Let’s take a trip back in time. Not too far; just 2006. America’s economy was zipping along at a frenetic pace. The price of real estate rose exponentially, and if you tried to tell someone that the market wasn’t sustainable, they would laugh in your face. Sony began gearing up for the release of the PlayStation 3, and if you spent any time on the Internet, you probably witnessed an argument or two concerning the $599 price tag for the more feature-rich of the system’s two models. The two sides of the argument generally boiled down to “it cost too much” versus “it’s a great value.” And you know what? Both sides were correct.
The fact that the PS3 cost more than the sum of its parts could be proven by gathering together the prices of similar, individual pieces (most Blu-Ray players at the time were still more expensive than the PS3, with none of the extra features). This much was undeniable. However, value is a wholly subjective notion and decided by consumers. If a consumer sees value in a product such as the PS3, then they decide that the price is just. If not, they simply don’t buy it, buy a substitute product, or wait until the price comes down to a level they feel is acceptable. This is known in economics as the subjective theory of value.
“The labor theory of value,” say Associate Professor of Economics at the University of Maine Michael Montgomery, “is a very old and very popular idea going back to medieval economic scholars.” The labor theory of value holds that prices are set objectively, the so-called “just-price,” where the price is set based on how much labor goes into producing the good. However, the subjective theory of value postulates that “the good is worth exactly as much as you’re willing to pay for it, and the cost of producing the goods may bear little or no relationship with the item’s value in the mind of the buyer.” A good example of both of these theories in action is the Nintendo 3DS. There was a bit of a hub-bub when it was alleged that the 3DS cost just around $100 to build. Under the labor theory of value, then, the 3DS is worth only around $100, or how much labor goes into producing a single unit.
Of course, it’s a little grey when you take into account things like research and development, distribution, and marketing, which add to costs for Nintendo, but the recent price drop to $169 goes to show that the initial price of $249 was considered too high by many consumers. At the individual level, consumers decided that the value of the device was less than the manufacturer’s suggested retail price, and sales of the device were certainly not as brisk as Nintendo had hoped — hence the drop in price. “In a capitalist system,” says Professor Montgomery, “a good is worth exactly what people are willing to pay for it, no more and no less. [Companies] speculate by putting their time and energy into things, but sometimes they don’t pan out. Sometimes they pan out above their wildest dreams.”
If the 3DS fails to capture the attention of consumers at its new price, it would mean quite a loss for Nintendo. Such is the nature of markets. Consumers, meaning you and I, ultimately have the last say as to whether or not a product will be successful. It remains to be seen whether the 3DS will succeed or fail, but if Nintendo moves a significant amount of units in the busy Q4 of this year, the initial lukewarm reception to the device could be pinned less on consumer disinterest in the product itself and more on the disinterest of consumers at the $249 price point. Time will tell.
The price of games are also subject to the whims of consumer subjectivity. The term “bargain bin” can be considered a slur when attached to certain titles. That’s because most bargain bins are filled with two types of games: ones that are very old, and ones that aren’t very good. Naturally, there are exceptions; some games can be good but still be unpopular, for example. They find their way from the shelves of the retailers into the bins as a way to unload excess inventory. Here, supply and demand — one of the most basic of economic concepts — comes into play. Demand for a title is low, therefore the price drops. If we lived in a society where all prices were negotiable we could go in and name our price, haggle with the shopkeeper for a bit, and walk away from the transaction with a price agreed upon by both parties.
Since that model doesn’t exist in most retail environments, it’s up to the retailer to set a price that’s desirable. It’s up to the consumer to send signals to the retailer that the price is acceptable or not through his or her purchasing habits. When demand falls, so falls price. All of those titles in the bargain bin are there because demand is low and the retailer is trying to sell them at a price close to the equilibrium price; basically, the hypothetical price where the supply curve and the demand curve meet.
In some cases, these titles may be priced for less than the cost to the retailers in an attempt to liquidate inventory, to make room for newer and perhaps better selling titles. There’s another cost tied in with having these unwanted titles taking up room in a store: opportunity cost; in other words, the cost of the next best alternative. If you run a game shop and have an entire rack of space devoted to games that aren’t selling, your opportunity cost is the money you could be making by stocking that space with titles you know will sell. Looking at it from that perspective, you can see why a store would sell something for perhaps less than they paid for it; they could be making more money simply by clearing up room for a better product.
The Internet is a great place for people to come together and complain. Many gripe that the price of games for this generation is too high, that $60 for a title is ridiculous. Taking in the costs associated with developing a game is part of the pricing for manufacturers, but after that it’s in the hands of the consumer. “These are goods where there’s a tremendous amount of startup cost, where you have to put in a tremendous amount of intellectual labor, a tremendous amount of cooperation with other workers, a tremendous amount of debugging,” says Montgomery, “but once you put the thing out it’s costless.”
The cost difference between producing one copy of the game or producing a million copies of the game is insignificant, bound only by the price of the physical media itself, whether it be DVD or Blu-Ray or cartridge. People who feel that $60 is too much have many alternatives in today’s market, whether it be buying the game second-hand or waiting for a deal on the game, or just waiting it out until the popularity has waned and the price drops. Whether we know it or not, most of us subscribe to the subjective theory of value when we declare a game costs too much. Even if we decide a title or console is worth every penny it costs at launch, we’re making a conscious valuation of the good and expressing our opinion through our purchase. Believe it or not, when it comes to determining value, you’re always right… and so is the person who says you’re wrong.
Posted by: admin in Gaming News
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