The console wars - Game theory

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Managerial Economics “The console wars” Executive summary We have analysed the game console industry with the help of game theory to try to understand the players, their strategies, industry dynamics and boundaries and to try to
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predict the eventual victor. While Nintendo had the clear first mover advantage with a long presence in the market, Sony dominated the console market with its PS2. Microsoft soon entered the market with its Xbox. A price war erupted and with no clear signs of a winner. Sony upped the ante with its PS3 leading to Microsoft announcing its new console and we saw the battle spilling over to HD DVDs. The various moves of the players were studied with Betrand-Edgeworth model and the Bain-Modigliani model. We also used a decision tree with the various pay-offs to analyse what would be the likely responses of the various players. It is also interesting to note that while the boundaries of the game changed from a vertical command and control system of value creation to a more horizontal system of connect and collaborate, the various models that we used remained relevant despite whatever strategies were adopted by the players. Introduction The following case study on the three way battle between Sony, Microsoft and Nintendo is an exemplar of how corporations battle it out in the marketplace by seeking to create value, and
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product differentiation. What is at stake is more than selling game consoles. The consoles of today are designed to be the media-hub of the digital household and along with the ability to play games, these consoles allow users to go online and surf the net and are also equipped with next-generation DVD capabilities. It would not be too far fetched to make the point that this is in fact a battle between Sony and Microsoft for world domination of the entertainment heart of our households where riches and spoils await the victor whose console is recognised as the industry standard. Apart from earning profits from the sale of game consoles, there are massive spin-offs from network externalities accruing to the victor too. Material Facts on Sony, Microsoft and Nintendo Sony Sony launched the PlayStation2 (PS2) on Oct 2000 at the price of USD 299. Sony had the capability of increasing the production and hence reducing the average cost. This showed that economies of size are in practice. There is also the zero-sum constraint experienced by Sony where they are involved in the price war with Microsoft. Subsequently, on November 2006, Sony launched the PlayStation3 (PS3) at USD 599. Sony was able to maintain the market dominance as the incumbent by introducing the Blue-Ray technology into the PS3. The high cost of Blue-Ray optical device and the “CELL” technology may hinder the progress of Sony in the gaming console. Microsoft
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The console wars - Game theory

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