1/20/2008

Supply and Demand for Wii

This article describes the mismatch between supply and demand for Wii game consoles. I wanted to get my husband a Wii game console for Christmas, since my son said they were a lot of fun. I found out that Best Buy did not carry them because they sell out so fast, and that Amazon.com had a restriction on the number of consoles that a customer could buy. I decided that others needed those consoles more than I did this year. I guess Nintendo has been having trouble keeping up with demand since they introduced the Wii earlier this year. The article describes their situation, decisions and reasoning.

13 comments:

Dr. Tufte said...

What we're seeing with Wii is the exercise of a great deal of market power.

Nintendo has developed a product that currently doesn't have any competition - at least for some portion of consumers.

And, the way to maximize profits if you have monopoly is to restrict quantity to drive prices up.

This is such a good example it is already showing up in textbooks, and will continue to long after kids have moved on to other systems.

binoculars said...

Dr. Tufte said Nintendo WII is monopolist. Totally agree - come on who else have Super Mario games, Donkey Kong, and other great games that we were raised with? Not Sony Playstation 3 or Xbox 360. So what we learned from class - monopolists sell less at higher price - comes true for Nintendo WII. And dang it I hate it :)

Trinity said...

It seems as though Nintendo did not correctly understand its market quite as well as it thought. It tripled its production numbers and still wasn't able to meet demand. Perhaps Nintendo thought the Wii was a direct competitor with PS3 and Xbox 360 which could have thrown off its projections. Nintendo is just now realizing how different its console really is against Sony and Microsoft products in the consumers' minds.

Dr. Tufte said...

Oh no - I think Nintendo has done exactly what they should.

Just because they tripled output doesn't mean much. And ... they don't want to "meet" demand.

What they want to do in the face of higher demand is to increase production, but not by enough. So if they tripled production when the number of potential buyers, say, quadrupled, then they did a good thing.

Matthew said...

I think Nintendo has done an excellent job of targeting a market that has never really been approached in the video game industry. This wide-reaching strategy is another reason (besides keeping demand high with low supply) they are doing so well. As far as I know, there has never been a console that had a core strategy of getting the whole family off the couch and playing together. Many of the games sold for the Wii are family friendly and enjoyable for all, including moms! They even used several moms to advertise for the Wii and be spokes-moms. Could you imagine the whole family getting together for a Halo tournament on an Xbox? It's probably not as likely.

Gavin said...

Extra Credit - Dr. Tufte
If Wii has a great deal of market power and a monoploy, then why are individuals able to sell the Wii at a premium online? Doesn't this suggest that Nintendo is doing a lousy job managing supply and demand? A true effective monopolist should get that full surplus by realizing the price is not high enough.

Trinity said...

Dr. Tufte- I'm going to have to disagree. I think the production shortage was not in the company's best interest. While I agree it was smart to slightly underproduce to create a sense of novelty, Nintendo drastically underproduced. There were probably millions in lost sales. Also, Nintendo didn't profit at all from the shortages, it charged the same price. Individual consumers reaped all the benefits from the shortage by selling the consoles on ebay.

William said...

Dr. Tufte,
The one thing that I don't quite understand is why they don't charge a higher price. With only have a select few it seems that they could make more money, but currently are not capturing it. I know last year many guys in my classes where bragging to the fact that they bought the Wii for a really low price and then where able to resell it and make a good profit off of it. I do not understand why Wii was not capturing this.

Reagan said...

Dr. Tufte-Extra Credit,

I don't think Nintendo has done exactly what they should. If they wanted to take complete advantage of the monopoly they have they would have raised their prices. They have probably made the right decision in the supply but their pricing decision is off. They need to raise the price because it is very inelastic for they Wii. Because of this they have left a large amount of consumer surplus on the table for people to resale the product and make big profits. There is a ideal price and an ideal supply to maximize profits whether they have a monopoly or not and in my opinion they have made a mistake in their pricing.

TheFindlay said...

Dr. Tufte
The problem I find with your comment is that the price for Wii’s has gone down. If they really were exercising market power the prices would have at least stayed the same. Because the price is decreasing without any sign of competition I think the post is correct in stating that Nintendo is just having supply problems. Furthermore, it baffles me that there has not been any sign of competition with weak supply and such a popular product.

TheFindlay said...

Dr. Tufte
I know Nintendo sounds like they should know what they are doing and I am sure the piles of Wii money they have doesn’t hurt but it just doesn’t add up in my opinion. The iPod was in a similar situation and the cannibalized their own product. They definitely have not been hurt by ramping up production and the introduction of upgraded products.

Jacques said...

Dr. Tufte said Nintendo wouldn't want to meet demand. The Wii remains such a differentiated product that I agree it would not be in the interest of Nintendo to meet the demand. I think there is certainly an element of creating a "buzz" through the perception of heightened demand. A couple of holiday seasons ago, Tickle Me Elmo--another highly differentiated product with few relative substitutes--could not meet demand for three months leading up to the last couple of weeks before Christmas. Miraculously the manufacturers were suddenly able to meet demand and EVERYONE was finally able to get their must-have Elmo.

Dr. Tufte said...

Gavin and Trinity: economists don't have a solid explanation for this. But, we do see the same thing with stuff like movie tickets: why don't their prices change with the quality of the movie. There's something deeper going on that we are missing.

thefindlay: there is an Aplia exercise showing that your point doesn't follow every time.