More Misplaced Hatred For The Used Games Market

from the learn-some-economics dept

I'm constantly amazed at the general cluelessness of the video gaming industry on basic economics concerning the concept of the first sale doctrine and the ability to resell a product. More than pretty much any other industry, the video game industry is vehemently against the idea of reselling used games. They've claimed that it defrauds the industry, that it hurts consumers (say what, now?) and that it "cheats developers." All of this is ridiculous and economically ignorant.

The latest to jump into the fray, as pointed out by Copysense, is some industry consultant who basically calls used games sales by Gamestop a version of money laundering:
It is time to for Gamestop to fess up and acknowledge their real business. Relative margins reveal Gamestop's actual business to be the collection and resale of used games. New game and accessory sales revenue may equal or exceed the used game revenue, but they do not come close to matching the profit. The stock of used games is financed by the very publishers who are being harmed by the market. They put up the risk capital to make and market the game and put the unit on the shelf. Publishers receive a one time, per unit fee for putting the game into the Gamestop system and are required to pay marketing development funds to Gamestop to have posters and other promotions in store. But Gamestop does not pay for the games, customers do. Gamestop only provides credit until the games are sold. The consumers' payment covers Gamestop's initial outlay, plus a profit. Because Gamestop pays on terms, the consumers' money is in the bank before Gamestop ever makes a payment on the new game units. If the consumers do not sufficiently cover the expense, Gamestop will call on the publishers for price adjustments and protection. While this business shows a profit with no downside risk, the entire retail side is merely a highly cost effective way of funding the used game inventory. To ensure return of the games, consumers who buy a games are bombarded with offers to turn them back in for credit. Each turned in game builds the used inventory, at no cost to Gamestop. When sold, the only person receiving the benefit, is Gamestop. When I put it this way . . . . I don't want to say it sounds like laundering, but . . . . . They take a game unit a publisher should get paid for, run it though a consumer, and turn into a game unit they can sell over, and over, and over, and over without compensation to the publisher.
Of course, all of this is based on faulty economic theory. They all seem to ignore the fact that a healthy resale market increases primary market sales, by making the primary sale more valuable. It's a pretty simple equation. If I can buy a $60 game, knowing that I can sell it back later, that reduces the risk and the real "cost" to me. That increases sales. Separately, a strong resale market has other secondary benefits, such as hooking people on series of video games, so that they're more interested in buying the "new" (full price) versions.

But, overall, what these gaming industry execs and consultants are whining about is that they just don't like a free market where they can't artificially inflate the market price of games even higher. The used market acts as a check on the primary market to keep it realistic. And, as a result of a more efficient market, you actually have a bigger market. Those who assume that demand is totally inelastic think this is bad, but they don't recognize that game buyers have choices, and one of those choices is not to buy games that are too expensive. It's not fraud and it's certainly not money laundering. It's called keeping a market healthy.

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  1. icon
    A Guy (profile), 25 Aug 2011 @ 10:36am

    Two things are certain when you deal with physical products

    1. There will always be a resale market
    2. The original producer will bitch and moan about how the resale market is destroying his margins

    Nothing will change that market dynamic and I couldn't be happier about it.

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