Brooks R. Robinson was roused into action on 04/10/02 12:03 and wrote:
| * martin f krafft <madduck@debian.org> [04-10-2002 15:14]: | > > If I buy an X-Box that cost $300 to make for $200, then MS `loses' | > > $100. If I don't buy one at all, then they lose $300. | > | > Where did you learn economics? | | I should resist, but sorry. | | More Xboxes sold, is more developer support, is more games, is | bigger market share, is not nice, is it? I think that this purchase would decrease market share since they are not being used for gaming and not prone to entice someone to purchase it as a game console. MS would lose (development) dollars because the XBox is being sold at a loss. It might cause further failure by giving MS a false sense that their product is selling well for it's intended design; which could in turn cause future problems when it turns out that they aren't as popular as they were led to believe. The idea that they would lose $300 from a missed sale is accurate given market saturation (no more willing buyers). IMHO, right now, at least, the market isn't even close to saturation, especially with Christmas coming up, despite the dreadful US economy. A lost sale will be picked up by another buyer. A large purchase for alternate use would get them out of the hands of a willing buyer that would make up the margin on games for MS. (The point I'm trying to make here is this... I'll eat the pan of brownies so that you don't eat them and get fat, are I so nice for doing so!?! :) Thoughts...
I drew a few supply & demand graphs and the only conditions under which this market penetration scheme is going to work is if consumers' demand is fairly elastic at those prices (eg a small price change induces a much larger change in behaviour; though in this case a large price decrease induces a very substantial increase in purchases of XBoxen). The other requirement here is that consumers' demand for games must be fairly inelastic otherwise MS would be losing too much in sales by jacking up the cost of their games. The intriguing thing is that this isn't the most profitable way of doing things *IF* MS has a monopoly in this market; the most profitable thing to do would be to do what they do with their OSes vis-a-vis other software; they sell the OS at an extravagant price and include Office and IE at marginal cost, in this case nothing (the marginal cost of all existing software is 0 or pretty close to it; the only cost is really the cost of distribution, whether by CD or downloading). So with XBoxen MS ought to be selling them at highly inflated prices and selling games at little more than cost. The reason I suspect they aren't doing that is a fear on their part of competition or other competitors entering the game console market, so they price the way they do to prevent that (someone tell me if this is the case; I really don't know - this is just an analysis based on MS's actions).
The 'worst' thing about Microsoft is how they consistently manage to do exactly what imperfect competition theory predicts. Everytime we learn of some other form of imperfect competition I think to myself "Yep, MS does that".
Anyway, as to the question of whether or not purchasing XBoxen below cost is a good thing. Well, from a consumer perspective, if it makes you better off it's good, but I don't think that's what we have in mind. Rather, does this make MS worse off if you buy an XBox without the intent of using it for games? Well, true enough, if you buy one for $200 that cost $300 then yes, MS is worse off. However as Brooks notes above if you don't buy then someone else will, and, if people stop buying them altogether at $200 then MS will drop the price further or simply stop making them, so MS doesn't lose if you don't buy. The other way of looking at it is that all XBoxen will be sold at some price. However, before anyone gets too carried away and starts to think that large (I mean really large) alternate purchases is going to bankrupt MS, think again. All that will do is start to push up the price, meaning that MS is losing less. They may even stop subsidising XBoxen altogether. Worse still, depending on the cost structure, the increased demand might even start pushing down the average cost of units sold (an economies-of-scale argument).
Conclusion: you, the marginal consumer, might be able to stick it to MS for $100 or $200, but any concerted attempt to stick it to MS in this way is not going to work. MS wins again.
-- David P. James 4th Year Economics Student Queen's University Kingston, Ontario http://members.rogers.com/dpjames/ The bureaucratic mentality is the only constant in the universe. -Dr. Leonard McCoy, Star Trek IV