Game Riddles

While on the subject of riddles, here are two economic puzzles about video games that have me perplexed:

Why is there a shortage of Xbox 360s?

Neither the Slate article nor the Volokh discussion thread fully satisfy me. Tim Harford dismisses the obvious answer:

Perhaps the sellouts are supposed to generate free publicity. By deliberately giving Xbox consoles away too cheaply today, Microsoft gets the column inches before Christmas, and that may boost demand and sell more in the long run. If you had put that theory to me last year I might have believed it, but after all the hot air over gasoline prices this fall, no longer. It's now obvious that you can get just as much publicity by raising prices as you can by selling out at low prices. But raising prices makes money, and creating lines of frustrated customers who can't get the product doesn't.

Maybe Microsoft is worried that this would be the wrong kind of publicity, because customers would dislike a price hike. That's possible, but the publicity is already bad: Many empty-handed customers seem convinced that Microsoft has a secret hanger in Roswell stuffed full of Xboxes that they've decided not to release just yet.

Why don't companies like Blizzard permit, or even engage in themselves, the selling of virtual gold?

The suggestions given in Patri's thread also fail to satisfy. Surely the pure profit a video game company could make by selling virtual items they create would outweigh the liability concerns. Heck, Wizards of the Coast has an entire business model centered around selling virtual items and giving the game away for free.

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There were other concerns

There were other concerns raised than just liability. For example, gamers might perceive the value of playing to be less if high-level items can just be bought directly from Blizzard rather than be obtained by playing the game for many hours. Conflicts and grumbling would arise over whether Blizzard's pricing was "fair", about which goods were sold when, etc. In an extreme case you could have Blizzard sell level-60 Warriors with Brainhackers, Arcanite Reapers, etc, destroying the fun people would have dueling with those players, joining with them on missions, etc. Thus it is in Blizzard's financial interest, given people's preferences, to curb this activity.

Stefan, No game company that

Stefan,

No game company that I know of has successfully stopped item farming and the creation of blackmarkets when such a demand exists. So the question is, given that virtual item reselling will exist, why not (a) permit it, (b) encourage it, and (c ) engage in it?

Further, as a gamer, I would perceive the value of playing to be even greater if I knew that my findings would have legitimate monetary value.

Conflicts and grumbling will arise over any pricing scheme. If a company wants to retain good will with its customers, it will price accordingly.

Oh yeah, I'm perfectly aware

Oh yeah, I'm perfectly aware that it exists and they can't stop it, but you're asking them to go much further by actually endorsing it and run an item-selling business themselves. I can't be certain of course, but I would hypothesize that most WoW players would be against "monetarizing" the game in this way for the reasons I described (in-game statistics no longer reflect all the effort of the individual playing on that character).

*1. Why is there a shortage

*1. Why is there a shortage of Xbox 360s?*

A snarky answer would be "there isn't". Best Buy reportedly just got another shipment in, and anyone who really wants to pay a higher price can find a bunch on ebay. Most gamers who I know are waiting until spring or summer 2006, when there are actually fun games to play and a 360 can be found by walking into any WalMart and plopping down $300.

The first impressions of a console linger long after those impressions cease to be valid; the GameCube is still considered "kiddy" by most gamers even after games like Eternal Darkness and Resident Evil 4. The $700 Xbox 360 would be forever labelled "vastly overpriced", even if it dropped to a sensible level once there was no longer a shortage. This is more important than ever because the 360's main competitors are two systems that don't even exist yet, let alone have well defined prices.

Also, consoles depreciate at a *much* slower rate than the electronic components they're made out of. Microsoft may be losing money on the 360 hardware now, but I doubt they will in a year, when a not-insignificant portion of the console market buys one for Christmas 2006.

*2. Why don’t companies like Blizzard permit, or even engage in themselves, the selling of virtual gold?*

Such a system would have to be more efficient (for gamers) than the current system, or nobody would use it. By definition, game design involves making the player's objectives as hard to achieve as possible without pissing the player off. Any attempt to marry real-world markets (where efficiency is desired) to in-game objectives (where efficiency is a terrible idea) will be a disaster.

It also makes the time spent not playing the game (earning money and then using that money to pay off goldfarmers) more valuable than the time spent playing the game, giving players an excellent incentive to not play the game at all. When a hypothetical Bill Gates could sign up for World of Warcraft, write a check for a couple grand, and instantly walk away with a level 60 shaman, a great mount, and all the best items, the game loses whatever point it might have had to begin with.

Yeah, that's what I was

Yeah, that's what I was trying to get at. It would be like holding races where runners could pay the officials money for a head start; it defeats the point of playing the game in the first place.

Just FYI, Blizzard has not

Just FYI, Blizzard has not come out and "banned" people from buying virtual assets. You're perfectly free to go to any of the various gold/item sites on the net and buy stuff for your character. Or hell, even buy a premade character.

They've got other methods to get around it (bind on pick-up being the primary trick - that does more to kill a virtual economy then anything else), but look at it from their perspective. The player plays a monthly fee for WoW - and once you hit your level cap, the only thing you're looking for is l33t gear. You get said gear by going through dungeons - all of which require content creation. If you could buy whatever you wanted (with a large enough check-book), the amount of content creation the developers would have to provide is unreasonable.

Seriously though, the best loot is bind on pick-up, the stuff you can buy is usually not so hot.

Some virtual worlds do

Some virtual worlds do encourage users to trade and allow them to keep intellectual property. 'Second Life' users even created a computer game within a game, 'Tringo', and sold it to Nintendo for release on the Gameboy.
I think the difference between Second Life and, say, World of Warcraft, is that in Second Life this sort of entrepreneurialism is what the whole world is about, but in World of Warcraft it undermines the game and spoils it.
I admit that one argument is nevertheless, if you can't beat 'em, join 'em...

It's common for popular toys

It's common for popular toys to *intentionally* run out of supply at the holidays, so that parents will buy something else to have under the tree on December 25, and then still buy the popular toy early in the following year. It's a marketing ploy similar to inducing night clubs to force long lines to wait out in front. This subject is discussed in ASU psychology professor Robert Cialdini's excellent book, _Influence_.

re: Influence Even if we

re: Influence

Even if we assume that the same customers will purchase an Xbox later, why is it in Microsoft's interests to boost revenue for the toy industry as a whole? Couldn't they make more money by, say, selling the Xbox months earlier and then earning interest on the sales revenue?

I don't play WoW because I refuse to pay monthly fees. Guild Wars ftw!

"Couldn’t they make more

"Couldn’t they make more money by, say, selling the Xbox months earlier and then earning interest on the sales revenue?"

But there *is* no sales revenue from selling Xbox 360 hardware, and there won't be for a year at least. Probably far longer than that, if ever.

Second the recommendation

Second the recommendation for _Influence_

First, what server are you

First, what server are you guys on?

Second, as regards WoW setting up a white-market for gold, I think Joel hit it on the head.

There is another component to consider. I don't recall the formal name for it, but it's an auction whereby the highest bidder wins, but everyone else's bids are forfeit; bids for $1 can exceed $1 in bidders' hopes of recouping their losses. This is rather analogous to all MMOGs, hours upon hours spend farming for items or HKs or rep with whatever faction... "you can't quit now, you've spent so much time already." Being able to twink out your char with RL cash would abort this lucrative process.

Also, there is a stigma associated with buying gold irrespective of Blizzard's sanction or condemation. Look at what happened when EQ2 tried to do something like this; players were outraged. If Bliz were to allow purchasing gold, it would lose massively on the PR front. Don't ignore the fact that all those farmer accounts add to the revenue stream, and by not enforcing the prohibition, people with a higher time-value can still play (grinding SM for mount money FTL). No, the upside of selling gold does not outweight the costs. Leave it to the Chinese, at least it may help their economy.

You beat me to it, Jim: the

You beat me to it, Jim: the moment I read the query, I remembered Cialdini's fabulous and intellectually rigorous book. The idea is that people have an inherent desire to be consistent and honor their commitments, and the promotion and buzz inevitably cause the XBox 360 to be on the wish list of millions of kids, whose parents promise to buy one for them, and then discover they can't get it in time for Christmas. Of course, they have to put things under the tree, so they buy other stuff, but having made the commitment to the kid, they will still buy the XBox when it becomes available, increasing the total sales of the toy companies.

The company manufacturing the XBox has no fear of lost sales: they KNOW the parents who committed to buying them will do so. Even for a parent who sees they are being manipulated, if a friend of the kid got an XBox and the kid did not, it will be unbearable to the parent after a while, and the constant thought that children should learn of the importance of honoring their promises will force the parent to buy the toy.

INFLUENCE is by far the best book on persuasion techniques I have ever seen, and I use it regularly to influence my clients to do the things that I believe are in their best interests. There is much more of value in the book than just this one discussion of the Christmas toy everyone wants and nobody can find. Frankly, it is something that honest people trying to improve their success rate in promoting good ideas really must have under their Christmas tree this year. Assuming you can find a copy. ;)

I play on Blackhand server

I play on Blackhand server for WoW. I love being spammed by the gold harvesters...its normally hilarious. The trouble is they tend to hog the good gold farming spots for themselves. Except for PvP and "life-style choice" raids WoW gets really rather lame after 60. If you are not a hard-core gamer you are just a wee bit screwed. If there is anything wrong with WoW its that is so god-awful boring at really low levels. Don't think they are going to stop gold selling.

But there is no sales

But there is no sales revenue from selling Xbox 360 hardware, and there won’t be for a year at least. Probably far longer than that, if ever.

Each Xbox 360 sold yields expected future profits, no?

I would agree with above

I would agree with above posts that Microsoft must remain loyal to it committment to sell the 360 at $300 and $400. There might even be contract s with Best Buy and other retailers to sell the 360 at a specific price.

However, it might not be so obvious, yet i believe it to be true, that microsoft is indeed raising its prices. Because of the shortage of xboxes, people are willing to do a little more to get one, such as buying the premium edition at $400 rather than $300. Expect to see a lot more high end models being produced as long as there is a shortage. When there is steady inventory in stores, microsoft will most likely be selling more of its core systems, as those who would have been willing to buy the higher priced models would have already done so.

btw, they are not holding back on production, they realized they were going to have a problem meeting supply at first becuase they are still producing the chips on the 90nm process. In 3Q 2006 they should be able to make the switch to 65nm and have much better yeilds. There is nothing they can do about this, considering that fabs can take years to contruct.

to piggyback on my last post

to piggyback on my last post there is a motivation for microsoft to hold back production for the moment. Remembering that microsoft loses a large chunk of money with each console sold, they should eb expeded to find ways to cust costs. One MAJOR way to do this is to move to a 65nm process, though it will take time. Microsoft may be holding back on production because they know that in the future they will be able to do it much more cheaply

One interesting thing to

One interesting thing to note: Even if Blizzard started creating items and selling them themselves, it still would not eliminate the deadweight loss that Patri was discussing on his LiveJournal. At least, not entirely.

As it is now, there's a downward-sloping demand curve for WoW items and an upward-sloping supply curve - the higher the price, the fewer people will want them and the more people (in China) will be willing to sit and do busy-work to "make" them. The curves meet at some market-clearing price. If Blizzard starts making the items at essentially zero marginal cost and offering them at lower than the current market-clearing price, then some of the Chinese gold farmers will find themselves underbid by Blizzard and will stop farming (they won't earn enough to make it worth their while). But the rest will continue farming, because even though Blizzard has lowered the price, that lowered price is still high enough that they'll still be willing to do busy-work for that hourly rate.

This is true no matter what price Blizzard sets. The gold farmers will probably have to charge slightly less than Blizzard's prices just to attract the business, since Blizzard probably would have an advantage due to branding, placement, and so forth. But still, whatever price Blizzard sets, there will be some gold farmers willing to offer a slightly lower price because it will still be worth it to them.

There's some lower limit, of course, but it's near zero. At that point, Blizzard will be selling their items for trivial amounts, and everyone playing the game will be buying Level 60 characters with Super-Everything for the cost of a burger and fries. This undercuts some of the reasons people play the game in the first place (not all of them, but some of them). Blizzard would start losing customers while making very little from selling items because they had lowered the price so much.

There's probably a sweet-spot where Blizzard maximizes their revenue from selling items. But at that point, there will probably still be plenty of people in China and other places with low labor costs and good Internet connectivity where people will prefer to farm gold and sell items at slightly less than Blizzard's going rates. Would that activity still count as deadweight loss? It's work that Blizzard could do with zero marginal cost, thus wasted labor... but it would be against Blizzard's economic interests to do so.

If anything, the deadweight loss is in Blizzard having items that people desire, but requiring them to perform valuless busy-work in order to get them. The best scheme, economically speaking, would be to make it impossible to get those items through in-game make work and instead have the only source be direct sales for real money from Blizzard itself. But people probably wouldn't want to play in a game like that, either. There seems to be an expectation that a game is more fun if you can get cool stuff by doing boring things - even though people then look for ways to outsource the boring parts.

In seems almost off topic,

In seems almost off topic, but I'll mention one other possible influence. Although there is almost certainly an element of the "IT-gift" advertising push, from what I hear their CM (contract manufacturer) can't make enough. They apparently have production yield problems, in addition to a certain failure rate in the field. Makes sense based on my knowledge of the business :beatnik: though I'm sure if MS was willing to throw more money at the problem they could fix it.

Not to mention they're loosing money on every box, and won't make it up until they can actually sell enough games. No, that's not including sunk development costs, though I'm sure they want to pay those off as well.

Interestingly, there doesn't seem to be a shortage of the low end model... but then it doesn't play the old games. Hmmm.

Oops, It not In. MS really

Oops, It not In.

MS really is making a lot of these. Sounds like they were even saving up for X-mas (yes call it the Christ-box360) ~1mill/mo since August. Still only 4mill available, but I'd expect them to continue ramping through the holidays.

That's 30k/day >20/min 24-7. Think about the boot time, and figure out how many they have to do in parallel to meet that.:sweat: I'd be surprised if they didn't have more than one production facility, though. Luckily, the big holiday comes later in Asia.

The simple answer? The

The simple answer? The silicon yields for the tri-core PPC chips have been lower than expected. Design was finalized, fabs sent out to two plants, and between then then can just barely make enough functional chips to sell. They're selling all they can, but silicon yields are notoiously unpredictable for a first gen chip pattern.

Once they drop the pattern from a 90 nm to a 65 nm process, their yields will skyrocket, and production will accellerate accordingly. It's just that generating that 65 nm pattern is a long and ardous process.

I'm on Elune. Anyhow,

I'm on Elune.

Anyhow, Blizzard makes more money through monthly subscriptions than it would by selling "leet lewts". How long would a person play if they "bought" their full epic warrior compared to a person who actually built that warrior. It takes (for most people) a few weeks to level to 60 then another few months to get the upper-end gear. I am a bit more casual than that. I started playing in January. I have one level 60 character with a few epic items (and a want for many more) and one level 57 with no epic items. I have paid over $200.00 (game cost + quarterly subscription) just to play a game. If I could just "buy" a top-end character would my interest in playing keep me subscribing for a year? Not likely.