The Microeconomics Of The Video Game Industry

Tommy Deen

November 28, 2006

ECO 201

The Microeconomics of the Video Game Industry

Video games have been around for years with many different types of consoles and games. The video game industry has grown into a $20 billion dollar industry over the past ten years, and it only shows signs of growing larger in the years to come. In the United States alone, the market has grown considerably where 60% of all Americans play video games, 40% are women, and 60% of all gamers are between the ages of 25 through 44 years old (games-advertising.com). According to an article on Gamespot.com, analysts estimate that the video game category will have about 50 to 55 more square feet of shelve space in Best Buy by the year 2007.

The video game market is an oligopoly with only a few companies competing within the market. The "Big Three" companies in the video game industry's oligopoly are Microsoft, Nintendo, and Sony. Microsoft's Xbox 360, Nintendo's Wii, and Sony's Playstation 3 all sell similar products and contend for consumer's dollars. Each firm closely watches the moves of the other companies when considering pricing, technology, and marketing of the games. They also compete with each other to gain exclusive licenses to game software so they can offer console exclusive games.

Price wars are common in the video game industry. In the United States, Microsoft's Xbox 360 premium edition was released at $399.99 in November 2005. Sony recently launched their Playstation 3 at a price of $599.99. Nintendo released their system, Wii, at the low price of $249.99. In addition, Microsoft and Sony are selling their video games for $60 while Nintendo is selling their video games for $50. Nintendo definitely has the advantage in the video game industry's price wars.

In the video game industry, the demand is usually high, but the supply is low, which creates a shortage. This happens during the launch of new consoles. For example, when Microsoft's Xbox 360 was to be released on November 22, 2005, they only had a limited number per store. The total number of consoles released in North America that day was 400,000 units. Stores immediately sold out the day the Xbox 360 came out. According to Wikipedia.org, "Microsoft was not able to supply enough systems to meet initial consumer demand in Europe or North America. Many potential customers were not able to purchase a console at launch and the lack of availability led to Xbox 360 bundles selling on eBay at grossly inflated prices, with some auctions exceeding $6,000. It was reported that 40,000 units appeared on eBay during the initial month of release, which would mean that 10% of the total supply was resold. By year's end, Microsoft had sold 1.5 million units; including 900,000 in North America, 500,000 in Europe, and 100,000 in Japan."

Another example of this tactic being used is with the release of Nintendo's Wii. A total of four million Wii consoles were to be released worldwide with the majority of that number going to North America alone. On November 19 of this year, the consoles sold out immediately. Some stores passed out cards for the console to people who were in line the night before. Circuit City had people camping out early in the day, but gave out tickets to people later in the evening. They even had a sign that stated they only had thirty Nintendo Wii's, yet people were still hopeful and stubbornly stood in line.

Sony's Playstation 3 was released on November 17, 2006 with an even shorter supply than the Nintendo Wii; some consumers camped outside of the stores for days to get a console. The demands for these consoles were at a high. Sony also only had 400,000 consoles at launch (telegraph.co.uk). The consoles sold out only minutes after its launch (statesman.com).

It is important to mention that the video game industry is an example of a razor and blades business model. This means that the companies take a loss