The microeconomics of the Video game industry Essay Example for Free

The microeconomics of the Video game industry Essay 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 industrys oligopoly are Microsoft, Nintendo, and Sony. Microsofts Xbox 360, Nintendos Wii, and Sonys Playstation 3 all sell similar products and contend for consumers 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, Microsofts 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 industrys 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 Microsofts Xbox 360 was to be released on November 22, 2005, they only had a limited number per store. The total number of consoles released in North America that day was 400,000 units. Stores immediately sold out the day the Xbox 360 came out. According to Wikipedia. org, Microsoft was not able to supply enough systems to meet initial consumer demand in Europe or North America. Many potential customers were not able to purchase a console at launch and the lack of availability led to Xbox 360 bundles selling on eBay at grossly inflated prices, with some auctions exceeding $6,000. It was reported that 40,000 units appeared on eBay during the initial month of release, which would mean that 10% of the total supply was resold. By years end, Microsoft had sold 1. 5 million units; including 900,000 in North America, 500,000 in Europe, and 100,000 in Japan. Another example of this tactic being used is with the release of Nintendos Wii. A total of four million Wii consoles were to be released worldwide with the majority of that number going to North America alone. On November 19 of this year, the consoles sold out immediately. Some stores passed out cards for the console to people who were in line the night before. Circuit City had people camping out early in the day, but gave out tickets to people later in the evening. They even had a sign that stated they only had thirty Nintendo Wiis, yet people were still hopeful and stubbornly stood in line. Sonys Playstation 3 was released on November 17, 2006 with an even shorter supply than the Nintendo Wii; some consumers camped outside of the stores for days to get a console. The demands for these consoles were at a high. Sony also only had 400,000 consoles at launch (telegraph. co. uk). The consoles sold out only minutes after its launch (statesman. com). It is important to mention that the video game industry is an example of a razor and blades business model. This means that the companies take a loss on their consoles and make up for the loss with a profit on their video games and game accessories (Wikipedia. org). For example, Microsoft invested 4 billion dollars into their first console, the Xbox in 2000. Microsoft knew that they were not going to be profitable until at least three years, but they did not make a profit until after 5 years. They did not make this profit until the release of their exclusive game, Halo2, released in December of 2005 (Wikipedia. org). The video game industry can also be sited for having a direct relationship with other industries. As stated at ESA. com, about $73 million in high definition television sales (HDTV) can be directly attributed to sales of the Xbox 360 game console. Microsoft does not own any HDTV manufacturing companies, but they do spur the sales of these companies. On the other hand, Sony is using Blu-ray technology in their Playstation 3 because they are one of the nine founders of the Blu-ray Disk Association and are trying to promote Blu-ray technology (Wikipedia.org). Video game software is also being utilized in the medical and defense fields to simulate the conditions for training purposes (ESA. com). The Video game industry has had a major impact on the economy of the United States. The industry is constantly growing and shows signs of major growth in the future. The industry is always changing and is very dynamic. Nevertheless, the competition in this industry is always interesting to watch. Works Cited Blu-ray Disc Association 23 Nov. 2006 Gaming Demographics: Gaming is An Adult Thing. Games-Advertising Feldman, Curt. Game Drives Growth, New Retail Strategy. GameSpot News 16 Jun. 2005 Razor and blades business model 17 Nov. 2006 The economics of a video game craze 17 Nov. 2006 Xbox 19 Nov. 2006 Xbox 360 21 Nov. 2006 Xbox 360 launch down to 400,000 units? 8 Nov. 2005 http://www. joystiq. com/2005/11/08/xbox-360-launch-down-to-400-000-units/ Violence erupts as video game war is declared with US release of PS3 18 Nov. 2006 Video Games: Serious Business for Americas Economy.