Friday, October 23, 2009

How Should Nintendo Respond to Rivals Price Cuts?

A recent article in the Financial Times speculates as to how Nintendo should respond to the recent price cuts of Sony and Microsoft on their respective video game consoles over the summer. As of September Nintendo has decided not to lower their prices on the Nintendo Wii. Their argument as to why they are not lowering their price falls right out of the Bertrand heterogeneous oligopoly model.

The Bertrand heterogeneous oligopoly model shows us that as customers view products or services between two (or more) firms as being more different, that prices should not converge to maximize profits. It also shows that when customers do behave as if two firms products are similar (such as the Sony Playstation 3 and Microsoft's XBox 360), then as one firm lowers their price the other firm should also lower price, which is exactly what happened over the summer.

So, Nintendo believes their customers view the Wii sufficiently different enough from the Playstation or the XBox 360 as to not respond to changes in video game console prices, and this to be a profit maximizing strategy.

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