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PS3Blog.net | August 19, 2017

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PS3 Economics | PS3Blog.net

This post will outline the traditional economic model of PS3 sales during this holiday season. This is basic first semester economic theory to many and just plain common sense to others. But there has been a lot of confusion about this issue, so I’d like to clarify it.

Supply Demand Theory

This is the fundamental supply/demand graph. The red line indicates supply and the blue line indicates demand. Notice how buyers are willing to buy more units as the price decreases and suppliers are willing to sell more units as the price increases. These two factors of supply and demand react against each other to reach an equilibrium point. This point indicates the price and sales volume that the market gravitates towards.

This fundamental theory is very applicable to traditional commodity markets where there are many buyers and sellers trading the same product such as corn or oil or labor. The PS3 market this holiday differs in two main ways:

  • The available inventory is fixed. There is only one supplier (Sony) and they will only be able to provide a set amount of inventory this holiday season. Additional inventory will have to wait until 2007. The formal terminology for this is an “inelastic supply”.
  • The retail price is fixed. In traditional commodity markets, the price constantly fluctuates towards the equilibrium point set by the supply/demand effects of the market. For the PS3 holiday, there is a single fixed price which is predetermined by a business and analyst group based on various business and marketing estimates. The formal terminology for this is an “inelastic price”.

There are two main potential categories of outcomes of the PS3 selling holiday:

Shortage

If consumer demand is high relative to supply, there will be a shortage. Consumers are willing to pay more than the set price but there simply isn’t enough inventory to sell to them. Most economists would say that the product should have been priced higher and more inventory should be produced. The green hashed area represents the extra money that the seller forfeited that consumers were willing to spend while still buying up all inventory. Often, as seen with the 360, there will be scalpers, ebay sellers, and a gray market that attempt to capture this extra margin.

Surplus

If consumer demand is low relative to supply, there will be a surplus. Consumers simply weren’t willing to buy all the inventory that was made at the price it was offered at and some inventory goes unsold. In this scenario, most economists would say the good is priced too high or there was too much of it produced.

Summary

There will be one of two scenarios this holiday. Either

  1. Consumers will be shocked at the high price or favor alternatives and the PS3 will languish on store shelves. This indicates that the launch price was set too high.
  2. Consumers will eagerly buy up all available PS3 inventory leading to shortages. This indicates that the launch price was actually set too low.

My main point that I think many don’t understand is this: If you think the launch price should be lower, then you should share the corresponding belief that there will be a significant surplus at the current price. If you think that there will be shortages, then you should share the belief that the launch price should actually be higher.

Addendum: Perception

One factor not captured by this theory is public perception. While economic theory suggests that the price should be raised during a shortage, that often leads to a negative image. When the 360 launched, demand far outpaced initial supply. It probably would have sold out at twice the price. However, that would had formed a very negative perception of the product that could last long after the price dropped.

Comments

  1. Finally someone who understands the PS3 pricing system. Very informative and spot on as far as the values and principals of the ecomomies involved. Very good. spot on. I also like the point at the end about public perception which often an overlooked factor involved.

  2. You also need to take into concern that:

    1. The PS2 was a VERY high price also and sold most of its units at the end of its generation (meaning the last 1.5 yr)

    2. At first, it was regarded as TO HIGHLY PRICED, but regardless, it was sold out for weeks on end.

    As I am no Economist nor a Manager or such a type of person (I am studying Car Engineering), I dont know much about such things, but it is clear, that the starting price mainly matters for early adopters and hardcore players. Sooner or later the price will drop and many others will buy it nonetheless… This goes for ALL consoles!

    Its not just the “Hardcore Games” that sell the system (meaning MGS or DMC), it’s its name, it’s “special” games, which aren’t available for other systems (like Sing Star, Buzz or you name it).

  3. Darrin great post. I agree with a lot of it. The only factor that your graph doesn’t cover is PS3 fanboys. Fanboys of a system will go to extremes to get what they want. We saw this with the 360 launch. People paid 3-4 times what the system cost just to have one. This is only a small portion of the install base.

    My concern about the price is not the launch window or even the first 6 months of retail. Whatever Sony makes they should be able to sell. When you get to the 3-4 million mark the problems will start. This is when the not so adament will either buy or pass until a price drop happens. $300 (PS2) was a lot of money but it was only a 50% increase from the previous gen. Sony is doing a 50% increase (Most fanboys want the better systems) in only one year. That is asking a lot when people were freaking out about a $400 system.

    If I ran Sony, I would release the first 2 million units at $1000 price. Include something that makes the system worth the extra price during launch that is either collectable or make a special case for those first few million units. Announce your real price so the non crazy fanboys can hone in on a price they want to pay. This eliminates some of the loss and should help stop the crazyness at launch.

    Another concern is price drops. When will the first one be? This is why I think Developers are holding off and many gamers like myself are waiting. I refuse to pay that much. If history is a guide most US console releases stay at the launch price for atleast a year and sometimes 1.5 years to get through 2 X-mas seasons. I really have a hard time thinking they will be able to wait that long. If a price drop happens 6 months after launch (say $100) what will the early adopters say. I would venture to say they would be furious.

    Sony has their hands full. I am very glad that I don’t work for them right now.

  4. Darth Pixel

    Matt,

    Let’s use logic.

    If, after 6 months/6M PS3 units sold, sales go down, what can Sony do?

    1. They can reduce production to match demand and avoid stockpiling expensive hardware, until they can reduce their costs and the price of PS3.

    2. They can cut the price of PS3 to keep sales going strong.

    In the first case, they lose market share during the first 2 years and hope to come back after that.

    In the second case, they incur heftier losses at first and hope they make it all back in the next 5 years.

    If it weren’t for Blu-ray, I would say they are going to go with “1.”.

    Because of Blu-ray, I think they might go with “2.”.

  5. Thanks guys for the great comments and encouraging remarks! This is one my first posts so it is very appreciated.

    “The only factor that your graph doesn’t cover is PS3 fanboys. … People paid 3-4 times what the system cost just to have one”

    Actually, the graph does cover that. The upper left end of the blue demand line represents the millionaires and people who will pay any price. The lower right end represents the people who will only pay very bargain prices. As the price point moves lower you attract more buyers (units sold moves right) and as the price point goes higher, you attract less buyers (units sold goes left).

    Several of you raise a good point. This is just for launch pricing. After the initial 6-8 month launch window, the market is no longer limited by production and then lowering price makes a lot more sense; at that point, the issue becomes how many consumers do they want to attract and at what cost.

    Matt, if they drop the price $100 next year, I don’t think anyone would be furious. That’s a small and very fair premium to get a PS3 right out of the gate.

  6. Wow, taking intro to econ doesn’t make you an economics wizard. This whole post is rather pointless–no one is doubting that the PS3 will sell out initially. There is always that harcore group that don’t care about price. “PS3 economics” isn’t based on Sony maximizing profits at launch. If anything, it would be to minimize loses. Selling out the initial consoles is a given and not a concern. It’s reaching a critical mass in the market that matters for the consoles future. That doesn’t happen by making the most money possible at launch, but by building momentum and making it affordable to the masses.

  7. “no one is doubting that the PS3 will sell out initially”

    But people are extremely critical of the PS3 launch price and those two views don’t make any sense together. If you think the PS3 will sell out due to supply limitations, the price during that time isn’t a problem.

    “It’s reaching a critical mass in the market that matters”

    But since they will be supply constrained, dropping the price won’t move more volume and won’t help critical mass.

    I’m not claiming to be an econ wizard, I’m merely using introductory economic theory to illustrate that the price of the system on day one is not a problem.

  8. Anthony

    I’m glad to see people reasoning through the economics, unlike most of the rest of the media. But I think there’s a big assumption being made above. The first thing to do in an economic analysis is identify the market(s) — what _exactly_ is being bought and sold in each of those graphs? In this case, is it all “next-gen consoles” or just “PS3 boxes”?

    If PS3 boxes, then Sony sets the price and that’s what consumers pay per unit (Sony has a monopoly), as Darrin says. Sony’s high price makes a lot of sense. However, if next-gen consoles, then the supply curve and market equilibrium will be determined through competition between Microsoft and Sony. Such a huge price difference between xbox 360 and PS3 doesn’t make much sense at all — the high price will result in consumers going for a 360 instead.

    So Sony’s high price can only be justified by a large “PS3 box” market. The key question is how badly do people want a PS3 over any other next-gen console? On launch day, the strength of Sony’s brand provides the answer, and I’m confident that Sony has better data than anyone else to come up with it (and I also believe that this is what Sony’s now-famous quote was trying to explain) . But on the day after, once impressions and reviews hit the internet, it’s going to come down to how much better the games are. In the worst case, consumers might conclude that they are no better than what’s playing on the 360, and Sony will have to cut the price.

  9. Anthony, even when you take into account competition from 360 or Wii, it doesn’t matter whether they sell out at $200/unit or $900/unit; if a price drop doesn’t move more units then it won’t take away customers from the competition.

  10. Anthony

    Darrin, I agree, and I didn’t mean to suggest there was anything wrong with your first post: if PS3s sell out on launch, then the price is too low, regardless of competition. But the next question to ask is what’s the highest price Sony can set yet still move all its units? (Should they instead do $1000, as Matt says, for fanboys? For how long after launch?) And I think you need to take competition into consideration to answer that.

  11. Blue Spotted Frog

    I don’t think raising the price is an option at all. They have already announced the price at E3 this year and people are already angry enough as it is. If Sony decided to raise the price for the first two months or so and then bring it back down, it would have irrepairable damage that would affect public perceptions of Sony in the long term. Raising the price would look like price gouging and anger people further. A PS3 shortage to some extent is inevitable and we just have to put up with it. 🙁

  12. Doing the $1000 thing right now would be ludicris. If they would have announced a $1000 unit when they announced the $600 unit it would be acceptable. Granted the $1000 unit has to be different from the $600 unit. Since hardware is not an option, they could have created a unique casing that would only be offered with the $1000 unit. If they went with a Black $1000 unit, an extra controller and some making of book, etc (think of whatever crap that a crazy fanboy might want). They could have sold millions of them.

    If they released the $600 unit in off-white or silver this would seperate the units and I beleive that Black is still the color of preference.

    This would have worked if they launched them a week or two apart. This also would have made the $600 units seem not-as-expensive.

    The problem with a price cut after 6 months is much bigger than you guys think. 360 is going to offer a $399 premium with 1600 MS points, 3 months of Live Gold, and Project Gotham Racing 3. Reading some of the forums a lot of people who bought the console around launch are pissed. I don’t get it. They have been enjoying the system for almost a year and now they want a $50 game for free? Crazy. Just think how mad people who bought a launch $600 PS3 would be if March 1st they drop the price to $500. They won’t be a real good reason to get a launch unit because the games will be lacking. If March comes and the console is cheaper and their are finally some great games out the launch day croud will feel ripped off. The benefit of being an early adopter is lost.

  13. The benefit of being an early adopter is that you get the product right away. You get to use it right away. You get bragging rights about being one of the first to own the product. I don’t see how you make the jump in your last sentence from cheaper console to losing early adopter benefits.

  14. the graphs do not show up can u please send me the article and graphs on my mail….

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