Pricing Games: Sony PlayStation and Microsoft Xbox

Exhibit 1: Prices and projected annual sales volumes for Sony PlayStation 3 and Microsoft Xbox 360 Elite

PS3 price	Xbox	PS3 projected number of units sold (millions)	Xbox projected number of units sold (millions)
$299	299	11.25	11.25
299	399	11.75	7.0
399	299	8.25	12.5
399	399	8.75	8.0

Exhibit 2: Sony PlayStation 3 Production Costs per unit in dollars

Units produced (in Millions)	8.25	8.75	9.25	9.75	10.25	10.75	11.25	11.75	12.25	12.75
Production Labor	98	80	67	55	45	38	32	28	26	28
Materials & Parts	168	161	155	145	143	141	140	140	141	142
Overhead	66.67	62.86	59.46	56.41	53.66	51.16	48.89	46.81	44.60	43.14
Distribution	40	40	40	40	40	40	40	30	30	30
Per Unit Total Cost	372.67	343.86	321.46	296.41	281.66	270.16	260.89	244.81	241.90	$243.14

Exhibit 3: Microsoft Xbox 360 Elite Production Cost per unit in dollars

Units produced (in Millions)	7.00	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 & Parts	180	172	167	161	156	153	149	146	145	144	144
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

Question 1: Given the information in Exhibits 1, 2, and 3 and assuming that collusion does not occur, would you predict that Sony and/or Microsoft will want to reduce console prices by $100? Complete the payoff matrix below to analyze this two-player simultaneous game by (1) replacing the player names with the names of the firms, (2) appropriately renaming the players strategies, and (3) calculating the payoffs for each player in the four possible outcomes. You can assume Nintendo monitors its competitors actions, but has no plans to change its price.1: Player 2 Strategy 1 Strategy 2 Player 1 Strategy 1 $A , $B $A , $B Strategy 2 $A , $B $A , $B

Question 2: Assume the demand curves implied by the data in Exhibit 1 are linear. How many units of PS3 and Xbox 360 will Sony and Microsoft sell, respectively, if they both charged $399? How many units will each firm sell if they both charged $299? Use your answers to calculate the arc price elasticities of demand for Sony and Microsoft if they both initially charged $399 then both dropped their price to $299. Based on your arc price elasticity of demand calculations, would you recommend Sony to increase or decrease its price for PS3 if Sony solely wanted to increase total revenue? Would you make the same price recommendation to Microsoft if it was solely interested in increasing total revenue?

Question 3: Assuming that Sony and Microsoft do not collude, can you think of reasons why these firms would be particularly aggressive in pricing their consoles? Be sure to discuss the concept of dominant strategies in your answer. (5 points) Answer 3: Question 4: Suppose that Sir Howard Stringer, Sonys CEO in 2009, and Steve Ballmer, Microsofts CEO in 2009, communicated a mutual interest in colluding with each other. Which pair of strategies are they likely to agree on? How would this type of behavior violate antitrust laws? Other than this antitrust legal issue, why would this outcome not be a Nash equilibrium if they did not collude?