Pricing Games: Sony PlayStation and Microsoft Xbox

by: Valerie Y. Suslow, Francine Lafontaine

Publication Date: February 7, 2011
Length: 7 pages
Product ID#: 1-428-882

Core Disciplines: Economics

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Description

Economic game theory can be a tedious and difficult concept, but it doesn’t have to be. This exercise allows students to learn about game theory via an entertaining medium – video games. After considering a pricing war between two video game giants, Microsoft and Sony, students are asked to calculate pricing strategies based off game theory predictions. Students must use a 2-by-2 simultaneous one-shot game (like the Prisoner’s Dilemma framework) to determine if one or both companies will cut prices.

Teaching Objectives

After reading and discussing the material, students should:

  • Apply the Prisoners' Dilemma game to the context of pricing
  • Ascertain which costs are relevant for game analysis and determine appropriate payoffs
  • Apply a variety of other basic microeconomic concepts, including own-price elasticity of demand and the relationship between price elasticity and short-run monopoly profit maximization.