Playstation 4 Economics – or How to Screw Your Customers and Lose Market Share

Sony have announced that the PlayStation 4 will come before the ‘holiday season’ 2013, and wait for it, it will include PC Steam like features to prevent second hand sales of games.  No doubt they feel that they and game manufacturers will take some of the profits currently taken by the second hand/high street retail trade.

This is flawed, they will not make a cent extra profit and they will lose share as a platform – heres why.

Lets say a consumer spends $180 dollars a year on games.  With no second hand market that’s three games a year.

With a second hand market however you might buy a new game but sell it on second hand for say $20 and the shop might sell it on for say $50. (these costings are hypothetical examples to make the Maths easier to demonstrate not meant to be real world pricing)

So if the consumer buys only second hand games they get an extra 10% of games they can purchase in any one period of time, or if they buy new games they get an extra 1/3rd of their spending as income to spend on either new or second hand games.

What Sony are missing is that if you buy a product with a second hand value it doesn’t just have value to the customer through its first ownership but as an asset for resale, they cannot guarantee that they can automatically take as profit the resale value difference.  The reason being two fold, the customer has a budget constraint – they might only be able to afford $180 dollars per year, and Sony’s actions means that the consumer might simply buy less games with that $180 dollars.  Secondly the demand curve, the customer knows what they get with that $180 dollars, if they get less per game then they will either purchase less games if their is not a price fall per game.  With the loss of resale value the games will be worth less to them.

Take the £20 dollars resale value of a game.  Sony may believe that through their proposed system they can take the profit from retailers – killing off most high streets game shops – and keep it for themselves.  But they wont make a cent extra because they previously would have got that in the margin of the first sale and now they wont at all, the consumer will spend it elsewhere. That $20 dollars extra profit dangling before their eyes is an illusion, it doesn’t exist.

What is more if consumers spend on fewer games at too high a price the platform loses comparative advantage and market share.   They get out of the habit of using the platform.   After all one of the reasons consoles survive over PCs is that console games, unlike most PC games have a resale value.

This is the classic example of strategies which treat the market as a zero sum game and to be carved up rather than one to be expanded.  Apple has never made that mistake.

Clearly it would seem there are a few MBA fails working at Sony.


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