The pricing of competetive products

[Crescent Pulsar S]

How does the pricing work with new products of the same type? Is there anything that enforces a certain price (range), or are they free to establish their own price? This is one area I've never really studied, beyond how the price of something can be affected by the supply chain. I don't really know how something like the MSRP really works.

If it helps, the reason why I want to know is because there's an aspect of a story idea involving competition with video games, on different consoles, and I was wondering if pricing could be used as an issue of conflict.

[PCHeintz72]

How does the pricing work with new products of the same type? Is there anything that enforces a certain price (range), or are they free to establish their own price? This is one area I've never really studied, beyond how the price of something can be affected by the supply chain. I don't really know how something like the MSRP really works.

If it helps, the reason why I want to know is because there's an aspect of a story idea involving competition with video games, on different consoles, and I was wondering if pricing could be used as an issue of conflict.

That would depend upon your country...

MSRP is Manufacturer Suggested Retail Price is merely the product price the manufacturer recommends... That price *supposedly* takes into account not just the cost of the manufacturer to make the product, but shipping, advertising, and the biggest variable of all *profit*.

It is important to note that MSRP is not technically the same as the retail you and I know as everyday consumers, which is actually our perceived retail.

In the U.S. most but not all products legally and by law are market driven, meaning if the market finds your price too high, and a competitor makes a similar but cheaper product, they will go to that, thus forcing that company to lower prices or discontinue the product due to lack of sales. Likewise... to gain market share, a manufacturer might reduce the price of a product, and reduce the amount of profit they make, to gain market share and market saturation.

It is ILLEGAL for manufacturers to talk to one another one pricing of their products, and many court cases have come about just because of that. This is called Price Fixing. It is considered a crime committed by the companies against consumers.

Other variables come into play... take for example a TV... the manufacturer might suggest a MSRP of $500 for its TV... and it is what you might pay if you went directly to that manufacturer and bought it form them. But due to volume and shipping agreements they might sell it to say seller A at $420 each and seller B at $450 each. This is how the same TV might be at one price at the local Best Buy, and a different price at the local SAMs store, and yet a different price actually form the maker of the product.


Now... in the case of a manufactured product, it is fairly easy to track how much a item costs to make (cost of parts + time to put together), in the case of video games, that is intellectual property, and it is harder to pin down.

Generally a game maker will target as many platforms as possible (unless they also make the game machine, i.e. Microsoft will not likely make many Nintendo games, and vs. versus) with as little effort as possible so as to maximize the return on investment. The issue comes into play that they cannot charge too much or no one will buy it, and obviously cannot consult with their competitor (see price fixing above). So for each platform, they will try to make it cost as much as possible for the end user that guarantees they get as much money as possible.

These days that is two parts... how much can a game cost for the platform before people will not buy it, and how much can they charge for the on-line services and download additions and bug fixes. For that first part, that is the part that will vary platform to platform, and also explains why the same game might cost $30 on one platform, but $50 on another.

I've simplified it, but I believe I hit the main points... Anyone feel free to correct me if wrong, as I do not track the game industry much these days...

Does that help?

[Crescent Pulsar S]

A bit. I'm not sure if it will help me in regard to the story I have in mind, though. Maybe it will just take me time to figure out how to apply it.

[Spica75]

In the U.S. most but not all products legally and by law are market driven, meaning if the market finds your price too high, and a competitor makes a similar but cheaper product, they will go to that, thus forcing that company to lower prices or discontinue the product due to lack of sales. Likewise... to gain market share, a manufacturer might reduce the price of a product, and reduce the amount of profit they make, to gain market share and market saturation.

That´s more true in theory than in practice.
Simple example, over the last 15 years, compare CPU sales with the relative qualities and pricing of the cpus.

Intel P4 Willamette is a horribly obvious case of overpriced, underperforming junk forcing you to use another overpriced, overheating and underperforming piece of shit(RDRAM), and despite AMD at the time providing a clearly superior product, at a lower price, those early P4s still easily outsold AMD cpus by far. Simplified, what happened was basically that Intel´s market share dipped from 80% to 75%.

Oh, and that was almost right on the heels of Intel panicreleasing the 933 and 1Ghz P3s to try to compete with AMDs 1Ghz release. Except the both cpus were buggy as hell and required so much "babying" through BIOS code that the 1Ghz P3 was slower than the 866Mhz P3 most of the time. When they even worked at all, something that was somewhat uncertain.
And people still bought even those cpus, despite their almost nonexistant availability.

The invisible hand doesn´t work. Companies will often charge as high of a price as they can get away with.

[Ellen Kuhfeld]

The invisible hand doesn´t work. Companies will often charge as high of a price as they can get away with.

The invisible hand is right there in your last sentence, where you say "... can get away with." Invisible hands are not necessarily fast, fair, or precise -- but if you take things too far, they'll eventually slap you down.

[Pale Wolf]

The basic idea is 'you can charge as much as you like, but people have to be willing to actually pay'. So if you charge more than an equivalent product, you will sell significantly less because they'll buy that instead, unless you make it not-equivalent or look it (higher-quality, swamp the market with advertising, etc, only some of these methods are actually ethical).

[Crescent Pulsar S]

Hmmmm... Okay, in this scenario let's say that video games are selling at about as high as they can get away with, before you even get into add-ons and other things that one needs to pay in order to add or unlock something. Now, let's also say that independent developers are competing against corporations, producing roughly the same quality at a much lower price. Is it possible for the corporations to take any action (not necessarily completely legal) that would force the independent developers to match their own prices, if not make it difficult or even illegal to operate?

[Ellen Kuhfeld]

A market is an ecosystem, and has lots of niches a business or product can occupy. Let's say you have a grasslands ecosystem. There's still room for mice, rabbits, horses, and mammoths -- grass-eaters of all different sizes. They all eat grass and shrubs, but do it differently enough they don't force one another out. It's the same for widgets: there are individual artisans, small companies, large companies, all making widgets. Some will buy the artisan widgets, which are more expensive but offer greater cachet, while others will buy cheap mass-produced widgets because they only widge now and then. Same with other products.

The "invisible hand" is rather like evolution. It's more likely to pick losers than winners, and not in a friendly way. But price isn't the only thing it considers -- otherwise we'd be overrun with Yugos, and Cadillac would be out of business.

[PCHeintz72]

Hmmmm... Okay, in this scenario let's say that video games are selling at about as high as they can get away with, before you even get into add-ons and other things that one needs to pay in order to add or unlock something. Now, let's also say that independent developers are competing against corporations, producing roughly the same quality at a much lower price. Is it possible for the corporations to take any action (not necessarily completely legal) that would force the independent developers to match their own prices, if not make it difficult or even illegal to operate?

They can approach the backers... if there are any. They can outright buy out their product in a payoff to stop development... They can attempt to find a way to compromise them legally by foisting lawsuits on them...

[Spica75]

Hmmmm... Okay, in this scenario let's say that video games are selling at about as high as they can get away with, before you even get into add-ons and other things that one needs to pay in order to add or unlock something. Now, let's also say that independent developers are competing against corporations, producing roughly the same quality at a much lower price. Is it possible for the corporations to take any action (not necessarily completely legal) that would force the independent developers to match their own prices, if not make it difficult or even illegal to operate?

Happens all the time unfortunately. If you mean that the independents are making games for the big corporations systems, then they can simply restrict them from selling at all, by restricting licensing, or they can demand a high license fee that makes the games as expensive as their own, and putting the difference in cost into their own accounts. Nintendo, Sony, Microsoft etc, all are doing or have done either or both of the above.

[Spica75]

The invisible hand is right there in your last sentence, where you say "... can get away with." Invisible hands are not necessarily fast, fair, or precise -- but if you take things too far, they'll eventually slap you down.

In the example i used, for some time there, you could at the extreme, pay less than half the cash for an AMD cpu(and possibly about half for RAM as well because RDRAM was so freaking expensive despite offering a tiny advantage in some uses and more noticeable disadvantages in many more other uses), get better performance and much less hardware bugs(if P3, even more performance advantage if early P4), and yet most people still bought Intel.
When Intel had the "sudden Northwood death syndrome"(second generation P4s that just went dead, often from small amounts of intentional or accidental overvolting but sometimes even with stock voltage), it didn´t affect sales at all, when the Prescott turned out to be more useful as a frying pan than a cpu, while Intel was busy shouting about how AMDs cpus were so horrible for running hot, sales were not really affected much.

When AMDs Phenom had the issue with the TLB bug, which was an extremely minor issue(under very specific circumstances, it was a "one in a million" bug, under other circumstances it was so unlikely to cause problems they couldn´t even figure out the odds for it), they were almost instantly forced into issuing a fix that killed off 5-10% from performance, and their sales were hit badly.

Part of the definition for the "invisible hand" is that it´s supposed to be rational. Doesn´t work that way.
In my above example it´s mostly because Intel is cheating, actually paying OEMs and suppliers to only sell Intel-based products, messing with suppliers ability to deliver stuff from competitors, outright bribes and so on...

[Crescent Pulsar S]

Happens all the time unfortunately. If you mean that the independents are making games for the big corporations systems, then they can simply restrict them from selling at all, by restricting licensing, or they can demand a high license fee that makes the games as expensive as their own, and putting the difference in cost into their own accounts. Nintendo, Sony, Microsoft etc, all are doing or have done either or both of the above.

What if the games aren't made for a console, but one of the corporations that own one of the consoles and makes games also owns the most-used operating system for computers?