The Videogames Industry

The video game industry has become a huge influence on society and the economy today. It is an industry that is so huge that it is estimated that 70% of U.S homes will own a Video game system by the year 2005, (Cassandra, 2002) Just one year away. But what made it the way it is? Since it is still an industry it has to follow the natural laws of economics. In this paper we will dive into the industry that now has gone beyond movies and recordings in profit.

The first is that the video game consol industry is an oligopoly and has to deal with the game theory. It is an oligopoly because it has high barriers to entry such as hardware subsidies and very fierce competition amongst already established firms (Scevek, 2001) Also there are only three major producers of video game consoles: Sony, Nintendo, and the recently Microsoft. Because these three all have personal interests the game theory applies quickly. The most recent example is the releases of the Playstaion 2 by Sony, the Nintendo GameCube, and Microsoft’s X-box. Early in the year of 2001 Sony released its latest Playstation 2 and its profits surged. They had increased 3.1% to 24.8 billion Yen, and 22.t million units sent world wide in the first fiscal year (IGN, 2002). Microsoft and Nintendo however had a different story. They decided to hold off sending of their product until the holiday season of 2001, a well-known purchasing time for consumers. However this induced competition for personal interests and both ended up worse off. While the Xbox had sold 1.4 million units, and Gamecube 1.3 million, Sony had 1.4 million units sold in its fourth quarter (Weintraub, 2002). That 1.4 million was in addition to the millions sold before hand. This unwise release is catching up with Microsoft as the profits for the X-box had halved to 190 million in 2003 compared to the loss of 60 million the year before (Yabedo, 2003), and it may soon be forced to leave the gaming industry. As it stands now the current owning of systems in households is 75% own a Playstation 2, 12% own a X-box, and13% own a Gamecube (yabedo, 2003). While the figures may be small Nintendo is building up slow but steady steam with its big name titles, and domination of the hand-held industry. Its recent release the Game Boy

Advance has caused a make up for the loss by GameCube. It had sold 3.24 million units allowing the giant to remain awake. (Yabedo,2003) .However , as we know from example when a industry is earning economic profit others soon enter and drive it down. Sony announced that at the end of 2004 it would release a portable, hand-held gaming system known as the Playstation player (Yabedo,2003) While the effects of this are unkown, one thing is for certain the the two arms of the console industry are going to have fiercer and fiercer compition as time goes on.

Another aspect we will look at is the demand of video games. Demand for video games is generated by many factors. The first is concept and graphics. There has to be some compromise between the two. While graphics in a particular game may be good, a weak story line can prevent from sales expanding as people may get board and vice-versa (Tanaka, 2001). The solution is to have an integration of a strong story line and up to date graphics (Tanaka, 2001). The second factor is that the video game industry is an industry that is totally based off of players (buyers) tastes (Stalker, 2002) For example if a game did not have a huge amount of popularity, it is unlikely to have sequels as the case with Bobsy the bobcat (Stalker 2002). However, take a game that has had a lot of popularity and hype and you could have a steady source of income from die-hards and entering fans (Stalker, 2002). While most games are aimed for a male audience, games aimed for a female audience have begun to emerge causing the audience to increase, and the demand (Chmielewski, 2002).

So we’ve seen what causes the demand for this billion-dollar industry, but what are its costs? One of the explicit costs is that of the creative team, consisting of designers, graphic artists, sound effect designers, computer programmers, and video artists. (Stalker 2002). Other explicit costs are that of chips, CDs, advertising, a test team, packaging, booklets, etc. (Stalker, 2002) There is however a major implicit cost that everyone seems to forget “what could this have been” When a creative team designs a game they usually have a budget to follow, which means that 2 games are near impossible to develop. Therefore the implicit cost is developing one game or another (Stalker, 2002). When a team develops one game its implicit cost is that of what the other game could have generated in profits. Therefore, every game developed is a risk (Stalker, 2002)

As with almost every product in the market video games can produce externalities both good and bad. First we will look at the bad, the biggest