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

Conclusion

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

1 comment:

otr214423 said...

VIRUS REMOVAL
Is Your Computer Sluggish or Plagued With a Virus? – If So you Need Online Tech Repairs
As a leader in online computer repair, Online Tech Repairs Inc has the experience to deliver professional system optimization and virus removal.Headquartered in Great Neck, New York our certified technicians have been providing online computer repair and virus removal for customers around the world since 2004.
Our three step system is easy to use; and provides you a safe, unobtrusive, and cost effective alternative to your computer service needs. By using state-of-the-art technology our computer experts can diagnose, and repair your computer system through the internet, no matter where you are.
Our technician will guide you through the installation of Online Tech Repair Inc secure software. This software allows your dedicated computer expert to see and operate your computer just as if he was in the room with you. That means you don't have to unplug everything and bring it to our shop, or have a stranger tramping through your home.
From our remote location the Online Tech Repairs.com expert can handle any computer issue you want addressed, like:
• - System Optimization
• - How it works Software Installations or Upgrades
• - How it works Virus Removal
• - How it works Home Network Set-ups
Just to name a few.
If you are unsure of what the problem may be, that is okay. We can run a complete diagnostic on your system and fix the problems we encounter. When we are done our software is removed; leaving you with a safe, secure and properly functioning system. The whole process usually takes less than an hour. You probably couldn't even get your computer to your local repair shop that fast!
Call us now for a FREE COMPUTER DIAGONISTIC using DISCOUNT CODE (otr214423@gmail.com) on +1-914-613-3786 or chat with us on www.onlinetechrepairs.com.