Gaming enthusiasts camp outside electronics stores, desperate to buy the hot new game console. Corporate flacks are deployed to fend off PR calamity: "Consumer demand for the new console has exceeded our expectations, and we are doing all we can to fulfill the wish lists of people who want a new console under their tree this holiday season."
Video-gamers are clamoring for the new Xbox 360 console, but that statement didn't come from Microsoft: It came from Sony at the beginning of last year's buying frenzy for the new slim-line PlayStation 2. In 1996, parents wrestled to get hold of a Tickle Me Elmo. 1988 saw parental panic sparked by shortages of Nintendo game cartridges. And we're now celebrating the 20th anniversary of the Cabbage Patch Kid craze: They sold $600 million of those things in 1985, and that was in the days when $600 million was worth something.
These spectacular sellouts have become as much of a holiday staple as turkey and stuffing. And, of course, they have inspired conspiracy theories. Isn't it a little odd that the same story comes round year after year? Is Microsoft really running short of consoles? Yet, for economists, the Xbox 360 crisis is more alarming than a conspiracy, because these supply shortages make no economic sense whatsoever. Despite their suspicious regularity, the shortages benefit nobody.
It isn't the scarcity of supply itself that is puzzling. That is almost inevitable for some of these seasonal toys. In any given year, many toys will be unloved and oversupplied, but a few lucky ones will be in unexpectedly high demand. We shouldn't be surprised any more than we're surprised that the champion of a knockout tennis tournament won all his matches. Somebody had to.
In Microsoft's case, the Xbox 360 can be produced only gradually, but all the demand is there at once. Plentiful supply would be possible only if Microsoft made millions of consoles in advance and stored them without releasing them, or if it built vast production lines that only ran for a few weeks—both economically unwise strategies. It makes more sense to ship the consoles as they are made—and that means gradually. The steady supply can't match peak December demand.
So, supply shortages are a fact of life. The puzzle is somewhere else: Why don't companies raise prices when supply is short and demand is frenzied? Leaving aside oxygen and a few other essentials, there is no such thing as an absolute shortage of anything: There is only a shortage if the price is too low. At the moment, Microsoft is easily selling out the half-million or so Xbox 360 units (there's no official number) for prices starting at $300 for the basic package. Why doesn't Microsoft price them at $700 instead? That's the figure that the consoles are fetching on eBay. (Back in the days of the Cabbage Patch Kids, we could only speculate how much parents would have been willing to pay for guaranteed delivery. Thanks to eBay we can now put a price on customers' frustrations.)
Perhaps the sellouts are supposed to generate free publicity. By deliberately giving Xbox consoles away too cheaply today, Microsoft gets the column inches before Christmas, and that may boost demand and sell more in the long run. If you had put that theory to me last year I might have believed it, but after all the hot air over gasoline prices this fall, no longer. It's now obvious that you can get just as much publicity by raising prices as you can by selling out at low prices. But raising prices makes money, and creating lines of frustrated customers who can't get the product doesn't.
Maybe Microsoft is worried that this would be the wrong kind of publicity, because customers would dislike a price hike. That's possible, but the publicity is already bad: Many empty-handed customers seem convinced that Microsoft has a secret hangar in Roswell stuffed full of Xboxes that they've decided not to release just yet.
In any case, strange as it may seem, even if the consoles sold out at a higher price, the average Xbox aspirant wouldn't be any worse off: The increased price should be exactly balanced by the shorter lines, reduced aggravation, and greater chance of getting a console. Customers are infuriated by the shortage itself, whether that shortage is expressed in lines (as it is today) or in high prices (as it could be if Microsoft raised them). If Microsoft is going to aggravate its customers, why doesn't it at least make a buck out of it?
So, this is all something of a headache for the dismal science. Over dinner with a friendly local economics department, I challenged them to explain the puzzle of why prices stay low in the face of such shortages. They cited a number of ingenious explanations, all of them unlikely.
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