So you want to know why console makers don’t gouge early adopters with higher prices? Because they don’t want game buyers to hate and not buy their stuff.
Look at the iPhone. It received a price drop a little over two months after it was released. And people howled bloody murder and “Rip off!”. Why would game makers open themselves up to that for a short term profit burst (that would likely not even happen if they priced the console too high anyway)?
Just wait for Big Wii ™ to start manipulating the market!
Micro, no. Macro, slightly less no.
This sounds convincing, right up until we examine the practice, already indicated in this thread, that manufacturers dictate price to resellers. Why would resellers open themselves up to that for short term profit burst? If I am to accept your argument, it must account for the facts. That you perceive me as arguing for some position is completely contrary to my posts and my intention. I am assuming everyone knows what they are doing. I don’t know why they are doing what they are doing.
Here is what they are doing: fixing console prices at launch, when naive theory should suggest a fluctuating price due to fluctuating demand.
Your suggestion (others have made it as well): this protects the manufacturers from backlash.
My question: if this backlash effect is real, why do they need to fix prices to acheive protection from it? Why do resellers not suffer from this possiblity, which would stabilize prices in absence of a price fix anyway?
Because game systems operate on razor thin profit margins. That Wii that is on the shelves at GameStop for $250 was likely sold to GameStop by Nintendo for the price of $230 (or thereabouts, I don’t know the exact figure). So GameStop does not have any room to lower the price of the Wii and raising it would only put them out of line with the rest of the retail industry.
So why sell consoles at all if there’s no money in it? Simple. First, I believe all console makers require retailers to sell the system if they want to sell the games. Second, you want to lock in your customer base to buy the more profit friendly games in the same place they buy their systems. So you gotta be competitive with your competition. Ergo, all the prices of all the consoles are the same.
First, in an efficient market, marginal revenue equals the marginal cost of production, and so all profits are “razor-thin.” Second, selling gasoline is just such an area where profits are “razor-thin,” in some cases being a line of negative width, but gas prices do fluctuate under comparable conditions (that is, I must repeat, short-term supply shortages in the face of large demand).
First, production volume is a function of manufacturing ramp, and I’m not aware of any consumer company who deliberately cut supply to cause a mania. Schedules slip, I assure you, and unlike many business products these need to get into the stores for the Christmas shopping season, which causes lots of pressure. Microsoft even missed it for one XBox version, remember.
Clearly those people standing in line for 12 hours are buying something more than a game system. I’d say they were buying trendiness or the reputation of being leaders. Standard marketing texts split the market into early adopters, fast followers, and the rest. I wonder how many people standing in line for a PS3 also stood in line for an Xbox? I’m not sure these people are good customers, they just are early adopters. Look at the iPhone, for example.
For gas, there is clearly no cachet in buying any type of gas. But why do some stations charge more than others, and get away with it. Some may be convenience. I go to a real cheapie which is sometimes a pain to get into. At times I will decide not to sit in the street waiting for a pump and go to a more convenient station which is a few cents a gallon more. I’m cheap, and am willing to go at times with less congestion, but I can imagine some people aren’t. I think some people are convinced that gas is different, that gas that is more expensive must be better.
Concert tickets are distorted by on-line sales. When I was in college some people went and stood in line for 12 hours for Grateful Dead tickets. That is a combination of fandom, being cool (they weren’t that big fans) and shortage of tickets.
Why go to a movie opening night? I’d guess to impress your friends, and to read the reviews without worrying about spoilers, in other words to see it while it was fresh. People turned away will be back, and might even see something else to balance demand. Why not charge more? The owner might not want to get bad publicity from gouging - some concert promoters are getting push back on high prices. They may feel building demand through sold out performances will increase attendance in the long run.
One more thing - game boxes spend more time in the channel than does oil. If Best Buy is sitting on tens of thousands of game systems in inventory, and the price gets cut, they are going to be stuck with their share of that cut, or Sony will have to rebate it to them. I doubt if you want to do that too often.
Now you’re using hypotheticals in a specific industry.
The facts are that a game system wholesales for $230-240 and sells for $250 for a profit of around 6%. Games wholesale for $20-40 and sell for $50 for a profit of around 50%. Game boxes are also much smaller than game console boxes.
Which would you rather sell?
Games. Which is exactly why I don’t buy the given justification for price-fixing behavior by the manufacturers.
Nintendo is not just trying to sell you a product for a profit. They are trying to develop a relationship with you. Buying a game system is a long term commitment, families are generally going to buy only one Wii, and that Wii will be in their living room for years.
Resellers, especially eBay resellers, aren’t trying to create that relationship, they’re reselling a product for a profit, to the highest bidder. You pay more because they offer something (availability) that is hard to find in a brick & mortar store.
Look at the Wii, in stark contrast to a tankful of gas. Your commitment to that gas lasts a week, then you’re off to buy more, from whoever is convenient or has the lowest price that day. You don’t feel like an asshole for buying a tank of gas then seeing the price go down, because you’ll be paying that lower price on Friday. If the price goes up due to demand, you’re not going to wait for it to go back down, because you still need to drive.
For more durable goods, like game systems, people will wait for after Christmas sales, if they can expect to get a real price break. Jacking up your price during the Christmas season is also going to get a fair number of customers to say “fuck you” and never buy your system at all, ever.
Console makers want continuity. They want Alex Early Adopter and Tommy Tax Refund to feel like they got the same system. But if you charge Alex $500 and four months later you charge Tommy $250, you’re going to have a lot of pissed off early adopters on your hands.
And then when the Wii 2 comes out, watch those early adopters not buy it. And you never want to piss off the early adopters, because most of them are the “hardcore gamers” that will buy a lot of games (which is, remember, where game makers make most of their money).
No, they are not. They are different items with only moderate Substituability between them.
Commodities like petroleum and natural gas have many suppliers who all produce a basically indistinguishable product. One supplier can’t simply decide to charge more than the market without losing competetiveness and if they charge less, they miss out on profit.
There is ONE manufacturer of Nintendo Wii. That would be Nintendo, of course. Nintendo sets their price for the Wii in accordance with their overall marketing strategy. While there are substitutes (Xbox, PS3, PC), they are not identical products so Nintendo does not necessarily need to price their Wii the same.
Once the Wii hits the shelves, the retailers (EBX, BestBuy, CircuitCity) are essentially selling a commodity again as the BestBuy Wii is exactly the same as the P.C. Richards Wii.
Also, from a consumer standpoint, it’s a bit impractical for retailers to hold an Ebay-like auction for Wiis in order to obtain the feedback neccessary to sell them at the current market price. Unless you are selling them on Ebay of course.
What I meant was, consider one manufacturer and many sellers. ETA: what msmith just said.
Justin, based on your last post I have to admit I have the feeling that you haven’t even read my opinion on the matter, and only possibly have read the OP, so I will have to just let that aspect drop. We’re going in circles and I have only the smallest confidence that you read any of the subsequent discussion. I’m not trying to be a jerk, and I’m not insinuating that you are stupid, it is wholly possible that I am monumentally dense, I’m just saying: we’re going in circles, and now we’ve come right back to the theory I presented, now sort of coming out of your mouth, without ever actually addressing any of my global questions. In short: I give up.
This seems contrary to all the things ebay has actually done to create bidder confidence. In fact, in auctions in general confidence in the auction house, and by extension the seller, is extremely important. So I don’t even know where to begin here. I am sure you aren’t suggesting that Nintendo could escape backlash by auctioning off the first release.
Lest you get the wrong impression, I agree with this 100%. I cannot possibly agree more with this statement. What I will question, however, is to what extent this has anything to do with pricing. Houses are a long-term commitment: do house prices fluctuate? Is the asking price fixed? Automobiles are a commitment: do automobile prices fluctuate? Loans are a long-term commitment: do interest rates fluctuate? More to the point: do we actually know what we will pay prior to investigating the purchase? To save you the effort, let me answer the question. Housing prices are negotiable, automobile prices are negotiable, and interest rates are decided after a thorough credit review. In short: commitment on the buyer’s part has nothing to do with price-fixing. In fact, commitment on the buyer’s part has a lot to do with price fluctuating, as people want reassurances that they’re getting their money’s worth.
I think you are almost right where I am. Let me see if I can get you to take the last step: Your commitment to that reseller lasts until you’ve finished your video game, then you’re off to buy more, from whoever is convenient or has the lowest price that day. And we all seem to agree that everyone makes the most money on games, not consoles. Therefore, manufacturers fixing the price is not necessary, as prices will rapidly stabilize by all the forces everyone has taken great pains to explain the existence of. Ta-da!
…
[crickets]
Honestly, I don’t know what you’re asking for anymore. I’ve explained it every way I can explain it and you just keep coming back with another outlandish “Well what about this?”-type question.
[Empahsis added]
No, no, no! I think all the posts, particularly the last 7 or so, by those not named erislover demonstrates, quite clearly, where there is a need for stable pricing. I don’t understand why you are not understanding this concept. Is this deliberate? (rhetorical) I generally agree with your posts in other economic threads. ::shakes head:: 
Yes, that’s a reasonable model for how consumers behave with games. But we’re talking about the initial purchase of the console itself.
Buying a particular game is an isolated event. A game I buy today doesn’t have much affect on what games I’ll be buying a year from now.
But buying a particular console has long-term ramifications. It locks me into a particular product line and determines what games I will be playing over the next two or three years. So when I buy a console I’m not just making an isolated purchase, I’m establishing a long-term relationship with a particular console maker. So the console makers spend a lot of time nurturing that relationship. They keep the price steady so you don’t feel jerked around. They release some games as exclusives so you feel like you’re part of something special. Brand identity for an individual game isn’t important. Brand identity for a console is a very big deal indeed.
(That’s part of my job, incidentally. My little division in Sony is specifically tasked with bringing off-the-wall indie content to the PlayStation 3. We know it’s unlikely that any of our games will be blockbusters. We exist so people will say “wow, that’s COOL” and get a little more excited about the PlayStation 3 brand.)
Without price controls the price will stabilize at a point that maximizes profit for the RETAILER. However this is not necessarily the price that maximizes profit for the MANUFACTURER. In fact, since the two companies have different business models it almost certainly won’t be.
There is confidence, and there is a relationship. With eBay, the relationship goes no further than “this guy won’t steal my money”. Contrast that with your relationship to your barber, or favorite bartender, or local hardware store, it’s not about whether or not you’re going to be defrauded, it’s about getting good service. That’s the type of relationship Nintendo is going for, people buy Nintendo because it’s a good product, it’s got good games, they come out with clever accessories, it’s a product you can keep for years and be happy with it. Nintendo is not a company that’s going to wait for the Christmas rush to squeeze their customers dry over the latest new thing, then drop the price once the demand slows down.
There are reasons why each of these markets is different than the game system market. Housing is essentially an auction between individuals with nobody setting the price. Cars are not depending on you coming back month after month buying accessories and games (where the “real” profits are), the company must expect to make a profit on every car. Interest rates are determined in large part by the rates set by the government, and you don’t buy a loan, a loan is when someone gives you money, you are essentially the seller.
Every market is somewhat unique, usually the solid companies in the market have good reasons for the decisions they make. For the game console market, price stability is good customer relations, so that first price you announce is very important. It sets your place in the market, sets public opinion of your product, and can make or break the announcement. Fuck up the announcement, and it’s possible that a good product will be a complete failure.
I don’t even understand what this means.
I know it is rhetorical, but I do want to answer. Yes, it is deliberate. There is a need for stable pricing but, for some reason, stable pricing will not be the natural result of normal economic activity. That’s fine. I’m assuming that what is done right now is 100% the smart and right thing to do. If you think I’m suggesting Nintendo or MS is wrong, please understand, I am giving them full faith. They are sharp bastards, way smarter than me, they know what they’re doing. Everyone convincing me why this is a good thing isn’t actually explaining why the market is weird in this particular instance. Let me be Super Clear With Bold ™: I am essentially being asked to accept the fact that the video game market constitutes an example of a market failure. Price controls are necessary to acheive an efficient market. That is quite an exceptional claim, wouldn’t you say? So I’d like to understand why this is so. Every answer people have given so far doesn’t account for behavior in similar contexts. Commitment purchasing? --prices move. Total lack of commitment? --prices move. Backlash? --why wouldn’t there be a backlash at resellers? Commodity in gas v console? --relative to resellers, consoles are a commodity. Etc, the rest of the thread.
Give me education, I will tell you, “Hey, education has external benefits that will not accrue directly to those paying for it in a private market, so a free market will underproduce an educated population.” Great. Market: failed.
Is my intent, and consternation, now more clear?
In the context of this thread: I agree. I reserve the right to quibble if the topic comes up again! 
Then I will ask you the same thing I’ve asked Cheesesteak: why doesn’t this same idea apply to every other commitment purchase like a home, car, or (the generalization of the two) multi-year loans? Accepting a professional job is a commitment; salaries are negotiable. Is a console a car? No, of course not. But both are a commitment, so if commitment is the reason for one, it should be the reason for the other. But I cannot, simply cannot accept that commitment causes price-fixing behavior in one case but the exact opposite result in other cases. This is just not what I understand by the verb “to cause.”
That, in itself, is cool. I only wish I weren’t biased, perhaps unfairly, against Sony for reasons that are probably unrelated, or at least only tangentially related, to videogaming. (The SonyBMG rootkit issue. But thanks to the reissue of Final Fantasy Tactics, Sony got a PSP out of me anyway, damn it, as I had previously committed to buy whatever handheld would do this.)
I agree 100% that this is true. The problem is that the interests of the retailer are strongly correlated with the interests of the manufacturer because of the important aspect everybody recognizes: games. Wait wait! Please don’t balk yet.
I am being asked to suppose that even though both resellers and manufacturers maximize their profit on games (no one has denied this), retailers nevertheless have less interest in increasing console sales, even though people will not buy games without consoles. Thus it is somehow possible that, for some as-of-yet unspecified reason free pricing would somehow lead to this amazingly inefficient result of no one maximizing profit! I cannot suppose that retailers can somehow convince people to buy games for which there is no corresponding console. There’s something dastardly at work in the video game market. This thread has yet to uncover it, IMO.
Your insight is very valuable. Please don’t interpret me as hostile! It’s great to hear things from an insider. More than I can possibly express.
Sony got roundly criticized when the PS3 came out for pricing it too high, and IIRC the sales did not meet expectations. Is my memory correct, and did this affect your negotiations with the indies?