How do video games and consoles get apparently price-fixed?

Buy a Nintendo Wii (if you can find one), the base Wii with Wii Sports is always $250.00. Amazon, Best Buy, wherever.

Buy the game Mirror’s Edge for XB360 or PS3. It’s $59.99 wherever you get it, Toys R Us, Amazon, Best Buy.

Why is this and isn’t it technically illegal for the supplier to dictate the price goods are sold for by the retailer?

More info here

Sort of:

Price fixing is a nebulous term. Horizontal price fixing is where two entities at the same level agree to set prices. For example, Alice and Bob both sell widgets, and they agree to sell widgets at a higher price than the market price, making “extra” profit. This type of behavior is per se illegal.

The case with video games is different. It’s vertical price fixing instead of horizontal. As mentioned in the wikipedia article, this kind of behavior is based on the rule of reason, which is an economic analysis of the behavior to see if it actually harms consumers or not (which is the end goal of antitrust law).

Video games are an especially good example of beneficial vertical price fixing. The goods are fungible – a Wii is a Wii, no matter where you buy it. Games are the same way. The question to ask then boils down to if the price restraints hurt competition. They do stop price competition, as Wal-Mart can’t undercut Best Buy. On the other hand, it keeps Wal-Mart from undercutting businesses who can sell the same product but just don’t have the same market power to get volume discounts, etc. There is also another vertical restraint that is possibly more important but less obvious – release dates. Stores that break street date get a LOT of sales, at the expense of other retailers. Enforcing street dates are important to keep all of your other customers satisfied by not giving an advantage to some retailers and not others. The benefit here is twofold.

First, Wal-Mart can’t be THE place to go for Xbox games and then use that power to guide the market – for example if 90% of all games get sold at Wal-Mart and they refuse to sell violent games, violent games are going to become scarce.

Second, the vertical restraint drives competition in other areas, like customer service or bundling. An actual real life example of this is the Xbox 360. For a while they were a bit scarce, but prices were fixed. Thus retailers started offering bundle packs - buy an Xbox get a game or get twenty dollars off of a controller, etc. Note that it gave customers a better deal both on bundles and since demand had outstripped supply, 360s would sell for higher than the set price in a free market.

There are a few other benefits as well, and a couple of drawbacks, but these are kind of the major ones. The Leegin case explains in better detail the rationale behind allowing reasonable vertical price fixing. Also important to remember is that the vertical restraints WERE illegal before Leegin (which was not so long ago), and enforcement was sparingly used. I’m guessing that the harms to the consumer were not high enough to justify going after the video game industry when there were far more harmful actions going on. Either way, the industry can’t get too out of line or their restraints will cease to be reasonable and they will be in violation of antitrust law. In my opinion, the game industry actually does a pretty good job for consumers in most cases (Madden football’s NFL license being a glaring exception).

On the other hand, there are a lot of good arguments AGAINST allowing vertical price fixing. The law at the moment is to allow it if it is reasonable, but it is still controversial.

Are the stores going along with this willingly, or are they required by the suppliers to sell for MSRP? I can’t believe that Wal-Mart wants to sell for the same price as Toys R Us.

A little of both. It guarantees them a certain profit margin, and if the publishers got too annoyed they could refuse to sell games to the retailer.

Recent threadon videogame pricing.

I’m surprised Wal-Mart hasn’t thrown it’s considerable weight around to get this changed. I’d shop around for games and hardware if there was any point to it. At least with used or older stuff there’s a lot more flexibility.

Wal-Mart is a huge retailer and games are a tiny part of their bottom line. I suspect they haven’t thrown their weight around because it’s not a particularly important battle for them to win.

There’s very little money to be had selling consoles so having a lower price than competitors would probably mean making no money or losing money.
The $250 set price on the Wii goes along with retailers buying them for $246.

(Old joke: You’re selling these for less than you bought them for, how are you making any money? Volume!)

So why do retailers even bother selling consoles if there’s no money to be made? Because the money is made selling accessories (cables, cases, etc.)

Here’s a story from 1984 about "resale price maintenance"and the Levi’s case of the 1970s.

The author takes a skeptical viewpoint, but the argument boils down to, having a set retail price encourages wider retail sales. Retailers will sell the product who might not otherwise, because they are afraid their competitors will be able to undercut them.

The lack of competition (according to the argument) means that the product distribution would become limited and/or the lower-priced retailers could jack up the price – either way the consumer would be hurt more than having to pay a higher price but having more retail choices.

I’d like a cite that Nintendo is vertically fixing prices on the Wii. I’m not convinced this would be legal. Manufacturers can set an MSRP, but that’s not the same thing as enforcing it. Note the S – it stands for “suggested.” I believe the real reason the price is so static is because of the razor-thin margins mentioned by Hampshire.