This is more general than the subject might lead you to believe.
Gas prices fluctuate daily, based on a number of factors including, some say, dart boards and tea leaves. In any case, let’s say there’s supply and demand at work. But I’m not concerned with general fluctuations in this thread. So-called “price gouging” is a good example of price negotiation in the face of a short-term fixed supply meeting a huge increase in demand. I have no problem with it.
But. But there are plenty of things that face extremely high demand with short-term fixed supplies. X-Box 360 when it came out; the PS3 had a short run like this IIRC; the Wii; popular concerts; movie tickets; the iPhone; hell, pretty much anything I can think of doesn’t really act like this.
There are a fixed number of seats for a popular movie on opening night; why doesn’t the price change to reflect this scarcity? There is a fixed volume of gas at a gas station; why does the price change to reflect this scarcity in the face of massive demand?
Only one thing I request is this: please do not propose that people are selfish jerks. If you think people are selfish jerks, please take it to the pit. I propose we assume that people in the movie business and people in the gas station business know what they are doing… I would like to ask, “What do they know?” I know I cannot control a thread, I can only make this request, but I am making it.
What’s the difference? Is one party or the other actually wrong in some way, or are they both right for reasons I don’t see?
I’ve often wondered this about airline tickets and taxi fares…both of whose operating costs are directly impacted by gas prices. Airline prices fluxuate all the time…but taxi rates are always consistent (with periodic increases based on inflation et al).
Taxi rates are set by governmental regulation, to a greater or lesser extent, everywhere I have seen in the US. The most they do is meet every so often and decide whether to put the rates up, or, more frequently it seems, add a dollar surcharge on for higher fuel prices.
Taxi rates in most cities and towns are regulated by a local authority, a condition of holding a taxi license, and cannot be deviated from by the taxi company. If you look aorund in a cab, you’ll usually see a schedule of fees with a reference to the deciding authority.
Beaten by a few minutes I see.
To add more, though, airline prices USED to be similarly regulated, and didn’t fluctuate as much as they do now. That’s a good thing for you; when the airline industry was regulated plane fares were astonishingly expensive, two to three times more expensive than they are today, if you adjust for inflation.
Companies may prevent prices from rising to their natural market level for a variety of reasons.
In the case of the Wii … Nintendo is interested in growing market share in the long term, not maximizing profit in the short term. The more households with Wiis, the more game disks Nintendo can sell over the next five years. So they’re not going to do anything that will suppress demand for the system. In fact, it’s common for console manufacturers to actually sell their systems at a loss just to help increase their install base.
There’s also the issue of not pissing off your customers. With videogame systems people expect the price to drop over time as the hardware gets cheaper to manufacture. Raising the price – even if the market would bear it – would be perceived as “gouging” and piss off lots of consumers. Again, Nintendo is taking the long view here. Any short-term profits from a price increase would have to be weighed again the potential for damaging their reputation with their customers.
Pretend Microsoft/Nintendo/etc are “the ground” where we (EB Games, Amazon, Target) “dig up” consoles. They are all comparable quality. Therefore, prices should rapidly reach equilibrium at these sellers’ places. But they don’t actually move at all. So I’m not sure you actually even attempted to answer the question.
Are you suggesting that neighborhood gas stations are not interested in maximizing long-term profit?
I’m not suggesting they price it so that they do not sell out. I’m wondering why the price doesn’t change so that they just manage to sell out.
Why are local gas stations are not subject to this incentive?
(The incentive to not piss off customers by raising prices while a commodity is scarce)
Because, while it’s possible to imagine ways in which your local gas station could piss you off to the level that you no longer wished to patronize them, it would take some doing. And for the most part, most people will just go to the gas station with the lowest prices that happens to be reasonably convenient to them.
Whereas if Nintendo manages to piss off someone, they’ve lost someone who they might otherwise milk for hundreds if not thousands of dollars in further cartridge etc. sales.
(Also, I suspect that the video game system manufacturers treat shortage reports as a form of publicity - “Oh my god, that system is so popular I can’t get one? Then I must have one!”)
I thought that was Lobohan’s point. But of course I can’t speak for him/her.
For commodity items in a robust and competitive market, like oil, you don’t have a whole lot of control over the price. Your attempts to influence it via managing supply (for example, by restricting output) won’t make much of a dent. You can try, but it will probably be futile.
But when you have a truly differentiated product you have much more control over supply, since there aren’t any real close substitutes. Tight supply + fixed price = long lines. And marketing buzz.
If you think businesses in general, let alone small businesses like the neighborhood gas station, have the data available to maximize long term profits, then you need to think again. Businesses run by a whole series of goals, and profit maximization tends not really to be one of them.
The world does not work like Economics 101 suggests it does.
Nintendo sets the price of the Wii, “the ground” doesn’t set the price of gasoline. The wholesale price of gasoline is set on a wide variety of factors that affect producers more or less equally.
The price of the Wii was determined months in advance of the product introduction by a team of people who wanted to ensure the product held a particular place in the Game System landscape. Raise the price of the Wii in response to high demand and you stop being the high demand game system, you become the “rich kid” game system. When you buy one, instead of getting “lucky” you’re getting “screwed”. They also have fairly consistent costs, and often plan on selling individual units at a loss in order to make up the profits on game sales. It’s a product that lends itself to long term strategic pricing.
Gasoline sellers can’t do this. They have constantly rotating inventory, pay the spot price for raw materials, and customers buy the product in dozens of individual transactions over the course of a year. You can’t lock in a price long term, costs go up, you lose money, costs go down, your competitor can profitably undercut you. Since you have to constantly change price to meet the market conditions, and all your competitors follow the same general market pricing you do, there’s little customer risk in raising price in the face of higher demand.
I don’t think there’s much consumer loyalty with gas stations. So, for a gas station maximizing long-term profit is all about maximizing short-term profit.
With game consoles consumer loyalty is a very big deal. Nintendo is trying to lock people into buying nothing but Wii games for several years. So they try to make to the gateway purchase (buying the console itself) as attractive as possible.
Because the price was set before they knew how outrageously popular the system would be. If Nintendo had a time machine they’d probably go back and set the price slightly higher at launch. But they can’t make that change now without damaging their brand identity.
See, Nintendo positioned the Wii as a mass-market system. It’s less powerful than the other consoles and its graphics are inferior. It’s got simple, non-threatening controls that are easy to learn even if you’ve never played a videogame before. The low price point is part of their “gaming for everyone” marketing plan. If they were to raise the price now it would damage the Wii’s identity as a mass-market budget system.
I have not “thought” anything in this thread. I’m just asking questions. I have openly admitted in the OP that I don’t know. In any case, if the gas stations don’t have them, why would Nintendo?
Thankfully, no one here has actually suggested that.
Standing in line is a cost. Putting money down in advance for a console has an opportunity cost.
So why doesn’t Nintendo charge more, if it will not allow EB Games to? (Is this really true, though? Isn’t there just an MSRP? Can a manufacturer actually fix the price this way?) If Nintendo has reasons, are they the same reasons that the Rolling Stones have and movie theaters have? Why this weird link? The Rolling Stones have a monopoly on “being the Rolling Stones,” how weird that their ticket prices are so low that people have to stand in line to get them! Surely they could raise the price and still sell out…
This is not borne out in practice, unfortunately, as people buy multiple game systems and then sell them on eBay for enormous profit. People standing in line are assuming a cost. Suppose the only people that stand in line make about $10 / hour, and they stand in line for 6 hours on average. Why can’t we just raise the price by $20 to bring the line down to, say, two hours? Is that still a “rich kid console”? It’s an interesting argument, but it isn’t like Nintendo/EB Games/ et al aren’t still forcing their customers to assume a cost.
I’m familiar with loss-leader strategies. You know who else uses loss-leader strategies? Convenient stores. You know with what? Gasoline! Weird.
But this is not about long-term pricing strategies. It is about response to short-term surges in customer demand.
This is true of console the console world whether we a) consider just a single console and multiple sellers, or b) consider different consoles and one seller. Now, for the latter case, different sellers do compete on price, and price is definitely correlated to quality, so that’s all well and good five months after launch. But on launch day, the prices only affect people who say, “I’m waiting 'til next holiday season after they drop,” or, “I’ll wait until the hype dies down,” or whatever. The rest of 'em are standing in line.
Yes. The console makers include price caps in their contracts with major retailers.
This actually makes sense if you think about it. The console makers are interested in getting as many units as possible in living rooms so they can make money downstream from game sales. But the retailers don’t have that long-term incentive. They sell all brands of consoles and games so they don’t care who has the biggest market share. Left to their own devices, EB et al would charge the maximum the market would bear for each brand of console. So Nintendo puts a price cap in their contract: Sell at our price or not at all.
So people get pissed at the eBay sellers for “gouging” instead of getting pissed at Nintendo. Nintendo thinks it’s worth losing a little short-term revenue to avoid having consumers be pissed at them. And if someone really is willing to pay “market price” for a Wii … well, there they are on eBay.
You seem to be asking why they do not try to set price so that demand is 1+number available at release. I guess you have to figure that Nintendo has decided that publicity value of people standing in line waiting for their product is high enough to offset the loss of profit from charging more for the initial shipment. There is also the fact that some people skewed the market by buying multiple systems they did not want and holding them to sell at a profit later. That would skew the resale market and mess up Nintendo’s price point calculations.
The short answer is that oil/gas is highly, highly more commoditized that the Wii. People, in general, will care less about which gas they buy than what game system. The Wii attracts people who would not otherwise buy a game system. Therefore, Nintendo has to develop a strategy to maintain and increase market share, which includes, among other things, stable prices. To think otherwise is the flaw in the OP.
Between businesses, manufacturers can set price ceilings and floors for its goods. Unfortunately (or fortunately, if you’re an entrepreneur or a hardcore price shopper) this leads to grey market goods. Also, if every retailer has the same contract (which is more or less the same), there will not be price variance because retailers will be outsold by their competition. In few cases does one see the demand like there is for the Wii such that one can create speculation. Even then, Nintendo could end all that and flood the market with Wiis.
I don’t know the music business the way I know the game business, but I can guess the Rolling Stones have similar reasons for capping the price of ticket sales:
If you’re going to a Stones concert you’re probably a fan. That means you have a long-term relationship with the band and will probably spend more money on the Stones in the future. And THAT means that the band has an incentive to keep you feeling good about them. They may be willing to leave some money on the table when they sell you a ticket just to keep the love going.
The band also has an incentive to make their concert tickets feel like something special. If people have to work a bit to get them it makes the band seem popular and cool. “Wow, you managed to score some Stones tickets? Sweet!” So the price is set to make sure that venues sell out and people have to scramble a bit.
Pricing for entertainment is a tricky business. You’re not just selling a good, you’re also selling an image and a relationship. That means you might do things that cost you money in the short run just to shape consumer perception of your brand in the long run.
The components used to manufacture Wiis get cheaper all the time yet the Wii price does not go down. That’s because the supply of Wiis is barely keeping up with the still high demand for the solid product. Factor in the fluctuation of the dollar over time and you have several factors trying to move the Wii price up and down. They cannot because the Wii is a solid object whereas Oil is liquid and therefore, as most liquids do, fluctuates at the slightest movement.
Seriously though, the answer is simply logistics. It’s easier to advertise and sell something if you know what price you’re going to charge for it so you fix a price. As time goes by, you watch the sales and decrease the price in static waves (no less than 6-12 months apart) to maximize profit as rival companies do the same.