a money grab (which some people contend it already is). There will be some content worth paying for, and there will be the snake oil merchants that will try to disguise the content as being of more value than it really is, like Oblivion’s Horse Armor pack. Admittedly, that’s an unfair example, since Bethesda was testing to see what the market would bear (their pricing has been far more fair as of late), but I think we’ll see far more activity like that.

Of course, Sony has gone to an even further extreme than Q Entertainment, by parcelling out each car and track in the upcoming Gran Turismo 4. That’s another game who’s success worries me, because it would prove that gamers will buy full games piecemeal, probably paying more than they would have paid for a “full” game previously. It would only serve to inflate game prices even more, hiding the costs as “upgrades.”

In basic economic parlance, there has always been a gap between the price a customer is willing to pay, and the price charged, since a company wants to make sure that they can offer value to all customers, regardless of that customer’s view of the value. If games like Lumines and Gran Turismo 4 succeed, it basically establishes a model for squeezing that gap down to the point where the consumer surplus (the feeling for the customer that they got more value than they were willing to pay for) is non-existent. The consumer surplus is what makes gaming worthwhile, and is what encourages gamers to recommend games to friends and family (for whom the surplus is far less).

In fact, it would erode the entire concept of the “enthusiast”, since that class of customer (along with the “early adopter”) is built entirely on consumer surplus.