In the free market, price is determined by the intersection of supply and demand. According to the Law of Demand, higher prices will lead to a lower quantity demanded, and lower prices will lead to a higher quantity demanded. Similarly, according to the Law of Supply, a firm will be able to supply a greater quantity if the price is higher, and a lower quantity if the price is lower. At the price where the supply curve and demand curve meet, the quantity supplied is the same as the quantity demanded; this meeting point is referred to as equilibrium. If quantity supplied exceeds quantity demanded, there is a surplus, and a firm will need to lower prices in order to sell the excess goods.
This is exactly the situation that Nintendo faced in the summer of 2011. Having expected huge sales for their new handheld console, the 3DS, Nintendo instead found that the 3DS was being sold at an unexpectedly slow rate. There are a number of reasons why demand for the 3DS was lower than Nintendo expected. The market, it turned out, had changed considerably in the six and a half years since Nintendo released their previous handheld product, the Nintendo DS. It is important to note that demand for a product is often influenced by the price of substitutes, or similar products available to the same people. In this case, substitutes were now available from two competitors: Apple and Sony. Apple’s competition is relatively new and probably caught Nintendo by surprise. People who already own iPhones and iPads for other purposes unrelated to video games can easily use them as game consoles, and the games available on them are much cheaper than those available on the 3DS. Furthermore, Sony sought to make its next handheld console, the Vita, more competitive than its last one, the PSP, and surprised some consumers by charging only $250 for it, the same amount as the initial price for the 3DS, despite the fact that it is technologically superior to the 3DS in several ways. As prices of competing products go down, demand for a product goes down; so it was with the 3DS.
To deal with this surplus, on August 12, 2011, Nintendo went through with one of the most dramatic price drops in the company’s history, and the most dramatic price drop ever for a Nintendo product as new as the 3DS. In a single move, the price went from $250 to $170, a drop of $80. What is extremely unusual for Nintendo is that it will not be making a profit on any 3DS sold; unlike Sony, Nintendo is known for almost never selling consoles at a loss. This time, however, the price of a 3DS is actually lower than the production cost to make one, meaning that Nintendo will lose money with every 3DS sold. This may seem strange, but the video game market is much more complex than the simple supply-and-demand model might imply. This is because the important thing in the video game market is often not the console itself, but rather, the games that are developed for it. The games are complementary goods to the consoles; the two of them go together, and the price of one will affect the demand for the other. In this drastic move, Nintendo’s primary goal is not to make money on sales of the 3DS (which is now impossible), but to increase demand for 3DS games. In other words, making the 3DS cheaper will shift the demand curve for 3DS games to the right. Nintendo has also indicated that this move sought to increase the supply of 3DS games, because third-party developers (game developers other than Nintendo) would be nervous about making new games for a failing console, and now they have less to be nervous about. The profit Nintendo will make from 3DS games will give them the money they need to produce more 3DS consoles, even while selling at a loss. Nintendo also cut the salaries of their own top officials, presumably to redirect this money for the production of 3DS consoles so that they are still able to afford the same quantity supplied, ensuring that the supply curve does not shift leftward.
- Shaer, Matthew. “Nintendo 3DS price drops to $170, current owners get free games.” The Christian Science Monitor. 28 July 2011. The Christian Science Monitor. <http://www.csmonitor.com/Innovation/Horizons/2011/0728/Nintendo-3DS-price-drops-to-170-current-owners-get-free-games>.
- Yoon, Andrew. “3DS price cut puts PlayStation Vita in a ‘tough spot'”. 28 July 2011. <http://www.shacknews.com/article/69478/3ds-price-cut-puts-playstation-vita-in-a-tough-spot>.
- Shaer, Matthew. “PlayStation Vita enjoys great first week. Is it enough?” The Christian Science Monitor. 20 Dec. 2011. The Christian Science Monitor. <http://www.csmonitor.com/Innovation/Horizons/2011/1220/PlayStation-Vita-enjoys-great-first-week.-Is-it-enough>.
- Pereira, Chris. “Iwata’s Salary Cut in Half, 3DS Price Drop Explained.” 1Up.com. 29 July 2011. <http://www.1up.com/news/iwata-salary-cut-half-3ds-price-drop-explained>.