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- Econ 102 Microeconomics, Fall 2001
            After couple years of preparation, Microsoft is finally entering into videogame industry on November 15th. Since its popularity boosted, the videogame industry has been oligopolistic, in which the market structure consists of only couple firms producing videogame devices. On the other hand, Microsoft has been dominating whole computer software market, and it is now entering into a new market as an oligopolistic firm. According to the economical concept, entry into the oligopolistic industry is supposed to be not easy; however, economists are expecting that demand for Microsoft’s new product, the Xbox will be very high.

            Furthermore, presence of the Xbox will contribute to the balanced oligopoly in videogame industry, which has been primarily dominated by Sony for last five years. A year after the release of the Xbox, the videogame market share is expected to be almost equally divided between Sony, Nintendo, and Microsoft. Factors that contribute to successful outcome of Microsoft’s new entry into oligopoly are product differentiation, brand loyalty, and advertising.

First, Microsoft’s product differentiation of typical video game device was distinctive from any other firm’s attempt. According to the Wall Street Journal, the Xbox looks just like a typical computer that has a hard drive and a 733-megahertz processor produced by Intel Corporation. By just transforming a PC into a video game machine, Microsoft was able to start up a new business easily. This way, game developers, who are producing complementary goods, can easily write Xbox games, since Xbox is so similar to PCs. Because of the product differentiation in video game industry, the staff reporters of The Wall Street Journal, Guth and Tran say that, the software developers were forced to devise separated versions of a game for each machine. And, as a new competitor in a market, Microsoft’s approach to use a PC as a video game machine would attract more software makers to create games for Xbox. Another approach taken by Microsoft in product differentiation is to include a high-speed internet connection. The economists expect that this feature would assure Microsoft’s success in product differentiation because online gaming has not been attempted by any other competitors and it will attract significant number of consumers for sure. With online features and PC-based model, Microsoft has differentiated its Xbox clearly.

Another factor that attracts video game customers to Xbox is people’s brand loyalty to the brand, Microsoft. Since its beginning, Microsoft has been seizing every single part of the computer software and online service market, so that everyone knows how big Microsoft Corporation is. Also, people are expecting that the Microsoft will eventually seize market share in this market. That is why consumer surplus for the products of Microsoft and Sony is higher than that of Nintendo, one of the major competitors in video game market. Nintendo’s expected increase in market share is lower than Microsoft’s even though Nintendo’s new product, GameCube, is hundred dollars cheaper than Microsoft’s Xbox. Also, most game developers will consider creating games primarily for the Xbox because they too, have brand loyalty.

The best effort done by Microsoft to increase its revenue is its advertising. Advertising is one of the ways to really boost up the sales of the products; therefore, it reduces elasticity, especially in market of oligopoly. It can persuade consumers to switch brands without lowering price.

            So, for Microsoft, which is selling its Xbox at higher price than its competitors’ products, Nintendo’s GameCube for example, should invest on advertising if they want increase the market share and still make a profit. During the next eighteen months after launch of the Xbox, Microsoft plans to spend 500 million dollars for marketing. This is enormous amount for marketing of video game device whose primarily function is gaming; moreover, the analysts estimate that Microsoft will lose 125 dollars for every Xbox sold. However, this advertising will really help Microsoft in increasing revenue in the future, since the demand for the Xbox will be more inelastic. Therefore, Microsoft’s decision to plan heavy expenses on marketing will take effect in long term, after average total cost is lowered and economies of scale are reached.

    Although entry into oligopoly is not easy, Microsoft’s Xbox is expected to bring up its market share in a short time because of many advantages Microsoft has compare to other firms in the industry. From this issue, it can be seen that profit maximizing is not the best choice for expanding a firm. However, the firm has to risk itself to raise market share, and promote its products through advertisement in order to succeed in a long run. Microsoft has been following this rule rather than profit maximizing for a short run. In oligopoly, the firms in the market are interdependent, and depending on the companies’ marketing and products, survival is determined; therefore, good understanding of economics is high demanded for controlling an efficient business.

Corporate analysis on promotion scheme

- Econ 172 Economical Statistics, Fall 2002