Abstract
Using hedonic results from a unique data set covering the U.S. home video game industry (1976–2003) the interaction between software provision and console price is analyzed. Increased software provision negatively effects console price. This is contrary to many empirical pricing studies in the network effects literature greater software provision makes hardware more valuable and this should be reflected by increased hardware price. However, the main result from the paper is consistent with the recent theoretical literature on two-sided markets. Also, findings suggest the two-sided pricing strategy employed by hardware firms is dynamic. The percent of price decrease accredited to game provision decreases over time.
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Notes
While beyond the scope of this paper, symmetric software is clearly not the case for the video game industry. Out of all video games released in 1998, only 10% made a profit. By the late 1990’s, the top 10 best-selling games accounted for 1/3 of global revenue (Coughlan 2001). In 2000, only about a quarter of the 1300 games produced that year were able to sell enough copies to make back their development costs (Hillis 2001). The assumption of symmetric software allows a more tractable solution and allows the number of games to serve as a rough proxy for the value of complementary products. Other studies using a similar assumption include Church and Gandal (1993), Clements and Ohashi (2005), and Park (2002).
There are only 2 64-bit processor consoles in this data sample and these consoles mainly compete with 32-bit systems. The dummy variables are merged for reasons of parsimony (DUM3264). Also, the correlation between RAM and CPU is high (.955); RAM is not used in the estimations to avoid multicollinearity.
One exception occurs with the negative sign for DVD, however the coefficient is never significant.
For example, the real price of Sega Genesis changed by −24.24% from 1990 to 1991. Over the same time period, the predicted effect of increased games available for the Sega Genesis changed the price of that console by −6.01%. Therefore, growth in games explains −6.01% ÷ −24.24% = 24.79% of the console price decrease.
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Acknowledgements
The author would like to thank Darren Filson, Jannett Highfill, and Kevin O’Brien for useful comments on early drafts. However, any errors are the author’s own.
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Gretz, R.T. Console Price and Software Availability in the Home Video Game Industry. Atl Econ J 38, 81–94 (2010). https://doi.org/10.1007/s11293-009-9209-3
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DOI: https://doi.org/10.1007/s11293-009-9209-3