Thursday, November 28, 2013

Why video games are so flammable

With Black Friday upon us, the flame wars over next-gen gaming consoles have really been heating up.  Which will win: the Wii U, XBox One, or PlayStation 4?  No one truly knows, but gamers everywhere agree that everyone else is wrong and should feel bad about being so stupid.

While I don't intend to make a habit out of discussing economics, I do think that video game flame wars can be understood within economics.  The problem is twofold:
  1. There is limited space for video games and video game consoles, and everyone knows it.
  2. Video games are in a state of monopolistic competition.
Video game producers are most efficient when they make fewer, larger games, for many reasons.  Developing a game is a one-time cost, while actually manufacturing the game is cheap.  Selling more copies of a game is not a matter of paying for more manufacture, but paying for better advertisement and development so that more people want to play.1  Note that it's much easier to advertise one big game than to advertise many little ones.  The main reason to have more smaller games is to better cater to different tastes (e.g. see the indie game industry).

Video game console producers have even more reason to be large.  Besides the large development costs of video game consoles, gamers also want consoles with games on them (especially games exclusive to that platform).  Consoles won't get many games unless there are many consoles to go around.  Whenever game developers port a game to a console, or make a console-exclusive game, their market is restricted by the number of console owners out there.2

The important number here is the ratio of the optimal size of the video game industry to the optimal size of a video game or video game console.  For consoles, that number appears to be 3-5.  For games, it's much larger, but still noticeably discrete if you focus on major companies.

The second problem is that video games are in a state of monopolistic competition.  That means that the products of different companies are all different, and are not perfect substitutes for one another.  Thus different consumers might have different preferences.

This puts consumers in a sort of Battle of the Sexes game.  The best outcome to a consumer is if they buy the games and consoles they want, and everyone else follows even if it's not what they most want.  But if everyone buys something else, the consumer has to choose between buying what they want (even though a worse-selling product will suffer in value) and buying what everyone else is buying.  People don't like being in this situation, and it's clear whose fault it is: other consumers!  Flaming those people may vent anger, and also persuade more consumers to one's own side.

There are, of course, other causes as well.  Video game consumers are particularly well-informed.  Also I think people just like flame wars.

It will be interesting to see how the games industry changes over time.  Development and advertisement costs may go down.  The market may expand to include a wider array of consumer tastes.  Porting games between platforms may get easier.  How will this affect the number and size of video games?

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1. In a list of the most expensive video games, older games spent a lot on manufacturing, but more recent ones spend on development and advertising.   For example, GTA V (2013) spent 51% of its budget on development,, 45% on advertising, and only 3% on manufacturing.
2. Any smaller consoles face these difficult problems.  This is why people often mock consoles like the Ouya or Mojo.

3 comments:

Larry, The Barefoot Bum said...

Economics lost a great mind when you picked physics. :-)

Larry, The Barefoot Bum said...

Technically, video games have a network effect/externality, which is why they can operate under monopolistic competition.

drransom said...

It might be better to describe it as a pair of connected markets: the console market, which operates under a quasi-oligopoly, and the game market, which operates under monopolistic competition (since the number of games is much larger than the number of consoles). Really the model should have a separate market for games within each console, since multiple-console ownership isn't that common. I don't know that putting it this way adds much to the analysis, though.