Sorry, it is extremely ambiguous what I am agreeing to. I agree, 100%, that without price controls in favor of the manufacturer that prices will stabilize for the retailers. What I am 100% unclear on is how this is an improper result, because it is not clear how the entire video game market can possibly be improved by appealing to the interests of manufacturers instead of simply letting prices be dictated by the market. Because unless there is some kind of market failure, any benefit the manufacturers are accruing are a cost someone else is bearing: who? The retailers? Consumers? If price-fixing is the best the market can be, then why is this an example of a market failure? Why no effective tâtonnement, so to speak?
So Nintendo doesn’t know how to price at release. OK. Have an auction for the first release, and price relative to that. We know, for instance, that at a fixed price of Y for the 360, they went at auction for Z. (It is not as if auction prices reveal no information at all, after all, so gathering this is important.) If what I’m hearing is true, the BigN, MS, and Sony would give away consoles if they thought it could possibly improve their profits. They want to acheive some distribution of consoles that will maximize their long-term profits. As far as I can tell, setting a fixed price achieves neither of these goals in any way whatsoever. So either our suppositions are untrue, or fixing the price somehow does these things, when in other cases fixing the price has disasterous consequences.
A couple of things, many of which have been mentioned before. First, the price set by the manufacturers is as low as possible, often lower than the manufacturing cost. This limits the amount the games can be discounted. Second, retailers will naturally charge the same price, because the consumer doesn’t care where he buys the game. I suspect the price caps are in place to prevent gouging which affects the brand more than the retailer. Third, the price is set for early shortages, since a new video game system which can be easily obtained when it comes out is going to be seen as a flop. With the relatively small volumes possible after RR, the little bit of additional money you’re going to get will be trivial, and is probably considered not worth the risk of having stuff sitting on the shelves.
The cliche for this situation is razor and blades. Blade manufacturers heavily discount razors, since you are locked into the blades. I got my latest razor for free - it came out right before a competitor’s possibly better one. A more modern example is printer and cartridges. I’ve had a couple of printers where my first new ink cartridge cost more than the printer.
Car companies try to get you to come back for repairs, but there is a big aftermarket in accessories and repair services, so they are usually not very successful. I don’t see that homes are even close. Even when we refinanced, we have no commitment at all to our original mortgage broker or lender. Real estate agents will keep you on their holiday card list for years and years, but so will other brokers.
With all due respect, this is where you are wrong. Using econ 101, I suppose, you can make an attempt to prove your point, but you really need to take Theory of Auctions and Introduction to Finance, and possibly Price Theory (II or III, I forgot which). In short, in the Econ 101 sense, demand and supply will meet to create the market efficient price. However, the world is more complex than that, and some people are more rational than others, or have different priorities and utility. In addition, you also have to take into account the manufacturing process and the retail process. There are just too many moving parts and a constant need to keep operations going and the doors open to wait. I’m not about to go home and crack open my econ notes, even assuming I can find them. Just complete this thought experiment, please:
Suppliers cannot wait to negotiate with demand on every unit sold. The world will grind to a standstill. We can negotiate for goods and services which require a loan (there’s a classification for these types of goods which I’m forgetting, but in Econ 101 theory, it’s goods and services at every price point), because there is either a secondary market to make the process more efficient (e.g. cars, wholesalers, etc.) or they fall into a special category that is based more on the utility of need (e.g. houses). In every case, there is a stable price. What you are advocating is a fluctuating price, particularly one that will indeed fluctuate at product launch and will continue to fluctuate based on the season, absolutely ignoring all other factors of production, wholesale and retail markets, distribution, etc. This is not stable pricing. In fact, demand will know to wait it out because at some point, supply will be hard up for cash and prices will be less sticky. At this point, price(s) will make very little sense. At this equilibrium, then, each unit sold will be individually negotiated. The time it takes to negotiate will increase the inefficiency of the market versus a market with stable pricing.
Ok, here, think of it in another context: If what you are advocating, in your mind, is the most efficient way to maximize revenues, then why aren’t game manufacturers, or anyone supplier (outside purely customizable goods and services) pricing their goods and services in such a way?
I am advocating the exact situation we are in, which I assume is a practical approximation to the ideal situation. What I am unable to understand is just how this situation is, actually, a practical approximation to the ideal situation. What ideal situation? Everyone maximizes their profits. Secretly–I must confess, in which case it is no longer a secret–I think console manufacturers are attempting to maximize their profit using brand “monopoly” as leverage in order to extract profits that would otherwise go to resellers. No one has suggested this, but people have suggested that manufacturers have disproportionate power compared to resellers, so this seems like a natural conclusion when one consider price-fixing. But I was hoping to hear some more explanations before I decided one way or another on this point.
Yet this is not an argument for fixing prices in general, is it? Because what you’re talking about is a manufacturer setting a price for resellers. That’s totally innocuous. What is happening–I am led to believe, by this thread (I don’t actually know!)–is that manufacturers are dictating price to resellers. That’s like rent control.
I’m not advocating this! It’s nonsense to suppose gas stations know everything and the rest of the world is stupid. It’s even worse to suppose I’m right and the entire world is stupid. No, no. I’m not of the opinion that prices must fluctuate. I am of the opinion that fixed pricing is not the hallmark of efficiency. It’s exceptional to suppose that a fixed price is necessarily more efficient than a price that is allowed to move. Am I suggesting that every console sale must be an auction? No. The only thing I have actually proposed in this thread is the rather narrow idea that manufacturers use fixed pricing at launch to locate their preferred customers. Everything else is trying to understand just how the explanations I am given could possibly be true.
Take your typical B2B interaction. It is a negotiation of sorts. “I want to buy 50,000 x. How much?” “At 50,000, etc.” Take Mouser Electronics. They buy chips in bulk from Texas Instruments. Does Texas Instruments dictate what price Mouser must sell their chips? (I don’t know, but it would be surprising if so since Mouser and their competitor Digikey sell at different prices, nevermind Avnet and Newark and etc.)
I must be expressing myself very poorly to have appeared to advocate so many positions I have tried to take pains to avoid advocating.
See, this is exactly the sort of relationship-building I’m talking about! Your decision to purchase a PSP wasn’t driven purely by your assessment of its entertainment value but also by your opinion of Sony as a good corporate citizen.
The sales guys have decided that having a stable price sends a comforting message to consumers and increases sales in the long run. It also makes forcasting future revenue easier.
Yes. Here’s an example:
Say Console A is more popular than Console B. If both are priced at $100 then over the course of the week EB will sell 12 A’s and 8 B’s. EB books $1200 + $800 = $2000 in revenue.
But if Console A is really more popular than B then EB could probably make more money by charging more for A and less for B. Say they raise the price of A to $130 and still manage to sell 10 units. And they drop the price of B to $90 and increase sales to 10 units as well. EB makes more money this way. $1300 + $900 = $2200 in revenue. What a great plan!
But now Company A is pissed! Previously they were getting 60% market share and now they only have 50%! Over the long run they’re going to sell a lot fewer games and lose a lot of revenue!
EB doesn’t care though. They’ve put 20 new consoles out in the world with both plans. It doesn’t make any difference to them whether A or B has bigger market share. They make money either way.
So the next time Company A negotiates with EB they put price caps in their contract: “You can’t sell our console for more than $100”. EB won’t make quite as much money, but if they don’t go along Company A won’t sell them any consoles. Or they will limit their numbers so they make less money than if they’d agreed to the cap.
See how it works? The optimum price for the retailer may not be the same as the optimum price for the manufacturer.
I do see how it works. Your numbers are an excellent example, but now it makes me wonder if this arrangment isn’t after all a way for manufacturers to extract profits from resellers. Relationship building is important, sure. Can’t argue otherwise. But that doesn’t advocate price fixing. Extracting economic rent from a position of market power? That suggests price fixing is a good plan. Once your competitor does it, well, you don’t have much choice either. It isn’t like you could turn around and say, “Hey, listen, GameStop. Forget Nintendo and their domineering ways. You can sell my console at any price you wish, if only you don’t carry that damnable Wii.” This will result in maximizing console profit at the reseller level, but in the face of a severely priced competitor console, you’re SOL anyway. Once a reseller has been backed into this corner, it’s pretty much game over for them. Take it or leave it.
In one sense, it’s good competitive practice, because it means game sales are more spread out among consoles and manufacturers will compete for quality and content and etc. Yay for us! But in another sense, it’s dastardly, because it means they are also eliminating profits that, absent the fix, would go to resellers. Boo! Hiss! But then resellers start a used game market… hahaha, life is awesome.
I’m prepared to accept this as the reason why price-fixing in consoles is the standard practice, if no one objects. (No objections as SDMB? Then I know the fix is in…)
Not outside of a classroom, it isn’t. In the real world, you’re dealing with real people, who have real feelings, real desires, and real expectations about their purchases. In the classroom you forget that when things get priced in the market it’s people like me who sit down in front of a computer, talk to marketing, product experts, review comparable products, build a business case, and help the executives decide what price point to announce. It doesn’t just pop out of the “market”, WE are the market, all of us who make decisions, right or wrong, and deal with the consequences.
Why doesn’t Nintendo jack up the price of the Wii? Because there’s an executive looking at the case who says “We’re making money hand over fist with the most popular console in history, and you want me to start screwing with it?” You say just raise the price, but some dude has to sign his name to it, he’s going risk being the guy who fucked up the best thing to ever happen to the company.
Add to that the fact that every market is different, customer expectations are different, competition is different, costs are different, profit margins are different. All those differences mean that you have to attack the problem differently and make different decisions.
What WOULD be shocking is to have a proprietary durable good like a Wii following the same pricing methodology as a consumable commodity like gasoline.
So the Wii is so popular. This is irrelevant. Console prices are fixed, period. It sounds nice that the benevolent video game company wants to be our best friend and wouldn’t dare “gouge” us, whatever that means, but you’ll forgive me if even a modest level of skepticism prevails. I’m sure these things are in their interest, same as every other business.
Irrelevant to who? Certainly not irrelevant to the people, the businessmen, who would be deciding to raise the price of the most successful product the company has ever produced.
I’m not quite sure if “fixed” is merely a description or a statement of some sort. The manufacturer announced a price. Prices are announced for hundreds of thousands of products. From potato chips to mainframe computers, things have announced list prices.
When Nintendo announced the Wii, they needed to tell people how much it would cost. Sure, they could change price a week after introduction, but then all that advertising they spent money on telling people it was $249 is in the shitter and they have to start telling their future customers “We just raised our price $50” That’s the sort of announcement that goes over like a lead balloon. Yay, I get to pay $50 more than the last guy!
The company (and all companies, really) needs to treat its customers with a certain level of respect. You need customers who want to do business with you. You don’t piss all over them.
So are you claiming that Nintendo, et al, does not dictate price to resellers? Then the question becomes: why don’t the prices fluctuate at the game stores? The game stores don’t care about Sony’s reputation in the market. Why don’t they jack the price up on release?
Yep. But potato chips do not usually see a massive demand spike at the introduction, relative to the expected demand in the long term.
So Nintendo doesn’t change the price. FINE. This doesn’t constitute an answer to the question. If you think it does, I ask you reread the OP.
Because then they would anger their customer base that would no longer come back to the store and purchase games, where the real money is made. We’ve explained this already and you keep asking “Well, why?”
Neither do game consoles. At least until the Wii. Demand spikes used to be measured in days, maybe weeks. This is where that continuity of prices thing comes in. It’s all about striking the balance between short term profit, building a customer base (which is more important during a console launch than short term profit) and hitting the pricing “sweet spot” that will encourage gamers to make the leap to a totally new platform.
The Wii is a ridiculous exception to the demand spike that has changed all of the rules.
Only if you don’t want an answer to your title question. “Why do gas prices fluctuate, but not Wii prices?”
Because, the guy raising gas prices isn’t putting the health of the company in jeopardy, the guy raising Wii prices is fucking with the Golden Goose.
They do dictate retail price, that’s what announcing a price is. They announce publicly that the price is $249, what goes on under the covers is proprietary information, between Nintendo and retailers. The retailers don’t jack up the price because they have an agreement with Nintendo to sell at the list price. Sellers without such an agreement, small local stores, eBay sellers, etc. can and do jack up the price.
You may want to assign some kind of nefarious motive to such an agreement, but businesses have every right to negotiate mutually beneficial contracts with other businesses. These agreements are a normal part of doing business.
There is the possibility–remote, I know, possibly infintesimal, but nevertheless real–that the OP contains details on the underlying question, of which the subject, for the sake of expediency and space, lacks.
I am quite sure they are. I believe I have stressed multiple times that businesses know what they are doing. That has absolutely 100% never been in question by me.
You are missing the point of my questions, if this is what you think. If what you say is true, there is no need for manufacturers to dictate price because the resellers have an interest in stable pricing as well. But it has been asserted by other parties in this thread that resellers do not have the interest of especially stable prices. Left to their own devices, it has been suggested, they would tinker with pricing in an attempt to maximize their profit. So some of my responses have been trying to deal with that issue.
If so, then there is no need to dictate price to resellers, as they will not allow console prices to rise as if in an auction.
If we are talking about the long-term demand, I agree. But, frankly, that is a separate thread.
Doubtful as most, if not all consoles, sell at a loss or are launched at so, even the Wii.
Why not? You said you understood the meaning of loss leader and trying to gain market share. Are you saying that fixed-pricing (said the opposite way is something completely different) doesn’t help with gaining market share?
This is what’s happening. Yes, it is a good thing, unless you mean something else.
I’m not sure about game counsoles, but the suggested manufacturer’s retail price is just that suggested. The price is listed such that retailers have an idea what the market will bear. Plus, they also have expectation of profit per unit as almost always their cost per unit is less than the retail price.
This is illegal, commonly known as antitrust.
Because retailers have their own relationships and market share to worry about. They can’t go too high or they’ll be seen as price gougers. And, they will be undercut by the market, assuming supply is available. Does it happen, yes. One of the businesses that I am part owner of sells toys direct from the manufacturer. We have manufacturer suggested retail pricing, which is anywhere from 25-40% profit. For hot items, we sell immediately at full retail. For other items, we sell below retail (on sale) to turn over inventory more quickly. Do we sell out of hot items? Yes, more than occasionally, but this technique allows us to have more capital to spend either on the next guaranteed hot toy, or more of the same. The alternative is to have shelves and storerooms full of product not moving.
In a theoretical free market, the market itself sets the price. As we see in the case of commodities, this is quite possible even in reality, we don’t have to resort to smearing theory over fact. It has been shown that this, along with certain other assumptions that don’t really hold in reality but which is an approximation to reality in some cases, is actually the optimal level of resource allocation. That’s what’s so awesome about the free market. Sure, it doesn’t always obtain, no one is claiming otherwise. But when it doesn’t obtain, we (specifically, I) see an opportunity to learn about reality. Probably whatever is going on now is correct; but why is it correct?
The video game console market is not free. Specifically, it is not free at launch, when there is the greatest possibility of profit, as shown by fair auction prices. My question is: Why is this situation correct? I have received approximately four different answers.
Answer one [endlessly repeated]: relationship building. Apparently only manufacturers establish relationships, resellers do not. I don’t buy it. I buy that their incentives may be different, but that their incentives are different does not explain why the manufacturer must dictate price. It may account for some behavior, but it is just as applicable to other manufacturers who do not dictate price. Therefore this cannot be the important distinction. You may repeat it until you are blue in the face, but people all over the world build business relationships without dictating price, so this is totally irrelevant. Of course manufacturers build relationships. It’s a truism, it’s part of the backbone of price-setting and contract negotiation, etc, but it is not an account of price-fixing behavior anymore than “they gotta breathe oxygen!” is. Of course they breathe oxygen. They’re human.
Answer two [my answer]: it’s how they find their best customers at launch. Other mechanisms fail to select their best customers. Even though it is the only position I’ve actually advanced, it has somehow gotten very little play.
Answer three [mazinger_z’s answer]: they’ve gotta or the economic world stops spinning. Nonesense: manufacturers must decide on a price to sell to retailers and resellers, they absolutely positively do not have to dictate the terms of sale at the retailer’s. I deal with various distribution channels all the time and the overwhelming majority of products’ price vary from distributor to distributor, they are not dictated by the manufacturer. Console releases are somewhat exceptional here (not entirely).
Answer four [Pochacco’s answer with my severe embellishments]: They’ve gotta or else the retailers will screw them over. This I am leaning towards buying as the key underlying issue. But then I have to start to question whether my assumption is correct, that the current market is actually a fairly efficient one, as it seems that manufacturers are using their market power to dictate price, which is the number one hallmark of an unfree market. This doesn’t mean it isn’t going to be efficient, but it does mean that it is no longer a fair assumption. If, as proposed, it means that reseller profit decreases while manufacturer profit increases, then this behavior may be quite inefficient and only possible at all because these particular manufacturers are exploiting their considerable market power to extract profits that should, in a free market, go to resellers.
So now there is disagreement about manufacturers dictating price to retail outlets. I honestly don’t know what the situation is. I’m listening to people advance their reasons why prices aren’t very high during launch but instead we all stand in line. Part of those answers were that the manufacturers actually dictate the terms to the resellers. If this is not true, well, half of the answers I’ve gotten make even less sense.
I hate using this phrase, but YOU. JUST. DON’T. GET. IT.
Multiple people have explained to you that the video game market is a balancing act between the manufacturers, the game makers and the resellers. You have continued to ignore these explanations and shout “But why?” into the ether.
It seems to me that no answer we give to you will be satisfactory. And that’s a shame because I love discussing the business side of the video game industry.
The initial prices is not pulled out of a hat. It is set to balance supply and expected demand, and to provide the desired level of profit (or maybe loss) based on manufacturing costs.
If there is unexpected demand, Nintendo could of course raise prices - but risk being considered to be money grubbing, and get very bad press. Are you aware of any cases in this industry where prices were raised after an introduction? I can’t. This doesn’t hold for just game systems - Tickle-Me Elmo was also in high demand, and created am aftermarket. It’s price wasn’t raised either.
As for gas prices, consider this. The retailer component of gas prices actually doesn’t vary with the commodity price fluctuation, which is some service stations lost money recently, given that credit card fees are a percentage of sales and their markup is fixed. I don’t know if video game retailers get a percentage or a fixed markup, but in essence the two cases are similar - just the frequency of fluctuation in the gas price situation is much higher, and the nature of the industry is such that video game prices always fall.
Yes, assuming the only actors are supply and demand. As we see in the real world, even with commodities, this is not always the case as there are different levels of supply and demand, starting with, speaking generally, the manufacturer vs. (wrong terminology, but it illustrates my point of competing scenarios) raw materials supplier; manufacturer vs. wholesaler/distributor; wholesaler/distributor vs. retailer, retailer vs. customer. Each of these factors (these vs. situations) adds to the final price, i.e. the price that the manufacturer must recoup in order to stay in business. That price may be at a loss per unit, only if they know they can turn a profit some other way (e.g. loss leader). Otherwise, that manufacturer will close his doors. It might very well be that the auction price is lower than the MSRP (e.g. amongst my friends, we will not pay more than $350 for a console), but the auction price will never be the starting price because the manufacturer has survival ahead of overall sales. [snipped the rest of the stuff because it’s not making any sense for me]
I don’t think you understand what “free market” means in this case. How is the game console market not free? Because there is a fixed pricing scheme involved? Regardless if there is a covenant in the agreement between the retailer (note, not specifically a reseller) and the manufacturer, competition is so fierce for the retailer that he couldn’t deviate from the MRSP even if he wanted to. Why? Because: market share, pissed off customers, makes no sense to have auction pricing.
Retailers are free to negotiate with Manufacturers/Distributors/Wholesalers for the wholesale price. BigN/Sony/M$ all might have stipulations that for price X per unit, retailer must sell at retail price Y. This is a freely negotiated concept. I honestly don’t see why it’s so difficult for you to see why it’s advantageous to have fixed pricing for non-commoditized, highly durable goods.