Why are Nintendo games so expensive?

[Zechs Merquise]

That's a lovely post, however monopolitic competition =/= monopoly. Hence the "competition" part.

 

Also hence posts like this:

 

Apologies over the misread!

 

However isn't virtually every industry monopolistic competition? As basically there's virtually no 'perfect' substitutes as advertising and brand loyalty essentially create barriers through brand loyalty?

 

Even if you look at things such as cola, there's plenty of substitute products but none are exact substitutes?

 

I still believe profit maximisation is part of supply and demand and it simply involves the manipulation of the supply curve. People are not forced to purchase Nintendo products as they typically would be in a monopoly. The market power held by Nintendo is still rather low as there alternatives and there no conditions that a consumer must buy a Nintendo product. In other words there still must be free demand for Nintendo games.

 

With essentially any advertised or branded product falling into the category of Monopolistic Competition then the fact that Nintendo manages to maintain such prices over a long period and still profits when others don't manage to do the same suggests it is indeed demand for their products at those prices that allow them to pursue those tactics!

[MoogleViper]

However isn't virtually every industry monopolistic competition? As basically there's virtually no 'perfect' substitutes as advertising and brand loyalty essentially create barriers through brand loyalty?

 

Technically there are no "perfect" substitutes, but there are substitutes that are so close that we class them as perfect.

 

Lets use beans as an example. You might buy Heinz beans, but you could also buy Branston beans, or own label. Yes, you may consider Heinz to be better, hence why Heinz raising their prices above Branston by 1p won't cripple their sales. However if they suddenly upped their prices by 20%, then many people would buy Branston.

 

Lets look at Nintendo. If Nintendo increase the price of Zelda by 20%, then you can't buy a Microsoft branded Zelda. There is only Nintendo Zelda. So if the price increase, you can't substitute, so you continue to buy it until the price goes beyond your maximum threshold.

 

For beans, the price is unlikly to reach a consumer's maximum threshold. You might be willing to pay £1 for beans. Heinz are currently charging 70p a tin. If they raise their prce to 90p, that's still within your maximum threshold. But if Branston are charging 70p, then you'll switch to Branston. The whole category would have to raise their prices for it to exceed your maximum threshold.

 

Then there's the additional effect of formats. If you think MW Wii is too expensive, and MW 360 is cheaper, then you might prefer to buy the 360 version. However that would require a £200 investment in a 360. If you don't have the console, you can't switch.

 

This isn't the case with beans. If Heinz raise their prices, you aren't unable to switch because you don't have a Branston spoon. You can switch instantly.

 

That's why something like FMCG is usually perfect competition, and the video games industry is monopolistic competition.

[Zechs Merquise]

Technically there are no "perfect" substitutes, but there are substitutes that are so close that we class them as perfect.

 

Lets use beans as an example. You might buy Heinz beans, but you could also buy Branston beans, or own label. Yes, you may consider Heinz to be better, hence why Heinz raising their prices above Branston by 1p won't cripple their sales. However if they suddenly upped their prices by 20%, then many people would buy Branston.

 

Lets look at Nintendo. If Nintendo increase the price of Zelda by 20%, then you can't buy a Microsoft branded Zelda. There is only Nintendo Zelda. So if the price increase, you can't substitute, so you continue to buy it until the price goes beyond your maximum threshold.

 

For beans, the price is unlikly to reach a consumer's maximum threshold. You might be willing to pay £1 for beans. Heinz are currently charging 70p a tin. If they raise their prce to 90p, that's still within your maximum threshold. But if Branston are charging 70p, then you'll switch to Branston. The whole category would have to raise their prices for it to exceed your maximum threshold.

 

Then there's the additional effect of formats. If you think MW Wii is too expensive, and MW 360 is cheaper, then you might prefer to buy the 360 version. However that would require a £200 investment in a 360. If you don't have the console, you can't switch.

 

This isn't the case with beans. If Heinz raise their prices, you aren't unable to switch because you don't have a Branston spoon. You can switch instantly.

 

That's why something like FMCG is usually perfect competition, and the video games industry is monopolistic competition.

 

I see what you're saying, but any industry that advertises and creates brands is by it's very nature in the bracket of monopolistic competition. Heinz spends millions of pounds every year instilling in people that their beans are superior. Monopolistic competition is when a company differentiates its products on anything other than price and the substitutes are close but not perfect. So I would argue that by the nature of the advertising that Heinz do, are they really in perfect competition as there are, at the least perceived differences, other than simply the difference in price.

 

Secondly, ANY game could be seen in the same way. Zelda cannot be produced by Microsoft and Sony. But Halo can't be produced by Sony or Nintendo. And Little Big Planet can't be produced by Microsoft or Nintendo. So all games companies are in the same boat as every game produced is individual and part of a brand with a perceived (or real) value to the consumer.

 

However there are several games that continue to hold their price and buck the regular trend of full release prices followed by a sharp reduction sometimes weeks after release (just look at the new Splinter Cell, it's been out a matter of weeks and it's already discounted in several major stores).

 

Thus if only a few games (notably Nintendo ones) hold their value more than others (multi-platform or exclusive) what is it about Nintendo games that allows them to continue to sell through at a higher price and maintain their demand?

 

NSMBWii and Mario Kart Wii are still in the top 100 global selling games, even after all this time even without the price reduction! I think part of this has to do with the timeless appeal of Nintendo titles.

[Rummy]

Thus if only a few games (notably Nintendo ones) hold their value more than others (multi-platform or exclusive) what is it about Nintendo games that allows them to continue to sell through at a higher price and maintain their demand?

 

I believe the point is that they choose to, as part of a profit maximisation strategy. It's a choice by Nintendo.

 

You can't liken the brand difference between Mario or Zelda and Halo or Killzone to the beans though. The beans are extremely similar to each other as an end product, their brand doesn't offer a unique/perceived enough value to the customer. Clothing and games however, do. The perceived value is one of the major contributing factors in this situation.

[MoogleViper]

I see what you're saying, but any industry that advertises and creates brands is by it's very nature in the bracket of monopolistic competition.

 

Surely you must see that there's a huge difference between completely different games, requiring £200 consoles, and different brands of beans.

[Zechs Merquise]

There are essentially three types of competition:

 

Perfect Competition - This is when there are an infinite number of firms, all with zero market power over the consumer all selling identical products which are perfect substitutes for another and supply and demand is determined solely by how much people are willing to pay for the product - the consumer essentially sets the price and the company must accept it. This model is actually rather rare. You would apply it anything unbranded that you simply decide to buy based on price ALONE. An example would be unbranded beans.

 

Monopolistic Competition - This is where is there is a large number of producers with a small or moderate amount of market power. They sell similar products that have close but not perfect substitutes. These products all have differences other than price such as quality, perceived quality and perceived social value. In essence, whilst these products still compete on price as well because they do have substitutes, they do not compete on price solely, due to this firms in this model set the prices, however as there are still substitutes they still must be mindful of those substitutes prices. In a nutshell, monopolistic competition covers any product that is differentiated and that competes on things other than just price. This model basically describes almost every company and every product in today's market. As once a product is branded and that company spends millions marketing it and adding a perceived value to it, it is differentiated on things other than price.

 

Monopoly - This is when you have one firm with a high market power that controls the entire supply of a single product to the market place that has no substitutes (close or otherwise) and consumers are forced to purchase that produce from the company. This allows for zero competition hence the company can set the price without any input what-so-ever from the consumer. An example of this would have been the old BT.

 

@Rummy: So yes whilst beans and computer games are rather different they both fall into the bracket of monopolistic competition as both Nintendo and Heinz differentiate their products and compete on things other than price. One of the best examples of monopolistic competition is actually beans - they are an extremely similar product, yet companies spend millions in advertising every year trying to make their beans stand out and strengthening their brand to ensure their beans compete on things other than just price!

 

@MoogleViper: Nintendo, Sony and Microsoft (and all computer game manufacturers) all pursue the goal of profit maximisation. They are all price setters. The model they pursue is one where they sell the product at the price they set (usually around £40 to £50) at which point they will gain the maximum profit. All of these companies manage to sell their games at this level until no one is willing to pay that set price anymore. At which point they lower their price to say £25. At which point a large number of people unwilling to pay £40 or £50 but still want the product are then tempted into buying it. The company takes another chunk of profit and when necessary they are again free to drop the price.

 

The issue here is why do Nintendo games (and a few notable other releases) out of all the games that exist in the same model (monopolistic competition) manage to maintain their price for longer.

 

As all games companies are price setters, all exist in the model of monopolistic competition and all wish to maximise profit then the only variable left is demand.

 

Some Nintendo games (not all*) maintain a higher price for much longer than other titles, this must simply be because demand for those products is higher than other games, thus allowing Nintendo to maintain the higher initial price for a longer period as that price is still highly profitable. Once the price is no longer highly profitable, they follow the trend and reduce their price.

 

This is borne out through sales data. The fact that recently both NSMB Wii and MK Wii both were outselling the new Tomb Raider game shows that demand for these titles remains relatively high after years of release.

 

TL-DR - the answer to why some Nintendo games maintain their prices for longer is simply that the demand for those games remains higher for a longer period allowing Nintendo to maintain their initial price for a longer period!

 

* Not all Nintendo games maintain their prices. Where as Mario, Mario Kart and Zelda games tend to do this plenty don't. I've seen bargain bin copies of Punch Out, Excite Truck, the New Play Control Games, Endless Ocean, Super Mario RPG, Battalion Wars and Wii Music!

[MoogleViper]

The issue here is why do Nintendo games (and a few notable other releases) out of all the games that exist in the same model (monopolistic competition) manage to maintain their price for longer.

 

Because Nintendo games are far more differentiated. PS3 and 360 are very similar consoles. Most of the titles are multi-platforms. And since a large proportion of consumers own both formats, there are perfect substitutes for those games.

 

Additionally, Sony won't want to sell their version of MW for a higher price than the 360 MW. Because then consumers will see that 360 games are cheaper, and buy a 360 rather than a PS3. Thus hurting their sales far more than from one game.

[Zechs Merquise]

Because Nintendo games are far more differentiated. PS3 and 360 are very similar consoles. Most of the titles are multi-platforms. And since a large proportion of consumers own both formats, there are perfect substitutes for those games.

 

What?? There are plenty of platform exclusive games on Sony and Microsoft platforms which are just as differentiated as Nintendo titles. Kinect games for example are only available on the 360 and there really isn't anything like that on Nintendo or Sony consoles. Similarly Little Big Planet is a very unique game and I can't think of many close substitutes for that.

 

Additionally, Sony won't want to sell their version of MW for a higher price than the 360 MW. Because then consumers will see that 360 games are cheaper, and buy a 360 rather than a PS3. Thus hurting their sales far more than from one game.

 

I'm not sure what you're even talking about here, if by MW you mean Modern Warfare, Sony nor Microsoft set the price of third party games. The latest call of duty games will have their price set by Activision in conjunction with the retailers. But even multi-platform games are not perfect substitutes across platforms as there are differences other than price between multi-platform games.

 

Quite simply the facts:

 

All games companies (and anything that is branded) operate under the conditions of monopolistic competition as they compete on factors other than price. Even multiplatform titles are not perfect substitutes as people choose one platform over the other for a variety of non-price based reasons - they perform differently, loyalty to a platform, the online interface and the which user base they prefer.

 

All games are sold using the model of profit maximisation and all full priced games are released for almost the same amount despite varying costs of production because the companies are price setters.

 

There are a variety of games on all systems that are exclusives and many of which are as differentiated as Nintendo titles: MGS4, LBP, Kinect Adventures etc.

 

Not all Nintendo games retain their prices for a long period. Punch Out, Excite Truck, Endless Ocean, Metroid Other M, Battalion Wars etc.

 

Some Nintendo titles (NSMB, Mario Kart and Zelda) do hold their price for much longer. As do several games on other systems. There is a clear correlation between the games that retain their price and the games that sell well. The games that retain their price are the ones that there is continued demand for.

 

Some Nintendo games clearly retain their price because of high demand.

 

Some Nintendo games - like Endless Ocean (a game which is totally different to any other) drop their price rather quickly, despite being differentiated almost completely from other games on the market. I don't think there's a vast number of games (if any) where you just swim around in the ocean cataloguing what you see!

 

If all Nintendo games held their price because Nintendo was just being stubborn, or if the most differentiated games held their price (Endless Ocean) I would happily concede the point. However that is not the case, as NSMB and Mario Kart are two of the games that do hold their price and there is a number of close enough substitutes for both those titles on Nintendo consoles and across all platforms.

 

In simple terms - the only thing about Mario Kart and NSMB that allows Nintendo to maintain there prices is the continued demand, a factor that can clearly be quantified through their continued high sales even years after release!

Edited September 14, 2013 by Zechs Merquise

[Rummy]

You appear to be ignoring the homogeneity and heterogeneity of products. As both me and Moogle have said, there's a much larger difference in the end product with games than with beans. The beans are a much more homogenous product, the games are not. The beans are not really in a monopolistic competition due to this.

 

You're being just as bad as Sheikah attempted to 'agree to disagree' - this isn't something you can just pretend otherwise or twist to your own whim. Again, I'll have to source wikipedia for my definitions as I haven't others nor time to find them, but this;

 

Monopolistically competitive markets have the following characteristics:

 

-There are many producers and many consumers in the market, and no business has total control over the market price.

-Consumers perceive that there are non-price differences among the competitors' products.

-There are few barriers to entry and exit.

-Producers have a degree of control over price.

 

What are the non-price differences between the beans? Many people will go to the shop, and sometimes buy the cheaper product - it's a price only difference. Yes, some will maybe stick with the brands they know/want - but many will not(especially if they hike the prices past a certain point - coming into elasticity of curves iirc). That doesn't happen with Zelda, you can't pick up a different Zelda.

Nintendo can set the price, because only they produce Zelda. They know people can't pick up a different one. They don't have full control over the price, because yes, they don't have a true and full monopoly - they're still bound by some market factors.

 

Truly perfect competition is rare, yes. But beans, and most of the grocery market, is much closer to a perfect competition model than a monopolistic competition model. Differentiating the product on other factors doesn't change the fact that the end product itself, is extremely homogeneous.

 

Tomb raider isn't a fair example to mention, as it's a product available over three different systems. It's actually its own competition in some respects there - but that's an area I'd be totally unfamiliar with as my economics understanding is at a fairly basic level.

 

 

As for the price relating to supply and demand - we've already covered that. Profit maximisation is based on the supply and demand curves from what I understand. It's a choice by the manufacturer who has a greater control over the ability to set the price, as their product is extremely heterogeneous.

[Sheikah]

The difference between his 'agree to disagree' and mine is that I was arguing this point ages ago while you guys were insisting it was a standard supply and demand model, which it wasn't. I was doing you guys a favour by saying agree to disagree, because it was like a never ending argument with planks of wood. :p

 

In short, Nintendo's model can't be described as supply and demand, which is what you and Zechs were originally arguing. Supply and demand models assume perfect competition (before you say nothing is perfect; the closer to perfect, the better this model applies).

 

Yet now you are correctly arguing the opposite; that you can now see Nintendo's games are far more differentiated from the competition than say a can of beans; the latter of which ascribe to the supply and demand model better. Pretty obvious U turn really, but at least you got there in the end.

Edited September 14, 2013 by Sheikah

[Zechs Merquise]

The beans are not really in a monopolistic competition due to this.

 

What are the non-price differences between the beans? Many people will go to the shop, and sometimes buy the cheaper product - it's a price only difference.

 

This is exactly false. The beans, just like games, are monopolistic competition. Heinz spend millions every year convincing the customer that Heinz beans are the best. Many people will choose the Heinz beans over the cheaper or unbranded beans simply because Heinz have sufficiently differentiated the product to consumer base.

 

This is exactly the theory behind the model of monopolistic competition. Branding and advertising ensure product differentiation even when there may be none because they add perceived value to a product allowing the supplier to charge more for it.

 

There may well be greater differentiation between Zelda and other games, but differentiation alone doesn't guarantee higher prices. The initial question posed was 'Why are Nintendo games so expensive'.

 

The answer is firstly that not all Nintendo games are expensive. Some follow the exact same model as other games and receive large reductions in price reasonably early into their shelf life. Secondly, the Nintendo games that do maintain a high price do so because demand remains high, which is no doubt down to the public perception that they are good products!

 

In short, Nintendo's model can't be described as supply and demand, which is what you and Zechs were originally arguing. Supply and demand models assume perfect competition (before you say nothing is perfect; the closer to perfect, the better this model applies).

 

EVERY model, whether perfect competition, monopolistic competition or monopoly still live within the confines of supply and demand. Perfect competition isn't the only model that supply and demand applies to. Supply and demand even applies to a monopoly, the difference is the supply curve is inelastic and changes shape.

 

All models of competition (even monopoly) work with supply and demand, the only difference is the supply curve and the demand curve changes it's shape!

 

Also, your implication is somehow Nintendo is different to the rest of the industry, which it clearly is not. All game developers operate under monopolistic competition as all differentiate their products heavily and seek profit maximisation through price setting.

 

As someone who has a degree (and a A level) in economics, I can assure you that in the most basic of economics text books you will find the shape of the supply curve on a supply and demand diagram under all the competition models. What is more, every single product will have different supply and demand schedule that is unique.

[Sheikah]

https://www.boundless.com/economics/monopolies/production-and-pricing-levels/monopolistic-firms-versus-competitive-firms/

 

 

In a monopoly market, prices are set by the monopolist based on circumstances and not the interaction of demand and supply. As the only producers in a market, monopolists face a downward-sloping market demand curve. If the monopolist raises the price of its good, consumers buy less of it, so the quantity of output is small. Conversely, if the monopolist reduces the quantity of output it sells, the goods become scarce, and the price increases.

 

And as a lot of the recent discussion has been pointing out, games like Zelda and Mario mean it's more like a monopoly than perfect competition when it comes to Nintendo own brand games.

 

(That also goes completely against your argument that even monopolies abide by S&D)

 

Can't you just admit that you're wrong on this one?

Edited September 14, 2013 by Sheikah

[Rummy]

This is exactly false. The beans, just like games, are monopolistic competition. Heinz spend millions every year convincing the customer that Heinz beans are the best. Many people will choose the Heinz beans over the cheaper or unbranded beans simply because Heinz have sufficiently differentiated the product to consumer base.

 

Yes, many people will choose Heinz, but also many people won't - they might choose Branston instead. Some might choose Branston, some might choose a different brand, some might go whatever's cheapest at the time. You're ignoring the homogeneity/heterogeneity of products however, and that's very important. Do you always buy the same bread when you go to the shop? The same beans, the same veg, the same tuna, the same spreads etcetcetc? Do you always shop in the same shop for these products?

 

If someone doesn't want Heinz branded beans(say because they're too expensive at the time), they can opt for the Branstons, or the own brands. Or maybe they're usually a Branston person as they're cheaper but suddenly Heinz is on special offer - so they opt for the Heinz this time.

 

It's a substitute - one that Zelda doesn't have. If I don't like a Nintendo Zelda - I can't opt for the competition(as a substitue) because there isn't one per se. I can't buy a Microsoft brand Zelda instead, or a Sony brand Zelda - there's only one Zelda and that's Nintendo's. The product is incredibly heterogeneous; whereas with beans they are not. If I don't want Heinz baked beans for whatever reason, I can still opt for the Branston brand baked beans instead.

[Zechs Merquise]

https://www.boundless.com/economics/monopolies/production-and-pricing-levels/monopolistic-firms-versus-competitive-firms/

 

And as a lot of the recent discussion has been pointing out, games like Zelda and Mario mean it's more like a monopoly than perfect competition when it comes to Nintendo own brand games.

 

(That also goes completely against your argument that even monopolies abide by S&D)

 

Can't you just admit that you're wrong on this one?

 

Monopolies do conform to supply and demand. I'm not arguing with you, I'm stating facts. A monopoly has complete control over the supply of a commodity. Hence all that happens is the supply curve becomes vertical at the sole quantity of supply, set by the supplier. Demand then is set at the point the demand curve cross the vertical supply curve. Effectively, the company sets the price it wants to and supplies the units to meet the demand at that point.

 

Supply and demand has still occurred, but it was manipulated by a company. The company can only do this because of their monopoly status and the lack of substitutes.

 

ANSWER THIS: If Mario and Zelda make Nintendo like a monopoly, how come Little Big Planet, Uncharted, The Last of Us and Killzone don't make Sony a monopoly and how come Kinect games, Halo and Forza don't make Microsoft a monopoly!

 

@Rummy, the point of monopolistic competition is that advertising and band awareness means that Heinz beans don't compete on merely price. The also compete on the perception of quality. Which means it isn't perfect competition as that is solely price based competition. There are many people who only eat Heinz beans because they believe they are superior, this means it isn't perfect competition. That is the definition.