The definition of an oligopoly is a market in which there are a few sellers each having some market power. Sony Computer Entertainment America and Nintendo are the two main components of the video game console/oligopoly. Each corporation has developed and released new video game consoles every few years since the early 90’s. Sony Computer Entertainment America, the maker of the popular PlayStation Portable (PSP), is a branch of Sony Corporation, a world-renowned electronics producer. Its PSP has been on the market in the United States since March of 2005. Recently, there has been a market demand shift away from the PSP, most likely related to the tastes and preferences of the consumers and prices of related goods. Sony Computer Entertainment America must analyze the tastes and preferences of the consumers, along with the affect of price changes to determine how to deal with the decreasing market demand for its PSP.
The video game and electronics industry is a very competitive industry that is driven by market demand (the demand of the consumers). Traditionally, Sony has been the most popular company, having a strangle-hold on the video game systems market by releasing new, more technologically advanced consoles every few years. The current video game console market demands the best technology at the lowest possible price. In relation to video game systems, the consumers are currently looking for advanced systems with better graphics and more memory for the ultimate gaming experience. Recently, Nintendo has caught up to Sony with the release of its Nintendo Wii and Nintendo DS. The Nintendo DS in particular is similar to the PSP, but is around $70 less.
The first factor affecting the market demand shift away from the PSP, and more toward the Nintendo DS is the tastes and preferences of the consumers. The Nintendo DS was released in November of 2004, five months before the PSP. It became very popular because at the time, there were not that many products like it. The tastes and preferences of the time called for a focus on the younger consumers, so Nintendo created its DS and DS games accordingly. The DS was only 4 inches long, having cartoon-type color graphics, and folding feature for portability. Released along with the Nintendo DS, were games like Pokémon Diamond, Diddy Kong Racing, and Mario Cart (popular among kids).
When the PSP was released in 2005, the demographics of the time had changed to target teenagers. The new tastes and preferences of the market called for a compact gaming system that had stellar graphics, games for a more mature audience, and the ability to hold movies and music. The release of the PSP originally shifted demand away from the Nintendo DS because of its newer technology and more advanced features, but recently, the Nintendo DS has caught up again most likely because of the price difference between the two game systems. Cross-price elasticity can be used in this example to determine the market demand shifts of substitutes like the PSP and the Nintendo DS (See Figure 1 in Appendix).
Price is the second factor affecting the recent market demand changes. The PSP was priced at $200 when it was released, while the Nintendo DS was priced at only $130. This was not a smart move by Sony because of the fact that the PSP was narrowly defined. This meant that there were many substitutes for it, such as the Game Boy, Game Boy Advance, and the Nintendo DS. Substitutes are goods that are closely related, and therefore can take the place of each other. In March of this year, Sony took a loss of $443 million, mostly because of the costs related to the promotion and release of its new PlayStation 3 video game console. Sony’s video financial analysts have advised the company to decrease the price of the PSP to increase its consumer demand and revenue, and lessen the chance of its substitution with another product. The optimal level of production for Sony is where marginal cost equals marginal revenue (See Figure 3 in Appendix).
Elasticity shows the change in the market demand for a product due to a price change. The PSP is believed to be price-elastic, meaning that it is not a necessity by any means, but by lowering its price, there should be a relatively strong response of buyers to the price change (See Figure 2 in Appendix). The factors affecting the elasticity of the PSP were the availability of substitutes and the portion of the budget it takes up. Sony realized that $200 took up too much of the consumers’ budgets, when the closely related competitors were charging only $130 for a substitute good. On Tuesday April 3, 2007, Sony announced a $30 decrease in price for the PSP, allowing for a retail price of $170. This decrease in price will allow Sony to sell its PSP at a lower price, which should increase market demand and shift the demand curve to the right. If the analysts are correct, Sony should begin making profit again soon.
Sony and Nintendo are part of an oligopoly, each having some market power to regulate the prices of their goods. Changes in consumer tastes and preferences toward the PSP at first, and then back to the Nintendo DS, along recent price changes, have greatly affected the video game console market. Since price changes are a shift factor of demand, the PSP should slowly start to increase revenue once again with its $30 decrease in price.