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The Economics of Used Games

There has been a lot of debate around the rumor that the next consoles from Microsoft and Sony would block used games. A lot of it seems to be based on conjecture and speculation, so I though I'd give a proper economic view on the matter.

Johnathon Swift, Blogger

April 17, 2012

4 Min Read

So, what's the rumor? That the, lets call them Playstation 4 and Xbox 720, will block the ability of people who buy used games to actually play those games. This implies a lot of things for the video games market, in large part because used game sales, especially from the likes of Gamestop et. al.

This begs the question of what sort of impact Gamestop et. al. have on the console industry in the first place. Perhaps the biggest thing to note is that because the sales are second hand the developers, publishers, and console makers of the platform receive no benefit from these sales. And so the obvious motivation for them is to get rid of these sales, sales that may potentially be going to them.

Microsoft and Sony ultimately rely on attracting third party developers, who in turn recieve no real benefit whatsoever from used game sales. Thus it is in both their interest to retain as many such developers as possible, and will no doubt gladly do away with whatever dubious benefit used game sales may possibly provide them in order to better serve those same developers.

Legally this brings it into an interesting space. There is something called the "first sale doctrine" that has been fairly well established in court for software. It means that purchasers have the legal right to resell their own purchased software, and that EULA agreements that "license" the software do not actually apply to physically sold software. However, the question of whether this precludes the software from deactivating itself after the first sale, as has supposedly been proposed, has not been covered in court.

Another interesting affect that Gamestop has on game sales is as a competitor, and what this does to the market equilibrium price of games. Now, the market equilibrium price is the outcome of what customers wish to pay, which is hypothetically zero, and what the producers wish to charge, which is hypothetically infinite. In the end it comes out that the price will be whatever will realistically give the producers the most money, which remember must be balanced against what customers are willing to pay.

Now, Gamestop is, as I said, a competitor. And they are a competitor that can, assuming supply, always deliver a game at a lower price than buying it new. In other words, Microsoft lowers Halo X's price to $40, Gamestop lowers it to $35, and thus Microsoft cannot beat Gamestop, or ebay, or etc. on price. This may, in fact, help raise the aforementioned equilibrium price to artificial highs. I.E. Microsoft has less motivation to lower price, which keeps the expected price of used games higher, which means used games are sold for a higher price as well. Customers may be getting charged more because of used games.

In any case they are getting charged close to the same as if Gamestop actually existed. To try and get at this quicker and in a less complex manner, take the ever popular Steam sales. As I mentioned, the motivation of the producer is hypothetically to make as much money as possible. Participation in steam sales is voluntary, so why do producers do this? Because there is a large portion of the market that will be willing to pay a lower price for a game than it is currently at. By lowering the price they get more sales, and overall more money than they would have if they kept the game's price high.

But in the consoles space Gamestop gets this pricepoint equilibrium, with competition such that new game sales find it hard, but not impossible, to compete (remember, used game sales DO require new game sales in first place still). But the point is, because Gamestop exists, and always at a lower pricepoint than new, the motivation to lower new game prices is lowered. If Gamestop doesn't exist, then games will be able to be sold "new" at a lower pricepoint, and they WILL be sold "new" at a lower pricepoint, both on specific occassions and perhaps even in general.

The other thing to remember is that the PC has no used game sales market, and it remains quite healthy even with piracy, if odd and fickle enough that some publishers still don't want to sell much in it. Still, and in other words, there is no particularly good evidence that ending used game sales will have any terribly great affect on console sales at all.

There are a host of other effects to talk about. The rise of digital distribution could help create such a tradition as steam sales on consoles. The affect of used games as a financial drain on developers, etc. But I thought the above was the most interesting to talk about. 

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