On September 14, 2010, Bungie Studios and Microsoft Game Studios released Halo: Reach, the sixth game in the popular Halo franchise, for Microsoft’s Xbox 360.  This game was released immediately before the holiday season began in full swing, and was expected to be a bellwether for end-of-year game sales.  This post will examine the game market and how different retailers and holiday season sales affect pricing decisions.  We begin with some industry information. Next, I will discuss the data collected for this report. Then, I will analyze the results. Finally, I will provide a conclusion and key take-aways for consumers.

Background and Industry

This particular game was released to much anticipation, as well as much speculation from those who analyze the gaming industry.  The originator of the series, Halo: Combat Evolved, is credited with single-handedly saving Microsoft’s original foray into the gaming console market (Hill, 2004).  The highly anticipated sequel was able to make Microsoft’s attempt at online console gaming a highly profitable reality (Gamepros, 2007). The third game in the series was, at the time of its launch, the single highest-grossing entertainment product of all time, and has sold the most copies of any Xbox 360 game to date (Hillis, 2007) (Sinclair, 2008). With such an important legacy, it is easy to see why the industry was waiting to see the consumer reaction to this product.

Of course, the industry was watching for other reasons as well.  One big reason for this was the recent slump in the economy; the gaming industry, long considered recession-proof, felt the pain of lowered incomes in their key demographics.  However, while revenues declined, the holiday season is usually a good time for game makers.  Halo: Reach was one of the first major titles released for this holiday season; Microsoft tried to ensure a successful launch by putting on their largest game advertising campaign to date (Graft, 2010).  The industry expected a successful product, as this is the last Halo game from Bungie Studios, the production company who created the series; the game was expected to be an epic send-off to the successful franchise they created (Morris, 2010).

By all accounts, the game was a success.  Metacritic, a website which aggregates reviews from many different sources, rated the game as receiving ‘universal acclaim’ (Metacritic, 2010).  The game was nominated for Game of the Year, Best Xbox 360 Game, Best Shooter, Best Multiplayer, Best Original Score, Studio of the Year (for Bungie Studios), and Best Performance by a Human Male in the Spike TV Video Game Awards (Spike TV, 2010). Critics were not the only ones who received it well, as the game was the most-played game in the first full week after release on Microsoft’s online gaming service, Xbox Live (Nelson, 2010).  In the first four days after launch, over 2,318 man-years were spent playing the game (Osborne, 2010).  In the first day of sales, it garnered $200 million in sales (Slodkowski & Izumi, 2010).  As of this writing, the game has sold 6.03 million copies, well on its way to topping the 8.1 million copies sold by its predecessor (VG Charts, 2010). As we can see, the game has been wildly successful and a big boost to the industry in a struggling economy.

The gaming industry itself has many characteristics of an oligopoly.  For example, there are a handful of retailers who offer the product to a plethora of consumers.  In fact, a recent study showed that most consumers only choose between nine different retailers when choosing where to purchase a video game product.  Furthermore, this same study showed that 56% of respondents, or 144 million people, played video games for two hours or more every week (Imagine Games Network, 2008).  This forms the core demographic of the gaming industry.  Furthermore, the product is completely homogenous.  Every copy of Halo: Reach is exactly identical, regardless of where purchased.

This game followed recent industry trends by being released in multiple editions.  The regular edition features only the game, the box, and the instruction manual.  Increasingly expensive and rare editions feature add-ons such as statues, digital content, and replicated relics from the war that this product’s storyline encompasses.  In the interest of product uniformity, this report will analyze only the regular edition of this product, and will not discuss the used game market.

Now that there is an understanding of the background in this industry, we can establish some important questions to ask regarding this product.  How does the release of this product affect its price?  Will we see a steady increase in prices as demand increases near the holidays?  Or, will we see a steady decrease as retailers compete with one another?  Is the market for this product a true Bertrand oligopoly?  Perhaps most importantly, can this knowledge help consumers make better purchasing decisions?  All of these questions will be explored in full in this report.

Data

Data was collected from the following sources:

• GameStop

• Amazon

• EBay

• Half.com

• Wal-Mart

• Best Buy

For each of these stores, pricing data was retrieved from their online storefront.  Data was collected by utilizing a browser function to open saved web pages simultaneously, and then data was manually entered into an Excel spreadsheet based on prices found at these sources.  For most retailers, no special considerations were necessary.  However, Half.com and EBay provided unique challenges, as these sites are populated with products from users, rather than a centralized retailer.  For Half.com, only new copies of the product were analyzed, and the highest and lowest prices were recorded.  For EBay, I attempted to use my best judgment to determine which auctions were reliable.  For example, some auctions were for Australian editions of the game, or would not feature a picture of the game which was on sale, but rather a stock photograph.  Also, since my search was for “halo reach –legendary –limited new” I would occasionally get prices for related products such as stickers.  Obviously, these alternate products were ignored.  With regards to Amazon, only Amazon prices were considered.  Amazon Marketplace sellers were not analyzed.

Data was collected beginning August 30, 2010 and ending December 3, 2010.  Data was collected every Monday, Wednesday, and Friday between those two dates.  The data was normally collected in the morning, yet time-of-day did vary slightly; however, it is not expected that this had any effect on the data collected.  The only issue which could affect the reliability of the data is the discrepancy between in-store and on-line pricing.  However, all of the retailers which were analyzed have a significant on-line presence, and it is expected that their website prices are accurate and in accordance with their in-store pricing.

Below is a graph showing prices from all retailers across the entire span of the project. All charts in this report are interactive; hover for more information on a data point, or use the slider at the bottom to zoom in on a specific date range.

Even from a casual glance at the prices, we can see that there is a substantial amount of price dispersion.  Not only do prices vary between stores, they also vary over time.  The sources with the most variation in price are, by far, EBay and Half.com.  Reasons for this will be discussed later; for now, a graph showing price dispersion without these sources may prove more practical.  As retail prices did not vary before the product’s release date of September 14, those dates are not included in this graph.

The chart shows some interesting variations in price.  For example, both Best Buy and GameStop offered the exact same price for the entirety of the project; for this reason, only the Best Buy line is visible, as it covers the GameStop line perfectly.  The two retailers who more frequently varied their price, Amazon and Wal-Mart, have some marked similarities in the time that they changed their price.  It should be noted that all retailers lowered their prices on November 26; this is considered “Black Friday”, a day where retailers offer severely discounted prices to attract consumers.  All retailers except Wal-Mart left prices low until November 29, often referred to as “Cyber Monday”, which offers similar low prices on-line.

The graph below shows the average, minimum, and maximum prices over time.

Almost all maximum prices are attributable to EBay; I believe that sellers offer their product at a very high price in the hopes of “catching” consumers with low levels of information as they shop.  These consumers would be unaware of the true price of the product, and may purchase the higher-priced version on accident.  Almost all minimum prices are also attributable to EBay.  I believe that these auctions are begun at a very low price in order to attract bids, with the hope of resulting in a bidding war which will increase the final sale price.

The product’s initial suggested retail price was $59.99.  On the product’s release date of September 14, it was available at this price at Best Buy, GameStop, and Amazon.  Wal-Mart offered it from day one at a price of $59.96.  The average price over the entirety of the project and all retailers was $56.54.  Discounting EBay, the average price was $54.21.  The lowest price ever recorded was $0.09 and the highest was $348.04.  Discounting EBay, the lowest was $32.00 and the highest was $79.99.  Per-retailer summary statistics are provided in the table which appears below.  Most of the minimum price values occurred on Black Friday, with the exception of EBay.

With regards to day-of-week specific pricing, Wednesday is the cheapest day to buy with an average price of $55.31, and Friday is the most expensive day to buy with a price of $57.94.  Discounting EBay, the cheapest day to buy becomes Friday with an average of $53.85 and the most expensive day is Wednesday at an average of $54.63.  Monday averages $56.37 with EBay included and $54.14 without.

Analysis

In order to understand the product market, it may prove useful to compare the market to a true Bertrand oligopoly.  This type of market would have the following characteristics:

• There are few firms in the market serving many consumers.

• The firms produce identical products at constant marginal cost.

• Firms engage in price competition and react to competitors’ prices.

• Consumers have perfect information and there are no transaction costs.

• Barriers to entry exist. (Baye, 2009)

We know that the first one is met by the information included in the introduction.  Specifically, the nine frequently utilized businesses are: Wal-Mart, Best Buy, GameStop, Target, Amazon, EBay, Toys R Us, Blockbuster, and Kmart.  Wal-Mart, Best Buy and GameStop account for over 50% of the most-visited retailers.  Toys R Us, Blockbuster, and Kmart account for less than a quarter.  Unfortunately Target, which has a significant market share, was not included in this project.  The retailers which I did analyze account for over 70% of the retail market.  Also, with 144 million consumers choosing to play games for over 2 hours per week, there is a significant user base available for this product.  We can say that the first requirement for a Bertrand Oligopoly is met handily.

Without a doubt, the product is identical.  This is because barring manufacturing defects the data contained on a Halo: Reach disc is identical across all stores.  In fact, these stores get copies of the product from a wholesaler, who herself gets the product from the manufacturer.  We can then say that, from the perspective of retailers, the marginal cost of the product is equal to the wholesale price.  Wholesale pricing data can be hard to obtain, as retailers will occasionally strike deals with wholesalers in order to pay a lower price on large orders.  From what data I could obtain, I determined wholesale prices to fall in the range of $38.99 through $47.99. (Various, 2006) (Matcom Distribution, 2010)  While this makes marginal cost fairly constant, larger retailers such as Wal-Mart may be able to secure a significantly reduced price due to the large size of their orders.  This can give Wal-Mart a competitive edge that allows them to charge a reduced price.

With regards to price competition, there is some evidence that this occurs, but to what extent can be difficult to ascertain.  For example, we saw in an above graph that GameStop and Best Buy do not change their prices very much, only lowering prices for Black Friday.  We may be able to understand why this occurs when we take a look at Best Buy’s business practices.  The block of text above comes from Best Buy’s web site. As we can see, they are willing to match any competitor’s coupon.  This allows them to charge a monopoly price, as they have no incentive to lower their price to compete with competitors.  However, GameStop does not have this policy.  I believe that they charge the price they do because they specialize in the gaming market, and they charge their prices based on a much more inelastic consumer base.  GameStop is able to attract this base because of their promotions for placing reservations on games, and the wide array of accessories that they provide in addition to just games.  Wal-Mart also offers a price matching guarantee, yet we saw earlier that they engage in price competition, as does Amazon.  I believe that both retailers target a much more elastic market with their advertised low prices, and as such have more to gain by being able to undercut the competition.

Perfect information can be hard to come by in the real world, and this proves to be an obstacle which encourages price dispersion in this case.  Examples of information-limiting factors are:

• Wal-Mart regularly randomizes their price.

• Amazon regularly randomizes their price.

• Amazon limits the availability of pricing information to consumers.

• Reliability problems prevent EBay from being a consistent good deal.

Price randomization prevents consumers from knowing which retailer will regularly offer a lower price, and prevents competitors from under-pricing Wal-Mart or Amazon.  Amazon’s price obfuscation prevents some search tools like Google Shopping from being able to provide consumers with perfect information, and also increases the amount of time it takes to discover their true price.  Finally, EBay is rarely considered a reliable source, as one is likely to be “ripped off”: to receive a product other than the one desired, or no product at all.

With regards to transaction costs, it may be unrealistic to say that any market in the real world would be free of them.  Transaction costs vary from taking the time to compare prices between retailers, to the time and expense of driving to a brick-and-mortar store.  Transaction costs are especially high when purchasing from EBay, as one must engage in the bidding process with other buyers.  Keeping an eye on an auction, making competitive bids, and comparing one auction to others require a large investment of time.  In general, transaction costs do exist.

The last characteristic of a Bertrand Oligopoly, the existence of barriers to entry, is also present in this market.  When we consider the massive power of large retailers such as Wal-Mart and Best Buy, it is not hard to imagine that truly competing with either of these retailers would be nearly impossible without a massive investment.  However, even GameStop is quite a market force.  GameStop also owns retailer EB Games, retailer Babbage’s, Game Informer magazine, retailer Funcoland, retailer Micromania, website Gamestop.com, website EBGames.com, retailer MovieStop, web gaming site Kongregate, and website Jolt Online Gaming.  This is not to mention the many other businesses which GameStop has bought and subsequently shut down.  EBay is the only successful online auctioning site, and there is no foreseeable end to their dominance in this category.  The same can be said for Amazon, which began somewhat innocuously selling books but has successfully expanded to sell almost any product desirable.  Half is a subsidiary of EBay, and as such has considerable investment behind it.  In summary, barriers to entry exist because of the incredible market power and financial investment behind each of these companies.

To summarize the characteristics of a Bertrand oligopoly in this market, we can say that there are few sellers serving many customers in the market.  We can also say that the product is homogenous, but marginal cost is not constant.  Some firms engage in price competition, while some do not.  Consumers do not have perfect information, and transaction costs exist.  Also, barriers to entry are realized as the expense of starting a major retail chain, and as the significant market power already exerted by existing firms.

One other important observation is the existence of pricing strategies in this market.  As we have seen, GameStop and Best Buy use almost no pricing strategies, with the exception of participating in Black Friday and Cyber Monday.  However, EBay users engage in a number of pricing strategies; for example, they can offer their product at a very low price to attract interest or they can offer their product at a very high price in order to take advantage of consumers with low levels of information.  Half uses very simple pricing strategies; usually, sellers will either offer the product at the price that they feel is fair, or price the product just below their competitors.  This sort of near-perfect competition is what, I believe, attracts many users to the site.

With regards to Wal-Mart and Amazon, they seem to compete with one another, which is an interesting outcome of this project.  The above graph takes a much closer look at the pricing strategies that are exhibited.  Amazon’s price varies considerably with no changes in Wal-Mart’s price, until October 15 when both firms begin to reduce their prices, both reaching $54.99 on October 18.  Both firms briefly raise their prices back to $59 plus some change, and then begin to gradually reduce their prices, often making reductions at the same time, all the way to a low of $35 for Wal-Mart and $39.99 for Amazon on Black Friday.  Amazon lowers their price further for Cyber Monday to $39.75, but Wal-Mart returns to $49.96.  At the end of data collection, both firms offer the product for $49.96.  We can think of this process as the gradual undercutting of prices that would be expected as two oligopolies alternately reduce prices in an effort to increase sales until both firms offer the product at marginal cost.  I expect that $49.96 represents a steady-state low price, and I would not expect the price to go any lower during the holiday season.  As a product becomes more outdated, especially in this market, it will gradually reduce in price.  Eventually, almost all games reach some sort of price floor.  However, before this occurs, it is possible that the product will no longer be available at the $49.96 price point after the holiday season ends, but will instead return to $59.99 as retailers are no longer willing to accept low prices in an effort to drive up holiday sales.

Conclusion

The market for video games is very close to a true Bertrand oligopoly.  There are few firms serving many consumers, selling an identical product, with substantial barriers to entry.  However: there are variations in marginal cost, not all firms engage in price competition, information can be limited, and there are transaction costs.  This leads to a situation which is near what we would expect from an oligopoly, with some differences.

GameStop is a unique business in that they specialize almost entirely in video games and video game accessories.  Because of this, they cater to a very inelastic market.  Also, they are able to secure lucrative deals with game manufacturers which enable them to offer bonuses for reserving video games, which allows them to profit before a game is even released.  As a result, GameStop does not participate in price competition.

Amazon is a firm which only offers products on-line; they have no brick-and-mortar presence.  I believe that Amazon’s low overhead allows them to minimize their marginal costs associated with retail sales outside of purchasing the product.  Furthermore, I believe that their large on-line presence allows them to secure the product from wholesalers at a discounted price.  As a result, Amazon engages in price competition.

EBay is an interesting business to analyze, as the frontend of the site is maintained by one firm, and many sellers use it to provide a product.  However, this gives some sellers an incentive to ‘cheat’ by claiming to sell a product which they do not have.  EBay must go to some lengths to resolve disputes between sellers and those buyers who have been ‘ripped off’.  Also, some sellers attempt to make a significant profit by offering the product at a very high price in order to take advantage of consumers with low levels of information.  Some other sellers offer the product at a very low price in order to attract interest to the product’s auction.  In total, EBay becomes a source with high variability in both price and product.  A consumer with a low opportunity cost of time may be able to get a high amount of consumer surplus by carefully using the auctioning process to get a good deal.

Half also consists of many sellers using one site to provide a product.  The primary difference is the lack of an auctioning system.  This results in a lower requirement for time investment to secure the product; as a result, prices are a little higher.  However, the availability of perfect information in regards to all sellers’ prices makes it possible for sellers to undercut each other and sell their product quickly.  In the end, consumers can get a good deal at this site, but the prices are not nearly as low as they may be able to get from another site like EBay.  Because this retailer was not examined in detail elsewhere in the report, a summary of their prices over time are available in the graph above.  After the product’s release, we can see that the prices at this site are consistently below the initial retail price of $59.99.  While Half does not engage in price competition, it is a reliably low-priced product source.

Wal-Mart, despite offering a price-matching guarantee, does engage in some level of price competition.  This is likely because they are a reputed low-price store, and as such they cater to a very elastic market.  Furthermore, their incredible market share gives them significant bargaining power with wholesalers, which allows them to negotiate low prices.  Also, they likely experience an economy of scale.  For these reasons, Wal-Mart engages in price competition.

Best Buy caters to consumers who have a significant desire for electronic and electronic-related products.  In fact, almost their entire store is dedicated to such products, with video games making up a sizeable portion of their store.  Because of this, they cater to a highly inelastic market, much as GameStop does.  This allows them to charge consistently high prices, lowering them only for special events such as Black Friday.  Ultimately, Best Buy does not engage in price competition.

The outcome for firms is that entry into this market is inadvisable.  With different retailers catering to different consumers, from video-game centric GameStop customers to deal-driven Wal-Mart customers, it seems unlikely that there is profit to be made in this particular market.  Furthermore, the high initial investments needed to participate in this market provide a significant barrier to entry.  Also, while Wal-Mart does not hold monopoly power, its significant market share affords it a level of power which is unusual in any marketplace.  For policy makers especially, a business such as Wal-Mart should be watched carefully to ensure that they act in a fair and just manner.

Consumers looking to purchase a video game should heed a few warnings.  Firstly, these products are likely to be at their most expensive when first released.  High levels of anticipation among fans of the franchise may lead to their willingness to pay this price in order to get it soon.  Gradually, the prices will lower, and in this case I believe the best time to buy would be at least 45 days after release.  Of course, consumers looking for an especially good deal can wait until Black Friday to receive very low prices, especially at Wal-Mart.  GameStop and Best Buy seem to offer the worst deal, yet it is likely that consumers who shop there regularly are also looking for other electronics-related products that may be unavailable at other stores.  If a consumer is looking online for a good deal at the highest level of reliability, Amazon is regularly priced comparably to Wal-Mart, and occasionally even lower.  If a consumer is willing to take a slight risk, Half offers good deals reliably.  EBay offers the highest risk and the largest time investment, with the possibility of getting the product at a very low price.  Also, retail consumers should shop on Fridays in order to get the best deal.  Given the variety of options available to consumers, and the drawbacks and benefits of each, I see no reason why these various retailers would not continue to co-exist in a near Bertrand oligopoly.

Works Cited

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(Header image credit Bungie Studios)

Price Dispersion in Video Game Markets by Steve Richey is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.

This post was originally submitted for a class in Managerial Economics.