Gaming news for the rest of us.

Friday, September 15, 2006

Console Subsidization

There is a funny "battle" that I want to chime in on real quick. First, some history:

The bottom line of the Joystiq issue says that consumers are more likely to buy a console that has a higher subsidy built in, all other things equal. If you aren't familiar with the practice of subsidizing, it's the concept of selling things at a loss, which I just mentioned in another news post. Basically, the article equates selling at a loss with getting a discount and saving money. Penny Arcade rips on the article and basically calls it crap, which I am going to have to agree with. Joystiq didn't find that funny and responded.

The basic premise boils down to, what is the biggest determining factor for you purchasing a new console? Is it how much Company A is losing on it, factored in as a discount, or is it the overall price of the system?

For illustration purpose let's say the MS loses $100 per 360, Sony will lose $200 per PS3, and Nintendo makes $50 per Wii. That would put the consoles priced like so:

  • Xbox 360 $399 ($499 before loss)
  • PS3 $599 ($799 before loss)
  • Wii $249 ($200 before gain)

Do you buy the PS3 because it has the biggest subsidy despite the $599 price tag? If so, do you feel like that $200 is a discount and you scored a deal? I personally think, all things equal, people gravitate towards an overall lower price despite "discounts". The article builds into thinking a major fallacy that consumers factor in the loss the manufacturer takes on the hardware when looking at the price.

Since the original article factors in ceteris paribus, Latin for "all other things being equal", so let's go back and pretend the pricing is equal across all systems:

  • Xbox 360 $299 ($399 before loss)
  • PS3 $299 ($499 before loss)
  • Wii $299 ($249 before gain)

Does the price before the profit or loss make a lick of difference? Again, do you buy the PS3 just to "save" $200? I personally think the loss is not factored in to consumer consideration. Now that I have thrown a ton of match and hypothetical situations at you, which console would you buy?


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