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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.
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.
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.
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.
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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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