Most people don’t think of video games as anything more than a great way to spend time that you could be using to study or do something productive (which brings up an entirely unrelated question: is playing video games a productive use of time?). But, in reality, the market for video game consoles and the games that accompany them can provide great insight into firm behavior under imperfect competition.
The three major game systems that are currently on the market are produced by three different firms: Microsoft (Xbox 360), Sony (PlayStation 3), and Nintendo (Wii ). Each firm faces similar issues, namely, how to distinguish its product from the others, how many systems to produce and release in a given time frame, and setting prices for their products. In addition, the video game market has some unique aspects. The cost involved with developing the game consoles is huge. There is a high up-front cost for the games themselves, but a minimal marginal cost for their production. So, the stage is set for Cournot-type competition in the game console market, with a Bertrand-type market for the games to go with the consoles, with tie-sales between the two! Needless to say, this creates a very complex market and equally complex firm behavior.
The firm that could be called the “veteran” of the video game market, Nintendo, is taking a slightly different approach with their new Wii than they have in the past. Leading up to product’s release in November 2006, Nintendo worked hard to differentiate the Wii from Microsoft’s and Sony’s products – a very smart move when dealing with the type of imperfect competition that Nintendo is encountering. Rather than focus on computing power or new advanced hardware, the cliché for this industry, Nintendo focused on revolutionizing it’s product through new and different game play, and by introducing a motion-sensor controller. The firm set a quantity to produce (typical for Cournot competition) for the first few months after its release and followed through. Everything Nintendo has done seems to be working – the Wii has outsold Sony’s PlayStation 3 (released the same week) by a substantial margin.
Another way Nintendo is beating its competition is by focusing on making profits on both the Wii console and games. This is in contrast to Microsoft and Sony. All three firms are able to mark up the games to make a significant profit, despite their low marginal cost, because consumers distinguish between the three consoles. The Bertrand model with differentiated products fits the game market very well. Both Microsoft and Sony are banking on the profits of their games to overcome the loss they take on the consoles - $240 per unit for the PlayStation 3 and $126 per unit for the Xbox 360. Nintendo takes no loss on the Wii console and still sells games for a substantial profit.
Will the success of the Wii continue in the coming months? Will the superior hardware of its competitor’s products begin to outweigh the Wii’s innovative game play? Only time will tell. But so far, Nintendo has proven itself in an imperfectly competitive market through its successful product differentiation.
~Chuck Thomas, Brian Rock, Lian Ye, Zoey Wang
2 comments:
Being an avid gamer, I find this discussion to be quite interesting. While the veteran Nintendo went a whole new direction with the motion sensing device, Sony and Microsoft are left battling it out for the best computer power and cutting edge hardware. While this move by Nintendo paid off in this round, one must think of the future of the gaming industry and how Microsoft and Sony will respond. One could imagine that Sony and Microsoft will come out with their own versions of motion-sensing controllers and try and one up Nintendo with more computing power and better games. While Nintendo served as a leader in this round of the game, they should prepare themselves for more competition in the next round. The importance of Product differentiation is clear in this industry where producers have mostly the same inputs and a similar products. This type of industry also possesses the opportunity to try radical new poducts to stray away from competitors and hope that the bet pays off. We'll just have to see where things go from here.
The real success of the Wii is of course in it's motion-sensing controllers. In fact, they use Wi-Fi technology with blue-tooth for the "sensors" built on the same graphics CPU as the Gamecube. Essentially, its just a gamecube with bluetooth. What does this mean? Almost zero cost of research and production - they just strapped a bunch of Wi-Fi networking devices to gamecubes. This is the reason why they can also make money on the consoles.
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