Economic Issues in an Industry

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Competition plays a major role in any industry, causing companies to improve under the pressure it generates but also creating stressors and a sense that there can never be any rest. In any technology-related industry, those high-pressure concerns are amplified by the rapid pace of change as new technology continues to astound the public year by year. For video game companies, the competition is particularly high-stakes, given the recent shift toward making games ever more collaborative. If one product becomes dominant in the market, the company manufacturing the competing product must fight an uphill battle to reclaim customers, for naturally, consumers will want to buy a product that is compatible with what most of their friends own. Any slight shift in a precarious balance between similar competing products can lead to a landslide in favor of one company over the other. This situation is exactly what is still in the process of occurring right now between two video game consoles: the Xbox One and the Sony Playstation 4.

On the surface of the matter, it would seem that the effect of the more popular console gradually taking over would be universal, but the realities of the economic issue of competition are indeed much more complex than that. For example, as some researchers have reported their findings: “We empirically study these network effects in the 16-bit home video game industry . . . [T]he firm with a smaller customer network (Nintendo) has higher network strength than the firm with the larger customer base (Sega)” (Shankar & Bayus, 2003, p. 375). This shows the surprising fact that when the circumstances conspire to bring about the dominance of the “underdog,” all the normal predictors of video-game console success go out the window. Though the field of economics does not yet appear to have filled the need for deeper analysis and relevant equations to model these types of situations, it can only be hoped that as the popularity of multiplayer video-gaming continues to rise, the paucity and sparse nature of findings in the literature will be remedied. However, there are still some aspects of this topic that have been covered in-depth, and one such component is the thought that goes into a consumer choice to buy one product over another, similar product.

A looming question revolves around just what, exactly, primarily influences consumer decisions when choosing between two competing products. Much has been made about the differences between video game controllers and the impact this can have on a consumer’s selection of which new unit to buy. For example, Natapov, Castellucci, and MacKenzie (2009) tested this topic, though not for the Xbox One versus the Playstation 4: “Comparing just the video game controllers, the Wii Remote presents a 75% increase in throughput over the Classic Controller . . . Fourteen of 15 participants expressed a preference for the Wii Remote over the Classic Controller for pointing tasks . . . ” (p. 223). This shows that those who experience a controller’s performance and subsequently determine a preference for one controller over another are indeed making decisions based on actual objective data about the device, rather than, for example, on the look and feel of its casing. Given that much has been said in gaming circles about the superiority of the Playstation 4’s controller to that of the Xbox One, it is therefore not surprising that Raymundo (2014) found that in the disruptive competition between the two companies, the Playstation 4 has dramatically outsold the Xbox One as of only the day before this writing (see the Table 1 for a graph based on this data). This is heartening news, for it implies that the company with the objectively better product will indeed emerge on top in a close competition within an industry. In the end, this suggests that video game companies facing the economic issue of competition need to put all resources available into making their next product the best it can be, regardless of current financial circumstances.

The video game industry is intense, dynamic, and fast-paced, but amidst all these issues, perhaps the most notable one is the competitive nature of the economic situation. Given the nature of consumer decisions, it is easy to see that companies with products that perform better will triumph over those with inferior products in the end. This is as it ought to be in the world of economics when dynamics function as they should. Though fierce competition leads to high stakes, in the end, it also brings out the best that companies have to offer and keeps business from devolving into the stale state of a monopoly.

References

Natapov, D., Castellucci, S. J., & MacKenzie, I. S. (2009). ISO 9241-9 evaluation of video game controllers. In Proceedings of Graphics Interface 2009 (pp. 223-230). Mississauga, Ontario: Canadian Information Processing Society.

Raymundo, S. (2014, March 10). PS4 vs. Xbox One sales comparison: Sony announces 6 million Playstation 4 Next Gen consoles sold. Latin Post. Retrieved from http://www.latinpost.

com/articles/8675/20140310/ps4-vs-xbox-one-sales-comparison-sony-announces-6-million.htm

Shankar, V., & Bayus, B. L. (2003). Network effects and competition: An empirical analysis of the home video game industry. Strategic Management Journal, 24(4), 375-384.

(Table 1 omitted for preview. Available via download)

Source: Raymundo, S. (2014, March 10). PS4 vs. Xbox One sales comparison: Sony announces 6 million Playstation 4 Next Gen consoles sold. Latin Post. Retrieved from http://www.latinpost.com/articles/8675/20140310/ps4-vs-xbox-one-sales-comparison-sony-announces-6-million.htm