Kotaku has an interesting article up which looks at a presentation given by Ethan Levy, formerly a design manager at BioWare. In his talk, Levy discussed the underpinnings of why the freemium model works so well in modern social/mobile games.

And surprise of surprises: “In a freemium game it’s not a rational decision to pay; it’s an emotional one.” And by “surprise of surprises”, I of course mean “well, d’uh”. No rational thought process should lead you to decide that you need to drop a dollar on a the 128×128 pixel stereo for your virtual mansion, when the 64×64 pixel stereo is available for free. And yet, that sort of thing happens. A lot.

The emotions that freemium preys upon tend toward the primal: they’ll make you wait (or let you buy faster progress), and they’ll make you want revenge (which you just need to gear up a bit more to achieve). They’ll make you want to top the leaderboards, make you jealous of what other players have that you do not (rather like in real life!), or offer you an even more heightened sense of accomplishment if you’d just kindly drop a few cents here and there. Or they’ll try and offer you more and better thrills. Kotaku goes through each category, listing Levy’s examples.

And it’s worth noting that these methods aren’t just limited to social and mobile games (although that is where they are primarily used). Kotaku’s article ends by noting that the booster packs for Mass Effect 3’s multiplayer campaign work on similar principles, and it’s arguable that some DLC relies on player emotions to generate sales as well.