Thursday, October 22, 2009

Sony's Playstation Pricing Dilemma

This past summer, Sony faced a pricing dilemma for the Playstation video game console. The dilemma was "One is that he (Kazuo Hirai) needs to make PS3 a big success – that would mean cutting the price. The other is that he must make the PlayStation business profitable, and that means keeping the price the same.” So what would you do?

I would turn to a rather old economic model, called the Bertrand heterogenous oligopoly. This economic model looks at how firms that compete on price (such as video game consoles) should set prices such that they maximize profits given that their customers view the different firms products or services as being similar but not perfect substitutes.

As we know, Sony decided to lower the price of the Playstation vidoe game console, and Microsoft followed suit, offsetting some of the potential gains in market share, and most likely reducing Sony's profits in that division of the firm - at least according to the Bertrand heterogenous pricing oligopoly model.

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