Newzoo Gaming Indsutry Case Study

...

Present condition

Despite the fact that the launch of the Xbox 360 took place much later after some companies like the Sega had already accessed the market, it is the best product in the market, ranked the second place taking into account the total number of units it had sold. Although it could not overtake Sony which had sold much more units. This it did and was made possible by the fact that Microsoft had other products already in the market like software and operating systems. This indeed helped the company to enter and penetrate the market which was already tested by its competitors.

Marketing Structure

A market structure helps one understand the economic power of firms operating within in. Most importantly, it enables better understanding of the pricing power that firms hold over their own products. For instance, the uniqueness of a product leads a higher entry barrier. Also, the larger the scale economy, the higher the pricing power of the firm will be. Firms that are based in a perfect competition market and sell homogenous products have barely any pricing power and the market decides the price of their product. On the contrary, firms based in a monopoly that are selling unique, rare or patented products can have near absolute pricing power, a factor that often leads to price discrimination. Figure 2 depicts the various market structures and the pricing power correlation. It is important to note that Xbox competes in an Oligopoly market, wherein price based competition very rarely yields desired results. Microsoft cut the Japanese price of its Xbox 360 games console by 13% as it struggled to match sales of rivals Nintendo Wii & Sony PlayStation 3[pic 9]

The following points better explain important factors of an Oligopoly market:

- The industry is dominated by few large firms.

- Strategic behavior/ interdependence among firms. An oligopoly based firm will be affected by how other firms set their price & output

- There are barriers to entry but less than monopoly

- Products sold are differentiated

There are different types of market structures that define businesses. Some of the known examples are pure competition structure, price discrimination, oligopsony, monopolistic competition, oligopoly, monopsony and pure monopoly. All these are used to define the different structures that govern businesses across industries. In this context, it can be said the Xbox operates within an Oligopoly structure. This is demonstrated by the fact that there are not many companies that manufacture gaming consoles and have distribution networks across the globe. The presence of fewer companies dealing in similar products and services makes the market structure of the Microsoft Corporation an oligopoly. This is also supported by the fact that, before Microsoft Corporation decides to make any changes to the design, features or pricing of the Xbox, it has to pause and consider the actions that will be taken by its competitors. This is in line with an oligopoly structure where an a company or an organization has to take into great consideration what its competitors may decide to do once it has made the effort of introducing a new product or service into the market (Moffat 2011).

In a market structure, there are other factors that dictate how much a company may make from the sales of its products. These factors include the supply and demand of the product. Supply can be termed as the total distribution of products that can be brought to the market by the producers. On the other hand, demand can be defined as what buyers are able to purchase. Demand is usually dictated by price if all other factors are constantly held, whereby increasing the price reduces the quantity of products demanded. Supply on the other hand can increase if a product’s price rises making the suppliers give more for sale. This can be represented using demand and supply curves.

Price

`The law of demand states that when a demand of a certain commodity was low and everything else remained constant, the price of that commodity was high. When Microsoft’s Xbox 360 first introduced into the market, the demand was a bit low due to the high price that was associated with the gadgets especially for the first few years. This is well explained by the fact that other products from competing companies like the Nintendo’s Wii and Sony’s PS3 were already in the market and they sold at relatively cheaper prices (Bishop 2006). Figure 3 represents the demand curve of Microsoft’s Xbox 360.[pic 10][pic 11]

The X- axis represents the quantity demanded in billions of Xbox 360 in a year. The Y axis represents the price in dollars per Xbox 360 console. The graph shows that when the Xbox 360 was introduced in the market, it was selling at a high price and the quantity of gadgets ordered was low. At this time the popularity of the Xbox was at its lowest. Bearing in mind that the introduction of a new product to the market requires much money for promotion, and the fact that the product was not popular in the market, this meant that not many people would order for it and this made the prices shoot up.

Microsoft had also introduced the gadget at a higher price than the rest of the competitors so as to recover some of the money they used while manufacturing the consoles. But this high pricing initially reduced the demand of the product. Figure 5 represents the supply curve of Microsoft’s Xbox 360. The X-axis represents the quantities of Xbox 360 supplied in billions while the Y-axis shows the price of the Xbox 360 per each box. From the graph, it is eminent that the more consoles were supplied, the higher the price was as shown for the Xbox 360.[pic 12][pic 13][pic 14]

Equilibrium is the condition that arises when quantity supplied and quantity demanded are equal. At equilibrium, the tendency for price to change is nil. When quantity demanded exceeds quantity supplied at the current price, the condition is known as Shortage of Excess Demand. On the other hand, when quantity supplied exceeds quantity demanded at the current price, the condition is known as Surplus or Excess Supply.[pic 15]

Figure 7 represents the market equilibrium for the Xbox. The X-axis represents the Quantity of Xbox in billions while the Y-axis represents the Price per Xbox. The graph illustrates that, at the point of introduction, the Xbox 360 was heavily priced, at which point it had the lowest demand although the supply was high (Bishop, 2006). Eventually, as prices of the