Assignment 4.1 - Supply and Demand of the WiiConsole

INTRODUCTION

Nintendo is known for its innovation and creativity in thegaming console market. The Wii is no exception. In September of2006 Nintendo launched the Wii, which was a new gaming experiencethat appealed to a wide audience. The Wii had WiFi capabilities,wireless controllers, blue tooth, and games that require movingyour body. For all these reasons, the Wii’s demand was very highwhen it was first launched.

BACKGROUND

The Wii controller revolutionized gaming. It used motion sensingtechnology and a pointer to provide a new level of gaminginteractivity. The accelerometer and optical sensor system allowedthe controller to detect its orientation. These capabilities wereharnessed to produce the new and unique highly interactive gamingexperience. The controller came in a sleek design that functionedmore like a mouse than a traditional controller. To highlight thesenew capabilities, Nintendo developed the Wii Sports gaming package.The package included five games: baseball, boxing, bowling, tennis,and golf. The controller could be used as if the player wasactually playing these games, as opposed to just controlling acharacter who is playing these games, as many consoles do. Forinstance, in golf, the controller was used as a golf club. The Wiicould easily be viewed as a whole new type of toy that was fun forthe young, old, and everyone in between.

Launch

Information about the Wii was first released in September of2006. Dates, prices, and the number of units that would beavailable were released and Nintendo announced that most of theshipments would go the Americas. The Wii launched in November 2006in the U.S. at a price point of $249.99. This compares to a pricepoint of $399.99 for the Xbox 360 and $499.99 for the PlayStation3, its main competitors.

Sales

The Wii was a huge success worldwide right from the get-go. Inthe U.S., demand for the Wii outpaced supply from November 2006through June 2007. A similar story played out in many othercountries and regions as well. The U.K. suffered shortages untilMarch of 2007 and in Australia the Wii became the fastest-sellinggame console in Australian history. In anticipation of the holidayseason, Nintendo increased production between October and December2008. Its worldwide production increased from 1.6 million per monthin 2007 to 2.4 million per month. However, demand for the Wiicontinued to remain high and it was not until March of 2009 thatthe Wii was available for walk-in purchases at retail stores in theU.S. At this point, 48 million Wii consoles had been sold.

Profit

Even with at a lower price point, Nintendo directly profitedfrom each sale of a Wii console. In 2006 and 2007, for each unitsold in the U.S. Nintendo made $49. They claimed to do this byoptimizing production costs. In contrast, Microsoft (Xbox) and Sony(PlayStation 3) rely on software sales to produce a long-termprofit and generally lose money on the sale of the consoles.Nintendo’s optimization strategy worked. Even after robust years in2007 and 2008, both operating profits and sales increased in 2009,and 2009 earnings beat 2008 earnings.

Price Drop

In 2009, sales of the Wii console declined until September whenNintendo decided to drop the price for the Wii console to $199.99.This was the first price drop and proved to be effective atgenerating additional demand. In December of 2009, over threemillion Wii consoles were sold in the U.S., which set a record formonthly sales in the U.S. Further, the record setting sales in themonth of December pushed the Wii to become Nintendo’s best-sellinghome video console, selling over 67 million units at that point. Todate, the Wii remains Nintendo’s best-selling console, having soldover 100 million units worldwide.

Resources for this case:

https://en.wikipedia.org/wiki/Wii_Remote

https://en.wikipedia.org/wiki/Xbox_360_launch#Release_dates_and_pricing

https://en.wikipedia.org/wiki/Wii

https://en.wikipedia.org/wiki/PlayStation_3

Further Reading:

http://wii.com/

http://www.nintendo.com/corp/history.jsp

Questions

1. Would the demand for the Wii console be relatively inelastic orrelatively elastic in 2006 through 2007? State why. (15points)

2. Would the supply for the Wii console be relatively inelastic orrelatively elastic in 2006 through 2007? State why. (15points)

3. Draw the demand and supply curves as you have described them.(10 points)

4. Was the severe shortage for over two years an old marketingploy called intentional scarcity, in which a company purposelykeeps its hot product in short supply to build buzz? Or was itsimply bad planning on Nintendo's part? Explain your answer andinclude some outside research to support your conclusion. (20points)

5. Can you suggest a reason why Nintendo dropped the price of theWii Console in late 2009? How would you expect this to affectdemand and revenues? (15 points)

6. Elasticity of supply and demand can change over time. In 2009,would you describe demand for the Wii as elastic or inelastic? Whatabout supply? Provide an explanation for your answers. (15points)

7. Draw the demand and supply curves for the Nintendo Wii in 2009as you have described in number 6. (10 points)