More on the Xbox shortage

I’m finishing an MA in Economics at Boston University right now, and am also the author of "PSX: The Guide to the Sony Playstation" which is being released this week.  In the course of research for the book, I interviewed a number of VPs at Sony about why they priced at 299 when the PS2 came out.  The waits for the PS2, in fact, were much longer than those for the Xbox360, and still no rise in prices.

Here’s my understanding of the pricing situation:

1) Console prices are announced months in advance of the system release, unlike many other products.  There is a general consensus that a price above 299 (or 399, perhaps, which is the true price of the 360) will be unsuccessful.  In the mid and late 90s, a huge number of consoles bombed by announcing prices of 400-1000 (Sega Saturn, cd-i, 3DO, Amiga CD32, etc.). Third party developers are essential to a system’s success (a system without games, after all, does nothing), and in order to have games ready for a system, they evaluate a system a year before launch.  A high price would discourage developers -> discourage games -> lessen demand.  Given the competitiveness of the console game market, I have no doubt that major third-party game producers (Activision, Ubisoft, Square, EA, etc.) would balk if Microsoft were to raise prices, fearing, justly or not, that system sales two years down the road (when their games are ready) will be lower. For the 500-pound gorillas (EA in particular) there might even be contractual stipulations with MS about the system price.

The other reason is the one Alex gave – The $700 consoles on ebay represent the highest WTP on the demand curve, not the average.  Personally, I don’t think MS would’ve sold 500k Xboxes at $500.  Why MS didn’t auction off "limited edition" systems early, as you said, remains a mystery though. Nintendo has done exactly that with some items (in charity auctions, however).

In any case, the basic pricing structure is no mystery at all.  MS needs to satisfy both end-users AND third-party developers, not just end-users. They’re selling a *platform* more than a product.


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