11/02/2007

HD vs BlueRay Price Wars

As if the battle between HD and Blue-ray wasn't ugly enough, Walmart first dropped the price of their Toshiba HD A-2 DVD player to $198.00, then to $98.87 on a one-day sale. One strategy is exclusivity of movie titles offered with the hope that loyal customers will fit the bill, but I fear that this strategy will fail.

The battle being waged is reminiscent of the Beta vs VHS war over video cassette tapes mentioned in our previous class. One has higher quality specifications and the other has a lower price. Unfortunately for Sony, Blue-ray will become this generations Beta, especially with price wars like these. The perceived quality to the average consumer is almost identical, but the cost difference is almost double.

The fact of the matter is that unless there is a significant benefit from the much higher priced item, consumers will choose the cheaper product because they receive more consumer surplus.

9 comments:

Hailey said...

It is interesting that to a degree quality doesn't matter. To a consumer who doesn't notice a major difference, a price difference of almost double will stop them from considering the higher quality product. It seems like Blu-ray needs to do a better job of portraying its higher qualities and greater benefits. Perhaps this could counter the lower price offered by the competition.

Hayden said...

It does appear that the BluRay is losing the competition battle to HD. I think one of the problems is that people don't care about the quality as much as the price since a better product will come out in a few years. Therefore, electronics are replaced often since technology increases so rapidly. BlueRay must reduce its prices to compete, but it is possible that they can't afford to drop their prices and will be the next Beta. Advertising might help a little bit, but it won't do enough unless the price is reasonable compared to HD.

Wyatt said...

I think HD is going to kill BlueRay this Christmas in sales. This will be the determining factor for how the BlueRay will due in future growth. If the BlueRay does not sell very well, consumers will lose confidence in it and go for the HD. I wouldn’t buy the BlueRay; if the system flops it will be outdated and hard to buy movies for.

Logan said...

There are 2 prisoner's dilemmas here, one with consumers and one with film production companies. Neither want to waste any money, and the majority want to be in on the latest emerging technology, but only the one that will stick around.

Since you have to choose, BluRay and HD DVD have tried to force the movie companies into one group or the other. By so doing, they hope that the loyal customers to names like Disney will follow like blind sheep and pay out the nose for their proprietary equipment.

In the prisoner's dilemma, the common customer will choose the least painful or the method that is easiest to get out of. Since the quality is roughly comparable, and the price is half for HD, most will choose HD. If the market ends up going BlueRay, to switch to BlueRay from HD will be more expensive currently, but price wars will drive these things down as low as possible. Therefore, a switch later will be less expensive than now, and their HD machine may need to be replaced by that time anyway.

Going the other direction, if you chose BlueRay and the market goes HD, your cost up front is a lot more but your conversion cost will be less. Since we are in a credit crunch and future prices are questionable, I believe most will go with something they can afford now rather than later.

Sophie said...

Consumers seem to be making rational purchases when it comes to HD and BlueRay. They have realized that the price that they pay to get the BlueRay is not worth the minimal benefits that are achieved from buying this type of technology compared to HD. Good old cost-benefit analysis!

Dr. Tufte said...

I think it's very interesting that quality doesn't seem to matter with a lot of media (video, audio, phones). It makes me wonder if - as a society - we aren't defining the good properly in this case.

BTW: here is the URL for my post about porn and the 2 systems. The porn industry has chosen HD-DVD. (http://voluntaryxchange.typepad.com/voluntaryxchange/2007/01/corporate_ethic.html)

Gavin said...

Extra Credit - Dr. Tufte
Dr. Tufte, what do you mean by society not defining good properly? I thought that the porn industry made VHS the winner, why is it not having the same effect now? My guess is because there were really no substitutes during the Beta/VHS wars. Now we have DVDs or the internet as substitutes that will sustain us until there is a clear winner.

William said...

Dr. Tufte,
It seems to me that it all comes down to marginal costs and marginal benefits. The consumers obviously believe that the higher quality (the benefit) is not worth the added costs. Obviously the HD will stay popular until the Blue-ray distinguishes itself enough to make consumers want to pay the added costs.

Dr. Tufte said...

What I meant by "the good" is that we think of VCR as a good, and a tape as a good, and the content as a good.

But, I really think there is a lot of bundling going on here. Applying William's point, my point was that it is a lot harder for us to figure out what the marginal cost and benefit actually are with a bundle.