Not to mention that gas stations are quite limited in pricing power, most of the price being set by the supplier. They get a few cents a gallon profit, which is why gas station owners haven’t gotten rich on the latest run up in prices.
At revenue release of many products, the supply is limited since manufacturing hasn’t fully ramped yet, so they can’t flood the market until later. I’d also expect that contracts with sellers have been done long before release, and would be difficult to change. Increasing the price might make a bit more money, but at the cost of a lot of complaints. Plus, there is a tradition in electronics that the price always goes down, and that is going to be hard to fight. A lot of the costs of the game systems is in development, and the faster you can amortize this the faster you can drive down your price (or maybe just cost.) You can also negotiate better deals with suppliers at higher volumes, and you can increase manufacturing efficiency and thus further reduce prices. The faster you do this the more profit you make during the product life, the end of which is independent of how much you charge today.
In response to others, market share is very important. Not so much for the Wii, but other video games depend on developers, who will write for market leaders. Lost share by overpricing might get locked in by missing a hot selling game on your platform.
Actually, I have thought about it, and it doesn’t make sense to me, that’s why I’m here! The retailers also make money on the games. In fact, they stand to make an amount roughtly proportional to what Nintendo (or whoever) stands to make, since they’re also selling the games. So, aren’t their interests aligned, after all? I’m going to go out on a limb here and anticipate a “no” answer, and pre-emptively ask: why not? Because what you’re saying is Nintendo/MS/Sony, being interested in selling games and consoles for the long term, have little incentive to raise the price of consoles, while the retailers, who are interested in selling games and consoles in the long term, have incentive to raise the price on consoles. Color me confused!
But those wacky eBay gougers are also advertising. “Man, can you believe how hot the 360 is? Some dude just bought one on ebay for $800!” I’ve read news stories about it. So I’m not sure that raising prices at launch would somehow constitute a bad image. To me, people standing in line for 12 hours is a bad image. I wouldn’t buy at the market price (ebay price); I also won’t stand in line. IOW, regardless of their strategy, I ain’t buying at release.
At least for this buyer, all they stand to do is decrease lines and make a few extra bucks by having a high launch price. I won’t be so irresponsible as to generalize from my own case, but in this particular instance Nintendo lost a long-time fan when I still couldn’t get a Wii by just casually walking into a store [eta: this didn’t happen recently; I have no idea what the availability of the Wii is now]. If your concern is that they don’t want people pissed at them for “gouging”, what difference does it make if they can’t even serve the demand they have anyway? Are people buying games for Wiis they don’t have?
Maybe I should start a new thread, but reading this thread reminded me. Is there a better way for us as consumers to react to insane gas prices? I mean, besides not driving, which obviously, many of us have to do for our jobs.
Why hasn’t someone come up with a way for Joe Sixpack to have a personal hedge against fluctuating gas prices? I know that I can fill my propane tank in the summer at a lower cost than it will cost me in the dead of winter, but if I know a hurricane is coming and gas is going to be an issue, or hurricane season for that matter, all I can do is fill my meager 12 gallon tank and hope for the best. Most gas cans hold less than 5 gallons and as far as I’m concerned, not the best way to store such a flammable substance.
We’ve figured it out for propane, why can’t we figure it out for gasoline?
The console makers charge developers a license fee, so they make money off every game published on their console. So their business model is to get as many consoles out in consumers’ hands as possible (without going broke in the process) and then make most of their money selling games.
On the other hand the retailers are set up so they make money off EVERYTHING they sell. Nintendo, Sony, Microsoft, new games, used games … they make a percentage. Retailers don’t care if Nintendo sells more consoles than Microsoft or even if no one is buying new consoles at all and they’re making all their money reselling used PlayStation 2 games. (There’s actually major tension between the publishers and the retailers over how much shelf space they devote to used game sales. Publishers don’t make any money off used games and it they cut into sales of new games. One of the market forces driving the switch to selling games online is the existence of the used game market.)
It’s the competition between the various console makers that drives price protection. The console makers don’t want the retailers taking a short-term profit by charging market price for the hardware thus reducing their market share relative to the other consoles.
Theoretically, yes, the retailers want there to be lots of consoles in the market. But since they don’t care nearly as much as the console makers, it’s the console makers who enforce keeping the prices low.
It’s pretty much conventional wisdom that the reason the PlayStation 3 is doing so poorly this time around is because it was too expensive when it launched. And even though the Wii is the least powerful of the three systems, it’s considered an excellent value because its price is so low.
Well, Nintendo screwed up. They never thought the Wii would be so outrageously popular. They priced it thinking that it would be scarse for a while after launch and then demand would taper off.
As I said above, if they could travel back in time they would probably launch at a higher price. But now that it’s out in the market they can’t raise the price without taking a major PR hit. They’re making buckets of money right now and don’t want to screw it up by looking greedy in front of the fanboys.
I know I’m not being very constructive in this thread, I’m just arguing against people honestly answering my questions (and thank you for it). I’m not doing it for the sake of being contrary, I’ve just wondered about this for some time and thought of many arguments and counter-arguments already. I am certain the deficit resides wholly in me, but so far it’s not clear at what point.
That said, I will offer my theory, as it is only fair that the person that opened the debate have an actual opinion on the matter. Here’s my stand.
I’m not sure how they can have it both ways. Manufacturers want to sell a console at a low enough price to grab market share. They also want to price it high enough to minimize their short-term losses, if they truly are running a loss leader strategy (I’ve read a few articles which call this into question in a few ways). Thirdly, price is a bearer of information. I’m not particularly impressed that someone would spend 12 hours in line for some gadget, but I am impressed that the going rate for a new console at launch is as large as it is at a fair auction. If the “ebay console rate” is $800, then we could probably say that the launch price, in a free market, should be somewhere around $800… probably less, but I doubt significantly so.
Let’s put it this way: sellers of goods in temporarily short supply have to weed out their customers somehow. I’ve heard it expressed from people my age (30’s) that it is irritating that they can’t get a console at launch without standing in line. I agree. I do not have the time to stand in line for 12 hours like I did when I was 19 or whatever. So the manufacturer is discriminating, but instead of discriminating based on willingness-to-pay, they’re discriminating based on willingness-to-stand-around.
Is it possible to look at it from this angle? --Willingness to pay is not an indication of willingness-to-buy-lotsa-games. So, Sony/MS/BigN wish to select very special customers for their first release: those who are Big Fans (lotsa-games) and those who have time to kill because they can spend that time playing games (willingness-to-stand-around). I propose it has nothing to do with image whatsoever, but is a means of getting their best customers to reveal themselves.
Sounds complete. But let’s test the theory.
Gas: who are gas stations looking for? Those who need gas the most. If they don’t move the price, do they still select just these people? I think not. If they do move the price up, do they select just these people? Hmm… I’m not sure here. But, if I am to buy the “commodity/non-commodity” argument which was just barely made, and the reference to a lack of elasticity, maybe it shouldn’t apply. But then, fluctuating price is a sign of an efficient market. So if anything, price being free to rise and fall according to the market as a whole is a good indication of “the right” customers being selected. So, I’m going to side with the free market here and say that fluctuating price picks the best customers, and that gas is not a stellar example of inelastic demand.
Concert tickets: they want folks who are Big Fans and who have money to burn on merchandise. Is there a correlation between people who have a willingness-to-stand-around and money-to-burn [on merchandise]? I don’t see how these should be correlated at all. But of course there are those who do have money to burn but aren’t willing to stand around; they look for scalpers. If they have money to burn, aren’t they the targets? But then this seems like an argument for fluctuating price; say, selling tickets at an auction (like Google’s IPO). But it should be said that people who spend more on the tickets necessarily have less to spend on merchandise. So perhaps while the willingness-to-stand-around, while not perfectly correlated with money-to-burn, is better correlated with money-to-burn than people who’ve already just dumped more money onto the same ticket. Is there another way to select just the right concertgoer? Hmm.
Movie tickets: honestly there are so many weird things about going to the movies it is almost unfair to bring them up. Their faux-monopoly on food prices for one, but I’ve convinced myself the reason for that is just so the lines are reasonably short. Nevertheless, I would love to know the idea behind not changing prices for opening-night or opening-weekend big movies. I remember–was it the sixth Star Wars or the third Lord of the Rings?–having to buy tickets days in advance. But that in itself is a clue, isn’t it? There’s pretty much no reason for theater-owners to use price discrimination on opening night, because there’s basically no cost to the person to buy a ticket ahead of time. That said, movies are very far from perfect substitutes for other movies. Having a customer show up at the counter only to find a sold-out show… well, the times I’ve seen this, the theater just lost the business that night. So perhaps they should change the price a little. Those that are sensitive to price see it next weekend; those that simply must see it opening night need to pony up. But this depends on theater owners attempting to maximize their profits at the ticket booth, when common knowledge (he says with slight tongue in cheek) suggests they try to do it at the concession stand. So why don’t concession stand prices change? Fuck, I’m totally in a muddle here.
Pochacco, thank you for the response which I just saw on preview; this post is already very long so I will take a look at it separately. (I’ve not even read it yet.)
But is there any advantage here? If none of them had the market power to dictate these terms, then they’d all be in the same boat, and presumably the relative proportions among them would be the same. Of course it is in suppliers’ interests to collude to some extent; but suppose, tomorrow, Congress passed legislation that removed the ability of a manufacturer to dictate price to resellers, what would happen? Would they start cutting the resellers out of the business entirely to keep their console prices low? This seems disasterous. It would also mean that resellers are bearing considerable cost for supplying people with consoles at rates fixed by the manufacturer. Weird that this would be the best way.
Don’t they? I’m trying to picture how it could be a more efficient market to have this weird price fix in play. It’s true that resellers could not reasonably collude to say “fuck off” to S/MS/N. And once any of the manufacturers sets up such a pricing scheme (what else to call it?) you’re right that the others are essentially forced to do the same, or lose market share. But then, why did the resellers ever enter into such a contract in the first place? Was the first time this was done some kind of exclusivity deal for a particular reseller?
I thought it was because the PS2 image was not as strong as the PS1 image was, personally, but I don’t pay attention to gaming economics too much. The PS2 was my least-favorite of the previous gen.
But this is exactly what happens in the short term with gas prices! Argh.
Now that I’ve given my theory on this, what do you think? I’m not especially sold on the “greed” angle.
Now I’m not so sure I do remember this, actually. Now that I think about it, movie tickets aren’t usually available until that Friday, when all the new movie times are released for the weekend. Hmm.
Possibly. They might set up some sort of “order direct from the manufacturer” distribution channel to keep the retailers from setting prices too high.
Smaller retailers don’t have much negotiating power and larger ones are afraid of being undercut by the smaller ones. So Sony can dictate terms to EB, and that forces Walmart goes along so they don’t lose sales.
No the PS2 was the 600-pound gorilla last generation. It totally dominated the market. This time Sony will be lucky if it avoid being in third place.
I’ve never heard it put in those terms, but that’s a reasonable assumption. The core videogame market is young men. It’s great if you sell to other demographics, but the real money is in the 17-35 male bracket. These guys are more likely to have the sort of free time you’re talking about and they probably have a little less disposable income than older consumers.
Now the weird thing is that the Wii is selling well outside the traditional demographic for videogames. But maybe something else is going on. The Wii may be priced so that it feels like a “casual purchase” to older consumers while the pricier PS3 and XBox 360 feel like “serious investments”. Even though the target market has less time to stand in line they’re also not very committed to games as a lifestyle and the Wii falls under some magic threshold for “what the hell” purchases.
… seems to indicate that you believe neighborhood gas stations do seek to maximize long term profit. If I misread your intentions, I apologize, but it seems pretty clear to me.
As to why Nintendo might have the necessary data, or more of the necessary data, than a neighborhood gas station, well, there is a pretty significant cost to gathering said data. I would imagine Nintendo is in a better position to absorb that cost than Joe the Gas Station Man.
AH, but the price of Wiis does fluctuate. yes, Nintendo sets the price for retailers, creating artificial shortages (artificial in the sense that if price was allowed to fluctuate it would rise with demand and their would be no shortages, just expensive Wiis). But there has been a healthy secondary market (eBay for example) that has adjusted the prices as necessary.
Here is another thing to consider: Do you really want constant price fluctuations from manufacturers/supplier? People in general, don’t really negotiate. They buy at the set price. In the short run, people might not negotiate, and suppliers will be able to profit maximize at will. However, people will become weary and learn to wait. They know that if they wait long enough, prices will probably come down sooner than originally intended. This will eventually cause people to not trust stated prices at all, and there will be a constant negotiation process, which will ultimately slow down the economy.
This is already true in the console market. If people wait about two years, prices drop. You can practically set your watch by it. It is also true of movie pricing (matinee).
Typical console launch sees a very temporary shortage. I do not think raising prices at this time will lead us down that slippery slope. In effect, resellers are doing it, anyway, by beginning to force bundles at launch. I think you overestimate how much some people want to be seen as early adopters. The rest of us probably don’t care, but we’re not standing in line anyway.
I think you’re overestimating the forced bundling just a little bit. Forced bundles basically disappear after a system’s first Christmas on the market and they’re only still be offered for the Wii (online purchases only that is) because the demand is still so huge for it.
It’s been two years already for the Wii. I argue the more that suppliers put up profit maximizing pricing (i.e. prices that change constantly, which is what would ultimately happen), the more people will distrust price mechanisms in general. The end result, again, is a slow down of the economy.
The technical answer is easiest illustrated in aggregate demand and aggregate supply curves. As Voyager has also pointed out, the Wii also has component issues. Noted, that these components get cheaper over time, the fact that the Wii hasn’t dropped in price yet. This means that demand, in general, is still high, which means that the Aggregate Demand curve has not moved or has increased.
I think we can all agree that the Wii atypical of a typical supply of good. However, without a stable pricing mechanism, future, and possibly current prices will start to lose meaning. Besides, from the supply point of view, it’s better to have stable prices and a predictable revenue chart then to try and second guess the market.
The entire point of this thread is short-term shortages at console launches. It is not about the general market for consoles, except insofar as such considerations come into play at console launch.
I really don’t understand this point. Are you suggesting that it is economically efficient to not let prices fluctuate? I cannot name the price of almost any single product except those $0.99 bags of chips at convenient stores. If a price changed underneath me in the last 20 minutes, how would I know? I don’t know what cars cost, what gas costs, what gum costs, what bread costs, just to pick a few items of various importance.
I disagree. A lot.
The possibility of volatile console prices at launch has little to do with price expectations in the long term. If they do, it is only because console manufacturers are so heavily pushing their price points. I’m willing to accept that console manufacturers know what they are doing, and I am completely certain that not wanting to undermine price mechanisms is not one of them, since their behavior is exactly contrary to natural price mechanisms in a free market. Their behavior is itself undermining pricing mechanisms. My question is why, in the context of short-term supply shortages, this could be a good thing.
Three months after launch, I agree. But all the evidence indicates people of various stripes are willing to assume amazing costs (ebay or line costs) to be early adopters, and since I’m only concerned with that aspect, it doesn’t really matter what happens three months after launch.
Not for game consoles it’s not. How many people wait for a price drop to buy a new console? A lot. If the price could change daily, how many would wait forever until they thought they found the best price? A lot.
That would be disasterous for game makers.
Again, you’re seriously overestimating this. Some people are willing to be early adopters at eBay costs, but those people are typically a small minority of a console launch’s audience. The “magical” price point of a console is $300. Few people will pay more than that for a video game system. I love gaming, but my wife has threatened to divorce me if I ever come home with a $500 PS3 to match my Wii and Xbox 360. And I think she is being perfectly reasonable.
You’re looking at the exception and asking why everyone is behaving that way.
Please reread the OP. I’m looking at the rule and wondering why the natural way is the exception, in the context of a console launch. I’m sorry but I just don’t know what else to say.
The retailers also make money on the games. In fact, they stand to make an amount roughtly proportional to what Nintendo (or whoever) stands to make, since they’re also selling the games. So, aren’t their interests aligned, after all? I’m going to go out on a limb here and anticipate a “no” answer, and pre-emptively ask: why not? Because what you’re saying is Nintendo/MS/Sony, being interested in selling games and consoles for the long term, have little incentive to raise the price of consoles, while the retailers, who are interested in selling games and consoles in the long term, have incentive to raise the price on consoles. Color me confused!