Dynamics of Pricing in the Video Game Console Market: Skimming or Penetration?

Journal of Marketing Research, 47 (3), 428-443, 2010

57 Pages Posted: 23 Jul 2016

See all articles by Hongju Liu

Hongju Liu

University of Connecticut

Date Written: 2010

Abstract

Nintendo lost its dominant position in the video game industry during the console war between its Nintendo 64 and Sony’s PlayStation. There were several strategic decisions that Nintendo could have made differently in order to change the outcome. This paper develops a structural model and investigates these alternative strategies through policy simulations.

In particular this paper provides a framework to study firms’ optimal pricing strategies under network effects, consumer heterogeneity, and oligopolistic competition. Consumer heterogeneity provides an incentive for a durable goods manufacturer to price skim, while network effects lead to an opposite motive for penetration pricing. The proposed framework incorporates these two competing motives under oligopolistic competition.

The author estimates a demand system that allows for indirect network effects and consumer heterogeneity, and then numerically solve for the Markov perfect equilibrium in firms’ dynamic pricing game. Policy simulations indicate that Nintendo could have won the console war either with 10% more games, or with a “head start” of one million units in installed base at the time of the PlayStation introduction.

Keywords: price skimming; penetration pricing; policy simulation; indirect network effect; dynamic programming

Suggested Citation

Liu, Hongju, Dynamics of Pricing in the Video Game Console Market: Skimming or Penetration? (2010). Journal of Marketing Research, 47 (3), 428-443, 2010. Available at SSRN: https://ssrn.com/abstract=2813269

Hongju Liu (Contact Author)

University of Connecticut ( email )

2100 Hillside Rd, U-1041
Storrs, CT 06269-1063
United States

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