In our Harvard Business Publishing Coursepack, look for two items

"Right Game: Use Game Theory to Shape Strategy"

"Pricing Games: Sony PlayStation and Microsoft Xbox"

Read the article and case in detail

Given the information in Exhibits 1, 2, and 3, would you predict that Sony and/or Microsoft will want to reduce console prices by $100? Use a 2-by-2 simultaneous game to analyze this short-run situation. (You can assume Nintendo monitors its competitor's actions, but has no plans to change its price.

To answer this, it is useful to calculate the per unit profit (above variable cost), given price and quantity sold if both firms price at $399; if only one firm prices at $399 and the other one doesn't; viceversa; and if both firms price at $299. By the way, why don't fixed costs matter in this case?

Assuming that all demand curves are linear, calculate the price elasticity of demand implied by the data, at prices of $299 and $399 for both Sony and Microsoft. Are your answers consistent with your understanding of short-run profit maximization for firms with market power?

Can you think of reasons why these firms would be particularly aggressive (that is, willing to cut prices) in pricing their consoles?