Based on the information provided in the case, illustrate the pricing game between Sony and Microsoft using a 2-by-2 payoff matrix when Sony and Microsoft charge for their games $399, or lower price to $299 as their price competition strategy.

1. Given the price information given in Exhibits 1 and cost information for both companies in Exhibits 2 & 3, find the average variable cost of making a video game produced by Sony and Microsoft.
2. Find the per unit and total video contribution margins for each company when they charge $399 for Sony’s PS3 video game and Microsoft’s Xbox video game.
3. Calculate the pay-offs(profits) when each firm charges $399, Microsoft charges $399, but Sony charges a lower price of $299, when Sony charges $399 and Microsoft charges $299, and both charge $299, In other words, fill out the pay-offs in each of the four quadrants.
4. Assume that the demand curves for the games is linear. a) Calculate the own point price elasticity's of demand for video games implied by the data at prices of $299 and $399 for both Sony and $399 for both Sony and Microsoft, b). Did Sony and Microsoft make the correct decision in cutting the price of their game from $399 to $299? Yes, or no and why, or why not?

Exhibits with Numbers

 

Exhibit 1: Prices and projected annual sales volumes for Sony PlayStation 3 and Microsoft Xbox 360 Elite PS3 projected number of Xbox projected number units sold (millions) PS3 price Xbox of units sold (millions) 11.25 $299 299 399 11.25 11.75 8.25 8.75 299 7.0 399 299 12.5 399 399 8.0 Exhibit 2: Sony PlayStation 3 Production Costs per unit in dollars Units produced (in 8.25 Millions) 8.75 9.25 9.75 10.25 10.75 11.25 11.75 12.25 12.75 Production 98 Labor 80 67 55 45 38 32 28 26 28 Materials & 168 155 145 141 140 140 141 142 161 143 Parts Overhead 66.67 62.86 40 59.46 56.41 44.60 43.14 53.66 51.16 40 48.89 46.81 Distribution 40 40 40 40 40 30 30 30 Per Unit Total Cost Exhibit 3: Microsoft Xbox 360 Elite Production Cost per unit in dollars 372.67 343.86 321.46 296.41 281.66 270.16 260.89 244.81 241.90 $243.14 Units produced (in 7.00 Millions) 7.50 8.00 8.50 9.00 9.50 10.00 11.00 11.50 12.00 12.50 Production Labor 78 69 62 56 52 48 46 44 44 44 44 Materials & 180 172 167 161 153 149 146 145 144 144 156 Parts Overhead 64.29 60.00 56.25 52.94 50.00 47.37 45.00 40.91 39.13 37.50 36.00 Distribution 50 50 50 40 40 40 40 40 30 30 30 Per Unit Total Cost 372.29 351.00 335.25 309.94 298.00 288.37 280.00 270.91 258.13 255.50 254.00 +