The Console Gaming Market
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THECONSOLE GAMING MARKET
Itis currently a common understanding that the industry of video gamesis among the largest on in the world. The industry brings a lot tothe economy of the UK, and its expanding on an annual basis. TheUnited Kingdom has an expounded history of making the video gamesthat are of excellent quality. With the increasing global gamesmarket, the sales are expected to go up to $115 billion by the year2018 (ResearchMarkets, 2016).The growth marks a yearly compound rate of growth of 8%, from the$83.6 billion of the year 2014. As of the end of the year 2015, theconsole games market was worth £4.2 billion. The amount representedan increase of £215 million in the year 2014, which also representeda 5% growth year-on-year. If it can be stretched a bit, the ConsoleGaming Market has grown at the CAGR of about 3.95% over the period of2012 to 2016. In 2013, the sales were £3.48 billion, which rose by13% in the year 2014. As such, based on this trend, 2016 is set to beeven better, with the new and better blockbusters that include StarWars, Halo, Zelda, and Uncharted (ResearchMarkets, 2016).There are also new technologies that are anticipated such as theSteam Machines, and Oculus Rift.
Analysisof the market structure of console gaming market
Theleading companies intheconsole gaming market andthe market shares they hold
Threemain video game console markets rivaling each other include Xbox Onefrom Microsoft, Sony’s PlayStation 4, and Wii U by Nintendo(Mosley, 2014).Nintendoand Sony simultaneously competed in the handheld game console marketwith Nintendo having 3DS while PlayStation uses Vita.
Accordingto an analysis by Ars Technica, Microsoft’s full share of theglobal console market has not worsened for the past three months, andneither has it gotten better. The reason behind this is Sony’smajority share of the console market in this generation. From thequarterly report released by Sony, it continues to outperform thecompetition by a wide margin. Over three months, it has sold threemillion PlayStation 4 units, Microsoft sold 1.4 million Xboxconsoles, and Nintendo only sold 470, 000 units of Wii U. Theseparation of the sales of Xbox One from Xbox 360 in the sales ofMicrosoft signifies a vague scientific figure. However, theMicrosoft’s system was given a projected range of 350,000 to560,000 sales within the period. It shows a drop from 500,000 to800,000 range in the previous year signifying a 30% drop. PlayStation4 belonging to Sony was the market leader in 2014 (Johnson andMackenzie, 2014). Areas not within London have Nintendo and Microsoftin a tough competitive position due to Sony’s high market share.They need to develop and execute innovative counterstrategies to winback their market share in 2016.
Typeof market structure that exist in theconsole gaming market
Theoligopolistic market structure characterizes PlayStation 4, Xbox, andNintendo`s Wii because of the following:
The dominance of the industry by few big firms and typically oligopoly entail five companies concentrated in a ratio of more than 50 percent. Here, only three large companies are dealing in the console gaming market.
There is interdependence among the firms since an oligopolistic firm will be influenced by the way other companies price their output (Wolf, 2012). The three firms engage in price competition to widen their market shares.
Barriers to entry exist but not as much as in monopoly markets as seen from the small number of companies in the console gaming market, that is, mainly three of them.
Theproducts are highly differentiated as observed in the three company’sproducts including PlayStation 4 for Sony, Xbox One for Microsoft,and Wii U for Nintendo.
Determiningprice and output for a single firm in the market of Console Gaming
Theprice and output of the console video games are influenced by thedemand and supply. The demands curve usually shows that the price caninfluence the quantity. A higher price increases the supply butlowers the demand for console games, up to the point where demand isequal to supply of the console games, and at this point, anequilibrium price is achieved, as shown below (Wolf,2012).Because it is an oligopoly market structure, it means that a slightincrease in price of the substitute console games will result to anincrease demand for the other substitute console games.
Figure1: Demand and supply of console games
Theprice wars have been greatly used in determining the output of theconsole games. However, pricing is not a fair form of competition, asthe war on prices usually results to lower profit, with a very littlechange in the market shares. As such, a firm in the console gamingmarket can charge a considerably premium price, but base itscompetition on promotional means such as advertising.
Figure2: Price and output determination of a firm in the console gamingmarket
Fromthe above diagram, the firm will maximize its profits at P1, Q1,where the marginal revenue is equal to the marginal cost. The changesin the marginal cost will have no impact on the market price. If allthe firms sell at the same price, the additional sales for the firmwill increase the demand for the product (Mosley,2014).Hence, a reduction price by the firm will result to inelastic demand.Thus, as shown in the diagram below, reducing the price from P1 to P2results to increasing the output to Q2, and vice versa.
Figure3: Oligopolistic competition
Thesignificance of barriers to entry in oligopoly market
Thebarriers to entry are usually significant because they assist themarket to maintain its oligopolistic structure in the long-run. Thefirms can decide to charge the lowest price to discourage others fromentering the market. Such a practice is significant because the firmsvoluntarily sacrifice their short-term profits to maximize on theprofits in the long-run.
Johnson,B. and Mackenzie, D. (2014). Xbox360 for dummies. Hoboken, N.J.:Wiley.
Mosley,D. (2014). PlayStation4. [Place of publication notidentified]: Emereo Publishing.
ResearchMarkets, R. (2016). PortableGaming Consoles: Market Analysis and Forecasts.[online] Researchandmarkets.com. Available at:http://www.researchandmarkets.com/reports/2255324/portable_gaming_consoles_market_analysis_and [Accessed 13 Mar. 2016].
Sutherland,A. (2011). Nintendo.London: Wayland.
Wolf,M. (2012). Thevideo game explosion. Westport,Conn.: Greenwood Press.