November 28, 2006
The Microeconomics of the Video Game Industry
Video games have been around for years with many different types of consoles and games. The video game industry has grown into a $20 billion dollar industry over the past ten years, and it only shows signs of growing larger in the years to come. In the United States alone, the market has grown considerably where 60% of all Americans play video games, 40% are women, and 60% of all gamers are between the ages of 25 through 44 years old (games-advertising.com). According to an article on Gamespot.com, analysts estimate that the video game category will have about 50 to 55 more square feet of shelve space in Best Buy by the year 2007.
The video game market is an oligopoly with only a few companies competing within the market. The "Big Three" companies in the video game industry's oligopoly are Microsoft, Nintendo, and Sony. Microsoft's Xbox 360, Nintendo's Wii, and Sony's Playstation 3 all sell similar products and contend for consumer's dollars. Each firm closely watches the moves of the other companies when considering pricing, technology, and marketing of the games. They also compete with each other to gain exclusive licenses to game software so they can offer console exclusive games.
Price wars are common in the video game industry. In the United States, Microsoft's Xbox 360 premium edition was released at $399.99 in November 2005. Sony recently launched their Playstation 3 at a price of $599.99. Nintendo released their system, Wii, at the low price of $249.99. In addition, Microsoft and Sony are selling their video games for $60 while Nintendo is selling their video games for $50. Nintendo definitely has the advantage in the video game industry's price wars.
In the video game industry, the demand is usually high, but the supply is low, which creates a shortage. This happens during the launch of new consoles. For example, when Microsoft's Xbox 360...