Sony Corp. launched its PlayStation 3 in late 2006. It was introduced at a price point of $599 for the top model. At the time of introduction, a California technology firm performed a tear-down of the PlayStation and estimated its cost of production to be $839. Based on this cost estimate, the California tech firm estimated Sony was losing as much as $240 per unit sold.
a. Assume that Sony generates more profit on royalties from the games played on PlayStation than on the sales of PlayStation itself. In light of this explanation, is it rational for Sony to sell the PlayStation at a $240 loss? Explain.
b. How would setting the price of the PlayStation at $599, rather than the break-even price of $839, likely affect (1) early life cycle sales and (2) total life cycle sales of PlayStation 3?
c. Is Sony's pricing strategy (i.e., introductory price below production cost) more beneficial if the product's life cycle is long or short? Explain.