This is an in-depth theoretical economics study into video game pricing in New Zealand (and Australia to a smaller extent). It's also an open letter to EA, Activision, Ubisoft, Bethesda, 2K Games and any other big publisher who happens to see this and anyone else who sees this. I know it's big; I know it's probably full of grammatical errors and generally isn't very well organised; I know it might be a little difficult to understand to anyone who hasn't studied economics at school, but it's good enough to get the point across. Hopefully. I just want people to read this, so everyone knows video games in New Zealand (and possibly in general) are over-priced - not because I'm a self-entitled stingy twat, but because publishers stand to make profits. I reckon that ought to convince them.
I see a lot of media out there on the internet claiming games are over-priced and $60 is too much. My only response is and will always be: "*****, please."
Gamers in New Zealand (and Australia, but being a New Zealander myself, I don't know all the details for Australians and you can assume I speak specifically for New Zealanders from this point on) are paying upwards of $100 for every damn game they buy. We used to accept this because before the global financial crisis when the exchange rate meant US$60 was actually around NZ$90-100 but now US$60 is about NZ$75 and yet, to purchase a newly released or pre-order a AAA game like Black Ops II costs NZ$110-120 - that's almost US$100! It's not just retail releases either, the Steam release does actually cost US$99.99. The worst part being that even though it knows I'm in New Zealand, it has the price listed in USD so I know it no longer has anything to do with the exchange rate, publishers just want to charge us more.
Now some of you may think "Well why wouldn't they charge you more when you're used to it?" and the simple answer is profits. There is a legion of economic reasons to suggest that by lowering the prices across their entire catalogue, a publisher will make more money. Why? Because video games are a luxury, they have an elastic demand curve. What this means is that a decrease in price leads to a more than proportionate increase in quantity demanded i.e. even though the price is lower, the increase in sales is so large it actually increases revenues for the publisher. So the obvious course of action in this situation for any profit maximising firm is to lower the price.
Of course, all this depends on whether or not video games are actually inelastic goods (and they are goods, not services like some publishers seem to think, but that's a different arguement.) Well a characteristic on an inelastic good is that they are generally also luxury goods, not necessities (e.g. food, waste management etc.) or inferior goods (e.g. budget food, second hand clothing etc.) but things we simply just want. It's pretty obvious video games are most definitely luxuries, but a way to mathematically prove a product is a luxury is to calculate their income elasticity of demand. Basically, a luxury is a good or service which you spend a progressively larger proportion of your income on as your income increases (income elasticity of demand > 1). A broke person doesn't buy any games, a poor person might get 1 on very rare occasion, and a particularly rich person might well buy every damn game on Steam just because they can. As your income increases, you spend a larger proportion of your income on luxuries like video games and other forms of entertainment. Another characteristic of inelastic goods is that their price is often a large proportion of income. Now you may think $120 is expensive, but not that large of a proportion of the average income for your average household, but reconsider.
The bulk of the gaming demographic in New Zealand is children, teenagers and young people in tertiary study. Sure there are older gamers in New Zealand, but they are most certainly a minority and also likely exclusively play older games. (I've only ever met two middle-aged gamers and both play older games like Balder's Gate and Warcraft 3. The only game either of them have bought in the last ten years is Fallout 3. That was because he played the original Fallout games.) Children don't have any real income (a job) and so $120 is a very large proportion of what little money they get as birthday and christmas presents. Children are far more likely to spend what income they have on other cheaper entertainment like movies or music. Teenagers and students in tertiary study are probably the biggest source of any publisher's NZ sales. They also have low incomes because only some of them have jobs, and those that do still have little discretionary income (income after tax and spending on necessities e.g. petrol to get to their part time job) and so a small price change is still a relatively large portion of income. To put it into numbers, say your average student has $210 of discretionary income every month (a number chosen solely for its convenience, I have no idea what the actual average discretionary income of a student is). Now at the current price level, this gamer can afford to buy one new AAA game per month, choosing to either save the remainder or spend it on other, cheaper luxuries. If the RRP of your average AAA game was reduced just slightly down to ~$100, they could now afford to buy two every month. If reduced further down to the value of their american counterparts - ~$70 - then the gamer can now afford three a month. This shows how a small price change could make a big difference.
Furthermore, it should be noted that the average income for New Zealanders is far less than the average income in America. This means that games take up an even larger proportion of NZ income than they do in America, so at any rate, demand for video games in NZ is definitely more elastic than in America, which is reason for them to be cheaper than their American counter parts, not more expensive. But I don't even care, I just want it all to be the same. Baby steps.
Gamers don't spend all their discretionary income on games, and they never will because they want other things too. Another characteristic of inelastic goods is that there are many substitutes, what that means it that there is many other goods or services they could purchase in place of games. Now I think publishers assume the only substitutes for their AAA games are other publishers' AAA games, but I don't think so. Pretty much any other form of entertainment can be counted as a substitute for video games. So if the price of video games decreases, people from all over who spend their money on the plethora of gaming substitutes will decide that maybe gaming is affordable now, maybe I'll get this new AAA release. Think about it, that's potentially one extra AAA game sold for every indie-gamer, movie-goer, tv-watcher, music-listener, alcohol-drinker, weed-smoker and lets not forget pirates! Any consumer of substitutes for buying AAA games will probably switch once they see AAA games are relatively cheaper. Obviously, it won't be that much seeing as most people engage in a couple of these substitutes, but because there is so many people buying so many video game substitutes, the increase in quantity demanded following a price drop will be more than proportionate, and publishers will receive higher revenues.
So before a fellow economist brings up the issue of brand loyalty to argue that publishers operate in an oligopolistic market structure (few firms, large set-up costs, heavily differentiated product meaning they advertise and try to make theirs look different but it's all just video games and will entertain you all the same) where decreasing price would lead to little increase in quantity sold, let me say this: nope. Gamers may be loyal to certain publishers (well, the developers the publishers own more likely) but substitutes aren't just other games. Publishers don't really operate in an oligopoly, they're kind of in a monopolistic competition (many firms, slightly differentiated product in terms of consumer experience) with every other firm in any kind of entertainment industry. All firms in all entertainment industries offer different entertainment experiences and since publishers generally have a foot in almost every popular genre, they don't have to worry about the tastes and preferences gamers, or entertainment seekers in general as they are likely to enjoy at least one game published by any given publisher. Any self respecting economist knows firms in monopolistic competition face elastic demand curves. Why? Because in monopolistic competition it's relatively easy to switch from one firm to another since they're all selling very similar things (they're all just selling entertainment) and so not switching the the firm selling the cheapest entertainment is unreasonable given that it's so easy; which basically just backs up everything I said in the previous paragraph.
Another economist might argue that video games' addictive qualities suggests it's actually price inelastic. To that economist I say: we've been through this, games aren't addictive, watch more Extra Credits and try not to be so big of a douche.
Someone else may try to argue that the prices are high because of the costs associated with making games, but the thing is, I'm not asking for an across the board decrease in game prices, (otherwise this already massive essay would be far longer,) I'm just asking for games in NZ to cost the same as games in America. I'm asking for a world where Steam doesn't display different USD prices depending on your global location. The Borderlands 2 Season Pass should cost US$30 or less in New Zealand, not US$40. We know it's got nothing to do with costs because they are selling the same games for less in America, and even less in Russia. We know they can afford to sell for less and still make a profit.
The mention of Russia brings up an interesting point, publishers may well already know everything I've said so far, because games in Russia are cheap. They're cheap because publishers know that incomes in Russia are lower and there's a bunch of substitutes for buying AAA games, probably the main one being pirating AAA games. Pirating is a substitute because while (significantly) cheaper than buying AAA games, it comes at the cost of reduced functionality; unless it's a Ubisoft game and the absence of ridiculous DRM makes the pirate version of Assassin's Creed II a straight up better product than the legitimate version. By the way publishers, if you don't want your game to be pirated, make the legitimate version a better, easier product, and assume it will be cracked and the crack will be simple. Because it always is. Back to the original point, publishers obviously know video games in Russia are very elastic because of the low incomes, but somehow managed to have missed the fact that NZ also has low income, and it too has an elastic demand for video games.
--Beware of minor jargon past this line paragraph--
With digital distribution comes an interesting idea: total cost doesn't increase with output. Total cost doesn't increase at all and so maximum profit occurs at the exact same point as maximum revenue. Maximum revenue occurs when the product of output and price is maximised. Publishers simply are not operating at a price level which maximises revenue (in NZ at least) because they've misinterpreted the elasticity of the demand for video games in NZ. Hell, maybe even for the whole world. Maybe US$60 is still too much and maximum revenue can be found at a lower price, but that's a maybe. US$100 in New Zealand being too much? That is definite.
Publishers think they're in an oligopoly, they think that lowering their prices will just mean every other publisher also has to lower their prices to stay competitive and no-one gains a bigger gaming market share. They're right, that is exactly what will happen if Activision, EA, THQ, Square Enix, 2K, Bethesda, Ubisoft or any other big publisher with their foot in multiple genres lowers their prices. But what they don't seem to realise is that video games isn't an isolated market. Video games is just a small part of the massive entertainment market, which is pretty much monopolistic competition. Normally, firms in monopolistic competition don't try to maximise revenue, they try to maximise profits because they have to take increasing costs of production into account when increasing output. This means that for other forms of entertainment, while they too face elastic demand, decreasing price and increasing revenue also leads to decreasing profits due to cost concerns. They operate where marginal cost equals marginal revenue like a normal firm. With digital distribution, video game publishers kind of no longer have a marginal cost curve. Marginal costs (the increase in total costs to produce one more unit of output) for publishers is zero at all output above 1, and so the profit maximising output occurs where MR=MC or rather, when MR=0. That's when total revenue is maximised. I think US$60 for Americans is close to this point, but US$100 for New Zealanders is miles off. So publishers, if you like money: lower your prices for New Zealanders. Don't you have your own economists to tell you this?
I see a lot of media out there on the internet claiming games are over-priced and $60 is too much. My only response is and will always be: "*****, please."
Gamers in New Zealand (and Australia, but being a New Zealander myself, I don't know all the details for Australians and you can assume I speak specifically for New Zealanders from this point on) are paying upwards of $100 for every damn game they buy. We used to accept this because before the global financial crisis when the exchange rate meant US$60 was actually around NZ$90-100 but now US$60 is about NZ$75 and yet, to purchase a newly released or pre-order a AAA game like Black Ops II costs NZ$110-120 - that's almost US$100! It's not just retail releases either, the Steam release does actually cost US$99.99. The worst part being that even though it knows I'm in New Zealand, it has the price listed in USD so I know it no longer has anything to do with the exchange rate, publishers just want to charge us more.
Now some of you may think "Well why wouldn't they charge you more when you're used to it?" and the simple answer is profits. There is a legion of economic reasons to suggest that by lowering the prices across their entire catalogue, a publisher will make more money. Why? Because video games are a luxury, they have an elastic demand curve. What this means is that a decrease in price leads to a more than proportionate increase in quantity demanded i.e. even though the price is lower, the increase in sales is so large it actually increases revenues for the publisher. So the obvious course of action in this situation for any profit maximising firm is to lower the price.
Of course, all this depends on whether or not video games are actually inelastic goods (and they are goods, not services like some publishers seem to think, but that's a different arguement.) Well a characteristic on an inelastic good is that they are generally also luxury goods, not necessities (e.g. food, waste management etc.) or inferior goods (e.g. budget food, second hand clothing etc.) but things we simply just want. It's pretty obvious video games are most definitely luxuries, but a way to mathematically prove a product is a luxury is to calculate their income elasticity of demand. Basically, a luxury is a good or service which you spend a progressively larger proportion of your income on as your income increases (income elasticity of demand > 1). A broke person doesn't buy any games, a poor person might get 1 on very rare occasion, and a particularly rich person might well buy every damn game on Steam just because they can. As your income increases, you spend a larger proportion of your income on luxuries like video games and other forms of entertainment. Another characteristic of inelastic goods is that their price is often a large proportion of income. Now you may think $120 is expensive, but not that large of a proportion of the average income for your average household, but reconsider.
The bulk of the gaming demographic in New Zealand is children, teenagers and young people in tertiary study. Sure there are older gamers in New Zealand, but they are most certainly a minority and also likely exclusively play older games. (I've only ever met two middle-aged gamers and both play older games like Balder's Gate and Warcraft 3. The only game either of them have bought in the last ten years is Fallout 3. That was because he played the original Fallout games.) Children don't have any real income (a job) and so $120 is a very large proportion of what little money they get as birthday and christmas presents. Children are far more likely to spend what income they have on other cheaper entertainment like movies or music. Teenagers and students in tertiary study are probably the biggest source of any publisher's NZ sales. They also have low incomes because only some of them have jobs, and those that do still have little discretionary income (income after tax and spending on necessities e.g. petrol to get to their part time job) and so a small price change is still a relatively large portion of income. To put it into numbers, say your average student has $210 of discretionary income every month (a number chosen solely for its convenience, I have no idea what the actual average discretionary income of a student is). Now at the current price level, this gamer can afford to buy one new AAA game per month, choosing to either save the remainder or spend it on other, cheaper luxuries. If the RRP of your average AAA game was reduced just slightly down to ~$100, they could now afford to buy two every month. If reduced further down to the value of their american counterparts - ~$70 - then the gamer can now afford three a month. This shows how a small price change could make a big difference.
Furthermore, it should be noted that the average income for New Zealanders is far less than the average income in America. This means that games take up an even larger proportion of NZ income than they do in America, so at any rate, demand for video games in NZ is definitely more elastic than in America, which is reason for them to be cheaper than their American counter parts, not more expensive. But I don't even care, I just want it all to be the same. Baby steps.
Gamers don't spend all their discretionary income on games, and they never will because they want other things too. Another characteristic of inelastic goods is that there are many substitutes, what that means it that there is many other goods or services they could purchase in place of games. Now I think publishers assume the only substitutes for their AAA games are other publishers' AAA games, but I don't think so. Pretty much any other form of entertainment can be counted as a substitute for video games. So if the price of video games decreases, people from all over who spend their money on the plethora of gaming substitutes will decide that maybe gaming is affordable now, maybe I'll get this new AAA release. Think about it, that's potentially one extra AAA game sold for every indie-gamer, movie-goer, tv-watcher, music-listener, alcohol-drinker, weed-smoker and lets not forget pirates! Any consumer of substitutes for buying AAA games will probably switch once they see AAA games are relatively cheaper. Obviously, it won't be that much seeing as most people engage in a couple of these substitutes, but because there is so many people buying so many video game substitutes, the increase in quantity demanded following a price drop will be more than proportionate, and publishers will receive higher revenues.
So before a fellow economist brings up the issue of brand loyalty to argue that publishers operate in an oligopolistic market structure (few firms, large set-up costs, heavily differentiated product meaning they advertise and try to make theirs look different but it's all just video games and will entertain you all the same) where decreasing price would lead to little increase in quantity sold, let me say this: nope. Gamers may be loyal to certain publishers (well, the developers the publishers own more likely) but substitutes aren't just other games. Publishers don't really operate in an oligopoly, they're kind of in a monopolistic competition (many firms, slightly differentiated product in terms of consumer experience) with every other firm in any kind of entertainment industry. All firms in all entertainment industries offer different entertainment experiences and since publishers generally have a foot in almost every popular genre, they don't have to worry about the tastes and preferences gamers, or entertainment seekers in general as they are likely to enjoy at least one game published by any given publisher. Any self respecting economist knows firms in monopolistic competition face elastic demand curves. Why? Because in monopolistic competition it's relatively easy to switch from one firm to another since they're all selling very similar things (they're all just selling entertainment) and so not switching the the firm selling the cheapest entertainment is unreasonable given that it's so easy; which basically just backs up everything I said in the previous paragraph.
Another economist might argue that video games' addictive qualities suggests it's actually price inelastic. To that economist I say: we've been through this, games aren't addictive, watch more Extra Credits and try not to be so big of a douche.
Someone else may try to argue that the prices are high because of the costs associated with making games, but the thing is, I'm not asking for an across the board decrease in game prices, (otherwise this already massive essay would be far longer,) I'm just asking for games in NZ to cost the same as games in America. I'm asking for a world where Steam doesn't display different USD prices depending on your global location. The Borderlands 2 Season Pass should cost US$30 or less in New Zealand, not US$40. We know it's got nothing to do with costs because they are selling the same games for less in America, and even less in Russia. We know they can afford to sell for less and still make a profit.
The mention of Russia brings up an interesting point, publishers may well already know everything I've said so far, because games in Russia are cheap. They're cheap because publishers know that incomes in Russia are lower and there's a bunch of substitutes for buying AAA games, probably the main one being pirating AAA games. Pirating is a substitute because while (significantly) cheaper than buying AAA games, it comes at the cost of reduced functionality; unless it's a Ubisoft game and the absence of ridiculous DRM makes the pirate version of Assassin's Creed II a straight up better product than the legitimate version. By the way publishers, if you don't want your game to be pirated, make the legitimate version a better, easier product, and assume it will be cracked and the crack will be simple. Because it always is. Back to the original point, publishers obviously know video games in Russia are very elastic because of the low incomes, but somehow managed to have missed the fact that NZ also has low income, and it too has an elastic demand for video games.
--Beware of minor jargon past this line paragraph--
With digital distribution comes an interesting idea: total cost doesn't increase with output. Total cost doesn't increase at all and so maximum profit occurs at the exact same point as maximum revenue. Maximum revenue occurs when the product of output and price is maximised. Publishers simply are not operating at a price level which maximises revenue (in NZ at least) because they've misinterpreted the elasticity of the demand for video games in NZ. Hell, maybe even for the whole world. Maybe US$60 is still too much and maximum revenue can be found at a lower price, but that's a maybe. US$100 in New Zealand being too much? That is definite.
Publishers think they're in an oligopoly, they think that lowering their prices will just mean every other publisher also has to lower their prices to stay competitive and no-one gains a bigger gaming market share. They're right, that is exactly what will happen if Activision, EA, THQ, Square Enix, 2K, Bethesda, Ubisoft or any other big publisher with their foot in multiple genres lowers their prices. But what they don't seem to realise is that video games isn't an isolated market. Video games is just a small part of the massive entertainment market, which is pretty much monopolistic competition. Normally, firms in monopolistic competition don't try to maximise revenue, they try to maximise profits because they have to take increasing costs of production into account when increasing output. This means that for other forms of entertainment, while they too face elastic demand, decreasing price and increasing revenue also leads to decreasing profits due to cost concerns. They operate where marginal cost equals marginal revenue like a normal firm. With digital distribution, video game publishers kind of no longer have a marginal cost curve. Marginal costs (the increase in total costs to produce one more unit of output) for publishers is zero at all output above 1, and so the profit maximising output occurs where MR=MC or rather, when MR=0. That's when total revenue is maximised. I think US$60 for Americans is close to this point, but US$100 for New Zealanders is miles off. So publishers, if you like money: lower your prices for New Zealanders. Don't you have your own economists to tell you this?
