Why You Can't Buy A 360

Slate Magazine is running a story about the difficulties of finding an Xbox 360 this holiday season. They explore the reasons behind the console shortage, and have some ruminations on Microsoft's motives. From the article: "So, supply shortages are a fact of life. The puzzle is somewhere else: Why don't companies raise prices when supply is short and demand is frenzied? Leaving aside oxygen and a few other essentials, there is no such thing as an absolute shortage of anything: There is only a shortage if the price is too low. At the moment, Microsoft is easily selling out the half-million or so Xbox 360 units (there's no official number) for prices starting at $300 for the basic package. Why doesn't Microsoft price them at $700 instead?"

ebay!

[dismorphic]

no need for microsoft to raise prices, as people on ebay will surely sell you one for a mere $1200!

Uhmm.. PR?

[Propagandhi]

At the end of the article this guy suggests that Microsoft should have sold all of their initial stock via auction. Ignoring the catastrophic potential for fraud, he claims that such a move "wouldn't have damaged their public image because the buyer is setting the price, not Microsoft" (paraphrased). That's the most laughable conclusion I've ever read in a Slate article, which is saying something...

Not only would everyone have been pissed that they weren't getting a fair shake at a 360 (especially real gamers, who aren't known for their endless funds), but the profits garnered from a few thousand 360's sold for ~$600 would have been miniscule (on the Microsoft scale of profits, of course). Furthermore, the ill will which certainly would have been created (contrary to author's opin, gamers would have been PISSED) could undermine the "real" launch of the console, when the normal demand could have been met.

All in all, this guy's an idiot for thinking that because some people were willing to pay a ridiculous amount for a 360 all of the consoles should have been sold at a ridiculous price.

Re:Jeebus

[GigsVT]

A hard-core fan would be happier paying $700 than not getting one at all. That's the point of economics, the people that want it the most will pay the most.

Higher prices ensure that only the hard-core fans get the console, and other people will just have to wait until the price drops to a point they are willing to pay.

Couple facts

[the computer guy nex]

1) Microsoft has a deal with each distributer to control the exact price of each console. Best Buy cannot change the prices to fluctuate with demand. Best Buy can, although, bundle products together to help mitigate the demand.

2) Microsoft will release another 300k or so 360's this weekend. Each Best Buy has from 30 to over 70 ready to sell this Sunday.

3) The 360 will continue to strive not only from what it can do but also how cheaply it can do it. The Power/Price ratio is completely outstanding. You cannot spend 2grand right now on a new PC and come anywhere close to the ability of the 360 (at a measily 300$).

PS3, on the other hand, has taken more expensive routes in developing their console. It will probably debut at aruond $500, and by that time the 360 will be easily at $250.

An idea

[bradbeattie]

If people see the prices of consoles dropping drastically within the first few months (ie: when the demand has dropped off), they're more likely to wait for a better price. The company in question is better off guessing one constant price (or range or prices like the core and full XBox systems) that will maximize their profits. Once you bring in fluxuating prices, you have to consider that your customers will strategically wait.

wrong business model

[rsw]

If MS were trying to make money on the console itself, the model suggested would be correct.

That's not what's happening.

MS makes money, theoretically, by achieving a high market penetration and then getting licensing fees for all the games that are sold. High penetration = lots of games = lots of revenue. That's why they're selling these things at a loss---the more people have them, the more money MS makes in the long run.

In this model, there truly _is_ a shortage, because the ideal scenario is an infinite number of XBOX360s available for sale (well, there are a few problems with that---obviously you only need enough that everyone gets one, and beyond that, there is evidence to suggest that in some markets, including this one, demand actually responds inversely to supply in certain situations, hence the rumors that MS was attempting to artificially increase demand by making them hard to get).

MS stands to make the most money by getting as many of the out as possible. Simple as that.

Now, you could argue "but the early adopters are willing to pay more, and they make up a large enough minority that the initial supply will be gone even at $700." Sure, MS could sell the first batch for $700 and drop the price immediately to $500. Problem is, they can only get away with this trick once, if that---once everyone knows that just have to wait a couple months and the price drops a couple hundred bucks, even most of the early adopters will wait, and that kills MS's edge over Sony in getting the XBOX360 out way before the PS3.

Just my two cents.

-rsw

Re:ebay!

[Dachannien]

Your comment may have gotten modded funny, but I'd have given it an insightful, instead. This phenomenon is called arbitrage [google.com], and is quite common with heavily-traded commodities. It's not surprising that the same concept would be leveraged for profit here. In this case, Microsoft doesn't raise the price in the retail market because of the PR fiasco related to jacking up the price, while actual supply and demand concerns allow the price in the resale market to be much higher.

Its all marketing.

[MaWeiTao]

You create a greater frenzy by making the console hard to come by.

First, the impression is that the system must be good if every last unit is being sold. If there are systems are sitting on the shelves within the first month of release it sends the wrong message.

Second, those that can't get their hands on a console are more likely to get even more anxious about getting their hands on one. It clouds judgement enough that one becomes available they wont think twice about buying it. That is assuming, of course, that the system is actually good and consumers are hearing positive reviews.

Companies aren't likely to be ambitious and ship out enough units to satisfy everyone from the start. So they need to cut back to ensure a shortage.

There are already plenty of idiots with so lacking in patience that they're willing to pay 5 times more for something that you're going to see sitting on shelves everywhere within a month or two. Not to mention that for the most part consumer products aren't priced according to demand anyway.

Re:Supply vs. demand

[alienw]

You are completely wrong. Demand is a function of many factors, not just price. Hype is a much bigger factor. Shortages create hype, and hype creates demand. When Microsoft ramps up their production in a month or two, there will hopefully still be enough hype to generate large demand. The PS2 launch was one of the best examples of this technique.

If Microsoft just priced the consoles to generate minimal demand, the hype will die down and the console will get a reputation for being overpriced. Since demand will be equal to zero, there will be very few sales once the price goes down.

Furthermore, huge price drops are considered to indicate a dead product, and few people want to spend money on a dying product. Sega had to lower the prices for the Dreamcasts to $50 to get the damn things off the shelves.

Re:ebay!

[AuMatar]

No, they don't raise the price because the 360 is meant to be a complimentary good. The real money is in games. If they price the machine high, fewer will be sold. THat means fewer games sold, which means less money in total. By keeping the price lower, they sell more consoles and will eventually sell more games, for more totala profit (or less total loss, if you look at how much they lost on the Xbox 1).

Re:ebay!

[AuMatar]

This isn't a short term game. By increasing prices, you brand yourself in the minds of customers as being too costly. They'll spend their money on other things, before you get the supply back and lower it again. Supply and demand is not the total of economics- its the starting point. The best long term strategy and best short term strategy are rarely the same.

Re:Why not simply MAKE MORE UNITS?

[fleck_99_99]

I'd say, because it's just not that easy. It's not like there's a secret Microsoft XBox Factory hidden deep beneath Cheyenne Mountain, guarded by the SGC and NID, that's lying idle while Bill Gates twirls his moustache and cackles over the shortage he hath wrought. There's a whole process [wikipedia.org] involved with manufacturing an item like this. Someone molds the case. Someone fabs the CPU chip. Someone fabs the power supply regulator. Someone fabs the ADC for the left stick on the controller. Someone makes cables. Someone etches the PCB. Once all 1700 or so parts are fabbed, someone assembles the whole shebang. Someone boxes it. Someone ships it to distributors. Distributors ship it to retailers. Meanwhile, marketing and accounting processes are running...

On the other hand, I still haven't received my preorder, so I'm sticking with the "Evil Bill and the SGC" theory.

Re:No need to beat around the bush

[Yjerkle]

People who are buying Xboxes on eBay are going to be in exactly that situation two months from now. More than that, they already know that they will, and it doesn't seem to bother them enough to keep them from buying. If Microsoft were doing the same thing, everyone would still know that the high price would only last as long as the supply shortages. The only difference is whether the extra money goes to Microsoft, or some random person who was lucky enough to be able to buy one early. I can't claim much insight into the minds of the people who would pay an extra $400 to have an Xbox a few months earlier, but if they're not mad at the eBayers they're buying from, it's hard to imagine they'd be mad at Microsoft, since they'd obviously rather have an Xbox now than an Xbox and $400 two months from now.