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Why You Can't Buy A 360
Slate Magazine is running a story about the difficulties of finding an Xbox 360 this holiday season. They explore the reasons behind the console shortage, and have some ruminations on Microsoft's motives. From the article: "So, supply shortages are a fact of life. The puzzle is somewhere else: Why don't companies raise prices when supply is short and demand is frenzied? Leaving aside oxygen and a few other essentials, there is no such thing as an absolute shortage of anything: There is only a shortage if the price is too low. At the moment, Microsoft is easily selling out the half-million or so Xbox 360 units (there's no official number) for prices starting at $300 for the basic package. Why doesn't Microsoft price them at $700 instead?"
no need for microsoft to raise prices, as people on ebay will surely sell you one for a mere $1200!
At the end of the article this guy suggests that Microsoft should have sold all of their initial stock via auction. Ignoring the catastrophic potential for fraud, he claims that such a move "wouldn't have damaged their public image because the buyer is setting the price, not Microsoft" (paraphrased). That's the most laughable conclusion I've ever read in a Slate article, which is saying something...
Not only would everyone have been pissed that they weren't getting a fair shake at a 360 (especially real gamers, who aren't known for their endless funds), but the profits garnered from a few thousand 360's sold for ~$600 would have been miniscule (on the Microsoft scale of profits, of course). Furthermore, the ill will which certainly would have been created (contrary to author's opin, gamers would have been PISSED) could undermine the "real" launch of the console, when the normal demand could have been met.
All in all, this guy's an idiot for thinking that because some people were willing to pay a ridiculous amount for a 360 all of the consoles should have been sold at a ridiculous price.
Because supply vs. demand only works in freshman economics class. If Microsoft priced the things at $700, nobody would buy them if they knew the PS3 would be $300. Furthermore, there are certain expectations for console pricing. Every company that tried to make a $700 console (namely, 3DO) died a slow and painful death.
Besides, the idea behind selling consoles is not to make money. The real money is made on games. The console needs to go to the people who will buy the most games, which are also the people most eager to wait in line at Best Buy all night to grab a 360.
A hard-core fan would be happier paying $700 than not getting one at all. That's the point of economics, the people that want it the most will pay the most.
Higher prices ensure that only the hard-core fans get the console, and other people will just have to wait until the price drops to a point they are willing to pay.
I've had enough abrasive sigs. Kittens are cute and fuzzy.
Because a company has finally come around that doesn't care about money. A company who decides that they want to make their customers look cool by being the only one on the block to have their rare game system. If you go out and by commonly available, high-priced system, you are a rich snob. If you go out and mannage to get your hands on a semi-high-priced, nearly-nonexistant system, you are truly the coolest of the cool.
I heard this guy get interviewed on NPR, and he sounds like an intelligent guy, but I think he is over analysing things, and missed the point that MS just got the console out the door as fast as possible, which is why they couldn't stockpile them, as he questioned why they didn't. MS's only intention was just to hit the holiday season and get out as many as possible. The price they chose was only made in the attempt to second guess and match what the PS3 and Rev will sell for. They will most likely still be selling out when the PS3 hits the shelves, and if it is $700 on the shelf next to a $300 PS3, the sells will plumit. Start at $700 and lower $300 in the course of 3 or 4 months is unheard of, and will only scar customers. His idea of MS selling their units through eBay themselves is interesting, but that would only piss off retailers that MS relies upon.
Same thing with minimum pricing. Ask why everyone sells iPods for the same price - because Apple says "you undercut our recommended pricing, you never see another iPod."
It's a game the retailers all play, or they don't get the hot products to sell.
1) Microsoft has a deal with each distributer to control the exact price of each console. Best Buy cannot change the prices to fluctuate with demand. Best Buy can, although, bundle products together to help mitigate the demand.
2) Microsoft will release another 300k or so 360's this weekend. Each Best Buy has from 30 to over 70 ready to sell this Sunday.
3) The 360 will continue to strive not only from what it can do but also how cheaply it can do it. The Power/Price ratio is completely outstanding. You cannot spend 2grand right now on a new PC and come anywhere close to the ability of the 360 (at a measily 300$).
PS3, on the other hand, has taken more expensive routes in developing their console. It will probably debut at aruond $500, and by that time the 360 will be easily at $250.
This is not how the economic theory works. Producers can enter markets and produce at any price they want. However, they will quickly lose market share until their economic profit approaches zero as more firms enter at lower prices or if other producers already exist in the same market they get no profit. However, this is not a perfectly competitive market i.e. agriculture would be close. Just a clarification; non-economists can easily make many theoretical errors easily so take this with a grain of salt when reading the econ stuff.
Last time Microsoft released an XBox in the UK, they had to drop the price by £100 after only a month or two, because no-one was buying them at £300.
As you can imagine, this somewhat annoyed the people that bought them at the higher price.
Microsoft would much rather have shortages at a price they plan on sticking to for at least 6-12 months than annoy their most valued game-hungry customers.
"I Know You Are But What Am I?"
If people see the prices of consoles dropping drastically within the first few months (ie: when the demand has dropped off), they're more likely to wait for a better price. The company in question is better off guessing one constant price (or range or prices like the core and full XBox systems) that will maximize their profits. Once you bring in fluxuating prices, you have to consider that your customers will strategically wait.
It's absolutely true that if you want a shortage of something, price it below its market worth.
Doesn't matter if it's gas (Carter), grain (18th c. France), or Xboxes, if the market thinks X and the price is set at X-something, there will be a shortage.
OK, so there's a shortage. So what? Xboxes are not energy or food. There's no particular harm done, other than to MS's immediate profit, by underpricing the 360.
Maybe MS has decided that the revenue from higher-priced XBoxes is more than offset by the cost in bad publicity when the market price drops by half by spring. Maybe they realize the value of being the hot item instead of Cabbage Patch dolls this year.
There are other forces at work besides the next quarter's earning report. A console system isn't a one-time revenue stream like a loaf of bread or a gallon of gas. The Slate writer is right in his assessment, but also short-sighted.
...but I haven't seen any kind of shortage. You can find the 360 at pretty much any decent retailer. These things aren't exactly jumping off the shelves here (Southern USA). Everyone that I know that was planning on getting one right away has gotten one, without standing in God-awfully long lines or any of the other stuff I have heard of people going through to get one. They bought them at normal retail prices, and didn't resort to paying $5000 on Ebay. Perhaps it is just the extremes (rural and urban) that don't have any of them?
Perhaps they wouldn't piss people off if they put out a price map. First run will be $999. Second run 2 weeks later will be $699 final run after Xmas will be $299 form then on. This way you can advertise it as pay what you want at the time that you want. If you want it 2 weeks earlier than everyone else you'll pay $300 more. is it worth it or should you just wait the 2 weeks or do you want to wait until after Xmas? Would all but stop the ebay scalping and would help Microsoft to not take a loss on the first ones sold. (ohh I'll get modded down for that I know. I can't give a suggesting that'll make MS money)
Paying taxes to buy civilization is like paying a hooker to buy love.
If MS were trying to make money on the console itself, the model suggested would be correct.
That's not what's happening.
MS makes money, theoretically, by achieving a high market penetration and then getting licensing fees for all the games that are sold. High penetration = lots of games = lots of revenue. That's why they're selling these things at a loss---the more people have them, the more money MS makes in the long run.
In this model, there truly _is_ a shortage, because the ideal scenario is an infinite number of XBOX360s available for sale (well, there are a few problems with that---obviously you only need enough that everyone gets one, and beyond that, there is evidence to suggest that in some markets, including this one, demand actually responds inversely to supply in certain situations, hence the rumors that MS was attempting to artificially increase demand by making them hard to get).
MS stands to make the most money by getting as many of the out as possible. Simple as that.
Now, you could argue "but the early adopters are willing to pay more, and they make up a large enough minority that the initial supply will be gone even at $700." Sure, MS could sell the first batch for $700 and drop the price immediately to $500. Problem is, they can only get away with this trick once, if that---once everyone knows that just have to wait a couple months and the price drops a couple hundred bucks, even most of the early adopters will wait, and that kills MS's edge over Sony in getting the XBOX360 out way before the PS3.
Just my two cents.
-rsw
Ages ago before computers existed and when dinosaurs still roamed the earth I was a baker by proffesion. Now bakers have a odd product, it is in constant demand (in times of economic crisis be in the food industry, people need to eat) but producing it is a hassle. You can't say, Oh monday is a slow day lets do some extra bread for the rush on saturday. You can't (if you want to keep your customers) sell yesterdays surplus today.
So most bakeries and even supermarkets run out before the end of the day (better sell no then be stuck with merchandise you got to throw away, waste eats up your already slim margin extremely fast). Just try to get bread at 6pm. Can't be done (well recently supermarkets have started with doing an extra run late in the day with bread that just needs to be baked off (sorry don't know the english terms) but many bakeries will already be closed or simply sold out)
So why don't they raise prices this person would ask? Well einstein because people got a very clear picture in their head of what they are willing to pay for their food and they are not going to exceed that. While people need food if the bread they can buy at 6pm is to expensive they will just eat something else.
Same with the 360. It's price is not set by supply and demand. It is set by a combination of what the people are willing to pay for it vs the cost of producing it. E-bay DOES NOT matter, same as people willing to pay 2 euro for a sandwich does not mean they are willing to pay 20 euro for a loaf, a lettuce and some meat (Tell your mom your local stay open late supermarket sells you that for about 7-8 euro and she will complain bitterly about the son she raised). Think of it like this. 1st edition Superman sells for thousands of dollars. That does not mean Marvel can sell their latest comic for 3000 dollar. Perhaps you have to have studied economy not to be able to spot this. It is not something you have to study it just is.
MS also of course will figure in that if they sell the device at 700 and drop the price in two months they will have two effects. The people who bought it at 700 will be pissed and the people who see the new price will think, lets wait for the next price cut.
I am like this with handhelds. I know that within a few months the price will have both come down AND it will have a bundle available. Look at the PSP, with the giga pack you get a 75 euro price cut.
Supply and demand is overrated as a price fixer. Just my example of bread being sold out before many people arrive home from work shows that in retail supply and demand hold very little sway. An other example was a breakfast cereal (brinta) wich I believe due to a fire was out of supply for a few months a while back. Now brinta has no ready replacement (it is a porridge) but did that mean supermarkets spiked the prices on their last supplies? Of course not. Nobody would pay 10 euro's for a package even if the alternative is going without. Even those who could easily afford too.
Some things just have a fixed price. MS realizes this. This economist apparently doesn't. 300 dollars is what the 360 will sell for. Less and they will loose to much (or worse people might think it is bad quality) more and people will just not buy it no matter how rare it is.
Oh and a final thing about e-bay. There supply is far far far more limited. 360 on ebay is like that first edition superman. Its pricing has no place in real world economics. Only a fool or an economist would base its retail prices on what is happening on e-bay.
MMO Quests are like orgasms:
You may solo them, I prefer them in a group.
You create a greater frenzy by making the console hard to come by.
First, the impression is that the system must be good if every last unit is being sold. If there are systems are sitting on the shelves within the first month of release it sends the wrong message.
Second, those that can't get their hands on a console are more likely to get even more anxious about getting their hands on one. It clouds judgement enough that one becomes available they wont think twice about buying it. That is assuming, of course, that the system is actually good and consumers are hearing positive reviews.
Companies aren't likely to be ambitious and ship out enough units to satisfy everyone from the start. So they need to cut back to ensure a shortage.
There are already plenty of idiots with so lacking in patience that they're willing to pay 5 times more for something that you're going to see sitting on shelves everywhere within a month or two. Not to mention that for the most part consumer products aren't priced according to demand anyway.
Today, I walked into Futureshop (BestBuy in Canada). I asked for a 360. They received 62 of them this morning. Got it, the warranty, a controller and Project Gotham Racing 3. There's no trouble getting them. At least in downtown Montreal. The stored had been opened for 30 minutes and there were still some left, tough that might be because of the snowstorm outside.
That must be some odd definition of "won" that I've never heard of before. You still had to pay for it, didn't you?
This whole thing is nuts. There are plenty of new games out for the consoles that are plentiful to justify waiting until there are a decent number of games and a decent supply to buy a 360. So many in fact, that you probably don't have time to play them all between now and then. Anybody who stands in line in the cold for hours for an 8% chance of buying one (for themselves or as a christmas present) is a moron.
On the other hand, I still haven't received my preorder, so I'm sticking with the "Evil Bill and the SGC" theory.
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Because the supply bottleneck won't last forever. They have to keep both the fanatics and fence-sitters happy for now.
How would you feel if you paid $700 for an Xbox in November and then the schmuck down the street picks it up for $300 2 months later? You'd likely see it as MS gouging its loyalest fans for a quick buck and catering to the common crowd once your wallets were tapped.
People who are buying Xboxes on eBay are going to be in exactly that situation two months from now. More than that, they already know that they will, and it doesn't seem to bother them enough to keep them from buying. If Microsoft were doing the same thing, everyone would still know that the high price would only last as long as the supply shortages. The only difference is whether the extra money goes to Microsoft, or some random person who was lucky enough to be able to buy one early. I can't claim much insight into the minds of the people who would pay an extra $400 to have an Xbox a few months earlier, but if they're not mad at the eBayers they're buying from, it's hard to imagine they'd be mad at Microsoft, since they'd obviously rather have an Xbox now than an Xbox and $400 two months from now.
FROM: Brian Dunn, President - Retail, North America
RE: Launch of Xbox 360
CC: Best Buy Store, District and Territory Employees
DATE: December 6, 2005
I'm writing to apologize.
While all of us at Best Buy were thrilled to be part of the recent launch of Microsoft's Xbox 360 video game system -- one of the most anticipated events in the history of electronic gaming -- the launch did not go as we had hoped. We sold out of Xbox 360s nationwide in less than two hours, and most of our stores did an outstanding job of serving our gaming customers. I'd like to thank the majority of our employees, who provided a terrific experience for customers at the launch date. However, our promotional activities in certain cases failed to follow company guidelines. As a result, some of our valued gaming customers had an experience in our stores that was inconsistent with what you've come to expect from us, as a leader in the consumer electronics industry.
Specifically, customers in some Best Buy stores were told that they were required to buy additional Xbox accessories or services if they wanted one of the sought-after Xbox 360 consoles, even though we advertised the Xbox 360 console alone. I want to be very clear that Best Buy does not condone pressuring customers to purchase items they may not want or that may not fit their lifestyle. In fact, these behaviors are in direct conflict with our desire to serve customers' needs better than anyone else, and our values of honesty and integrity.
We are currently investigating all leads about promotional practices that may have violated the company's guidelines, and we will take disciplinary actions as appropriate. We have also reminded all of our stores about our policies with respect to launches of hot products. Meanwhile, on behalf of Best Buy, I'd like to offer a sincere apology to any customers who felt pressured to buy items they did not want.
Customers who are unhappy with Xbox 360-related purchases made in November 2005 may return unwanted items for a full refund at any Best Buy store. In addition, if your Xbox 360 purchasing experience did not meet your expectations for any reason, please e-mail us at xbox360@bestbuy.com. (Employees with information pertinent to our investigation are encouraged to call our Ethics Hot Line instead.)
Lastly, I would like to invite you back to our stores, particularly later this month, when Best Buy will receive more shipments of Xbox 360s. While supplies continue to be very limited, we are truly excited about this new gaming platform, and we'd like to deliver the best of that experience to you. We promise an in-store experience that is focused on your needs and the needs of everyone on your holiday gift list.
Brian Dunn
Best Buy
Wow, Best Buy has an ethics HotLine.
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