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Monday, December 31, 2018

From Riches to Rags…to Riches Again: The Nintendo 3DS Price Drop

October 30th, 2012
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:


(The overall effect of the change in price of the 3DS is the sum of the substitution and the income effects.)


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.

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