Console Price and Software Availability in the Home Video Game Industry

By Gretz, Richard T. | Atlantic Economic Journal, March 2010 | Go to article overview

Console Price and Software Availability in the Home Video Game Industry


Gretz, Richard T., Atlantic Economic Journal


Introduction

Network effects are characterized by a positive feedback loop where consumers receive greater benefit as more consumers purchase the same product or service. These effects are direct when consumers obtain greater benefit solely through the addition of more consumers to the network. A telephone network, for example, becomes more valuable to the user when she is able to call more people. These effects are indirect when additional consumers prompt an increase in the amount of complementary products available for the network. For example, a video game console is more attractive to consumers when it has a greater selection of compatible games, while game developers find it more attractive to make games available for consoles with a larger installed base of consumers. In either instance, consumers experience increasing returns; value increases, either directly or indirectly, as more consumers join the network.

The present paper empirically estimates the pricing implications of increasing returns in video game console industry. Controlling for endogeneity, hedonic results from a unique data set which covers most of the life of the industry (1976-2003) show that increased software availability has a negative and significant effect on the price of a console. This is in contrast to many empirical pricing studies in the network effects literature: greater software provision makes hardware more valuable and this should be reflected by increased hardware price.

Several empirical papers have focused on the pricing implications of increasing returns. For example, Gandal (1994) shows a price premium exists for spreadsheets that have wider consumer adoption and greater amounts of compatible software. Also, Gandal (1995) finds that same result for the Data Management Software industry. Gandal et al. (2000) find that a 10% increase in the variety of compact disks (CDs) could cause a 5% increase in the price of CD players. Finally, Park (2004) finds evidence of increasing price premiums for VHS format video cassette recorders (VCR) as the market share of VHS grew.

Though the studies mentioned above are not exhaustive, the clear implication is that firms exploit network effects in their pricing strategies. It should be noted that a key feature of the industries examined above is that hardware producers (CD players, VCRs, etc.) obtain a majority of their revenue from hardware sales. Growth in the recent two-sided market literature has shed light on different methods firms use to capture (at least part of) the value of increasing returns when the revenue stream goes beyond hardware sales.

A market is two-sided when buyers and sellers interact through a platform and the structure of platform pricing on both sides affects the volume of transactions (Rochet and Tirole 2006). The video game console industry is a classic example of a two-sided market as hardware firms charge consumers for consoles and charge royalty fees to software developers. In fact, royalty fees are a main component of a console producer's revenue stream. There is a tradeoff between console price and software provision. A console producer may be willing to forego profit (or, indeed, take a loss) on console sales if they are able to earn greater profit on royalties.

This is a common theme in the theoretical literature on two-sided markets (see Economides and Katsamakas 2006; Rochet and Tirole 2006 for recent treatments). Rochet and Tirole (2006, p. 648) note

   managers devote considerable time and resources to figure out which
   side should bear the pricing burden, and commonly end up making
   little money on one side (or even using this side as a loss-leader)
   and recouping their costs on the other side.

However, the theory has relied mostly on qualitative examples for hypothesis testing and guidance. Empirical examinations of pricing in two-sided markets have been limited. This paper begins to address this gap in the literature. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Console Price and Software Availability in the Home Video Game Industry
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.