RawkHawk2010
October 30th, 2012
October 30th, 2012
EC3020
Beil
From
Riches to Rags…to Riches Again: The Nintendo 3DS Price Drop
Nintendo,
a video-game distributer, has (usually) always done a spot-on job at
analyzing its market and pricing products accordingly. After all, it
is unanimously agreed upon that when the video-game crash of 1983
took its toll on the industry (almost irreparably so), Nintendo was
its saving grace. Their first video-game console, the Nintendo
Entertainment System, was marketed in a way that made it appear more
“accessible” than consoles of the past. Nintendo also addressed
the problem of terrible, half-finished software sullying the market
by taking measures to approve developers’ game beforehand. Over the
years the company has continued to be successful, but a lack of
foresight with its latest portable system, the Nintendo 3DS, caused
Nintendo to suffer their first ever annual loss. This resulted in
massive reevaluation (and with it, price fluctuation) in ways that
had never before been seen with the company.
The
Nintendo 3DS was released in March 2011 for $250. Nintendo priced it
at this amount based on excitement from fans (which was indeed quite
high), but failed to properly communicate the product to those that
were less knowledgeable and loyal. Many potential consumers thought
it was simply a Nintendo DS (the 3DS’s predecessor) with 3D
capabilities, as opposed to an entirely new piece of hardware.
Nintendo was also purposely “conservative” with the games they
themselves developed for launch, as they wanted to create a level
playing field for third-parties so that they too could become
successful and familiar with the system. However, third-parties were
unsure of the system’s prospects and were “conservative” as
well. These two reasons combined with the recession meant for an
overly-expensive, poorly-communicated game system with a not-so-great
library of games. By September of that year, the price of the
Nintendo 3DS was cut by a whopping $80. Nintendo then began releasing
their stable of “desired” games (the ones held back from launch
to appease third parties), and voila! By Christmas of that year, the
Nintendo 3DS had momentum at last.
Associated
with the Nintendo 3DS’s release is a significant substitution
effect. Because some customers believed the 3DS was either too
expensive or that it was only a marginal improvement, many opted to
simply purchase the original Nintendo DS instead. The Nintendo DS
thus became a substitute for the Nintendo 3DS. Concerning the income
effect, few consumers had enough income to consider the system
desirable until after the price-drop. Obviously there is little
demand for someone to own multiples of the same video-game console,
so while the price-drop didn’t increase the quantity demanded for a
single consumer, it did increase the number of games and accessories
that were bought in tandem.
The
indifferent curve/budget constraint and demand graphs can be
represented as the following:
1.
(The overall effect
of the change in price of the 3DS is the sum of the substitution and
the income effects.)
2.
The price at $250
resulted in a supply over equilibrium and a demand below it. The
price at $170 resulted in a supply and demand at (or near)
equilibrium. Therefore, the market is clear and the consumer surplus
increases.
A price of $250 was
simply too much to ask for a portable video-game console that wasn’t
optimally communicated or equipped with the desired library of games
upon launch, despite the wave of excitement that followed its
announcement. People showed they would get their entertainment in
other ways, notably by settling for the aging Nintendo DS rather than
over-spending for the brand new hardware. That was the substitution
effect in its full splendor. Months later, the income effect came
into play when its price was cut and people actually bought it. The
Nintendo 3DS is a key example of how a price can make or break a
product, a lesson hopefully learned by not just Nintendo, but
companies everywhere.
Editor's note: This is Rawk's C-grade college paper on the Nintendo 3DS price cut that Ludwig parenthetically mentioned in the Nintendo Labo article a few days ago. The two graphs at the bottom of the paper were hand-drawn by Rawk prior to submitting the assignment, and have been lost to time. As a substitution effect, he put in videos featuring Nintendo President Reggie Fils-Aime. Rawk's original understanding of the micro/macro-economic principles at play with the 3DS price cut don't follow conventional economic logic, hence his C-grade.
Ludwig once did an assignment for Rawk for college (a sonnet for Masahiro Sakurai), but he dropped out before he got a grade on it.
Ludwig once did an assignment for Rawk for college (a sonnet for Masahiro Sakurai), but he dropped out before he got a grade on it.