South-Western EconNews: Video Games Competition Heats Up

Video Games Competition Heats Up
Subject	Demand, Determinants of Demand
Topic	Supply and Demand
Key Words	Prices, Sales, Demand
News Story	The two major video games producers, Sony and Nintendo, are engaging in a price war. Sony reduced the price of its Playstation console from $149.95 to $129.95 in June 1998 and is now cutting the price of its Playstation package. Nintendo has been offering rebates and now has decreased the price of its Nintendo 64 system as well as the prices of certain games and accessories. The result of the price war -- as well as other factors contributing to an already buoyant demand -- has been a ballooning of sales. Since the price cuts, Sony has doubled its sales compared to a year ago, while Nintendo has seen a 23 percent increase. After 1998, sales may slow because consumers are likely to prefer more novel hi-tech products. Indeed, Sega is introducing a new game console that works with Microsoft software. Also, computers are coming down in price dramatically. (Updated October 15, 1998)
Questions	1. Draw two axes, one representing the price of video game consoles and the other showing the quantity demanded. Add a demand curve. a) What does the demand curve show? b) Mark an initial price and quantity. Show what happens to the quantity of consoles demanded as a result of the price cuts. c) Has there been a change in demand or quantity demanded? Why? 2. Draw another diagram of the demand for video game consoles and show an initial price-quantity combination. a) The producers have also reduced the prices of accessories and games. What kind of goods are accessories and games in relation to consoles? b) Illustrate what happens as the prices of games and accessories are decreased, assuming that the price of consoles stays the same. c) Is there a change in demand or quantity demanded? Why? 3. Draw a diagram of the demand for conventional video game systems. Mark an initial price and quantity. a) Consumers are predicted to grow weary of conventional video game systems, especially as new systems and budget computers emerge. What kind of goods are the new systems and budget computers in relation to the conventional video games systems? b) Illustrate the effect of reductions in the price of computer systems, assuming that the price of conventional computer systems remains constant. c) Is there a change in demand or quantity demanded? Why?
Source	Associated Press, "Playing the game of price-cutting," St. Petersburg Times, August 31, 1998.