Supply and Demand

Introduction

The following paper analyzes the initial release of Microsoft’s XBOX 360 gaming system release into the United States and the changes that occurred with the supply, demand and pricing of the product in the months following its release. The social science of economics tells us that supply, demand and price are closely related to one another and have a significant on how much of a particular good is purchased and the rate at which it is purchased by consumers. The XBOX 360 phenomenon is a solid example of the impact that changes in supply, demand and price have on the marketplace and the rate at which goods are purchased.

Supply and Demand and Price

The law of demand tells us that “Quantity demanded rises as price falls, other things constant, or alternatively, quantity demanded falls as price rises, other things constant (McGraw 2004). The XBOX 360 phenomenon that took place in 2005 is a good example of this economic principle at work. Microsoft’s XBOX 360 gaming console was released into the U.S. market on November 22nd 2005. The release came after a great deal of advertising and media hype that ensured that the demand for the product would outweigh the supply. Quite simply, there were more consumers wanting to purchase the product than there was product available. The retail price for the gaming system with a hard drive was $399. Many consumers, however, paid a great deal more than the $399 sticker price to acquire the system. On the morning of the U.S. release, retailers across the nation sold out of the product within just a few hours of opening their doors to consumers. In the weeks that followed however, many consumers purchased the unit from sellers on on-line auction sites and even from individuals in parking lots for as much as $1500. The reason for this was that the supply was significantly less than the demand for the product. In some cases, parents who wanted to ensure that their children received and XBOX 360 for Christmas in 2005 were willing to pay well over retail for the hard-to-acquire system. In other cases, video gaming enthusiasts wanted to be among the first individuals to own and play the system. News reports across the nation showed footage of people lining up days ahead of November 22nd in order to secure a place in line at retailers that would have the product available on the release date. In some cases individuals pitched tents and resided in parking lots for as many as 7 days to ensure that they would be able to purchase this system. This type of behavior and willingness to pay prices that were well over retail continued through the holiday season at major retailers across the country. In these cases, social pressures, wants, desires and a lack of supply led individuals to pay high prices for the highly-demanded product.

A Shift in Supply

By April 2006, well after the holiday season of 2005, reporters in the consumer electronics industry were reporting that the supply of the gaming console would continue to be scarce into the Spring of that year (Baig 2006). At that point, camping in front of retail stores was no longer taking place for several days at a time, but consumers could still be seen lining up for the product as many as 8 hours in advance of a store opening time on a day that the product was to be in stock. By April 2006, pricing had also leveled off. While internet auction sites still featured the XBOX 360, the going price for the system remained fairly constant around the $399 retail price. This occurred for two primary reasons. First, many of the gaming enthusiasts who wanted to be one of the first to own and use the product