Sunday, August 3, 2008

The Oligopoly Perspective: Nintendo Wii vs. Xbox vs. PS3

Statement 1
“Microsoft is cutting the Japanese price of its Xbox 360 games console by 13% as it struggles to match sales of rivals Nintendo Wii & Sony PlayStation 3”

Statement 2
“Earlier this month, Sony also cut the cost of the PlayStation in the US & introduced a cheaper version. Both the Xbox 360 & PlayStation 3 are now trailing behind sales of the Wii”

Statement 3
“In the first half of 2007, Microsoft sold 122.565 units of Xbox 360 in Japan, compared with 503, 554 PlayStation 3 units & 1.78 million of the Wii”

Source: BBC, 22nd Oct 2007

PS3, Nintendo Wii & Xbox are best represented by the oligopolistic market structure where:

(a) The industry is dominated by few large firms. In UK, definition of an oligopoly is a 5 firms concentration ratio of more than 50%
(b) Strategic behaviour/ interdependence among firms. An oligopolist firm will be affected by how other firms set their price & output
(c) There are barriers to entry but less than monopoly
(d) Products sold are differentiated

Believe it or not, this form of market structure is the most common in reality

From Statement 1 & 2, there is a strong indication that those 3 firms are likely to engage in price competition to enlarge their own market share. Somehow in oligopoly market structure, it is never healthy for firms to do so. This can be explained using either the kinked demand curve or game theory. I’ll show you the first one here (we’ll do the game theory later for another analysis)

Some firms may think that by selling at a higher price they may make more profit per unit sold. However this may not be applicable to an oligopolist. Say, Xbox attempts to increase the price beyond the current level of P1. In this case, its rivals will not follow suit. So, Xbox will lose a large share of the market & suffer losses too as they become uncompetitive compared to other firms. The upper part is elastic, & any price increase will lead to fall in total revenue

However, if Xbox reduce its price from P1, its rivals will follow suit this time. As such, the inelastic demand curve (AR) means fall in price leads to fall in total revenue. This is because, the quantity of its sales will only increase by fraction given that other firms retaliate by doing the same. In the end, they do not enjoy much increase in sales & yet earn lesser than what they could actually earn before price cut


Price war is never a good strategy for these firms as it will just lead to lowering down their profit margin which is already thinning due to high capital reinvestment onto sophisticated technology.

It is best if they can engage in non-price competition such as:

(a) Product innovation e.g. better graphics & bigger processors
(b) Effective advertising with appealing themes e.g. ‘Larger than life’ etc

Also, non-price strategy is more difficult to model compared to pricing strategy

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