Nintendo Slashes Price of Wii

Nintendo has announced a response to recent price cuts by Sony and Microsoft. The Wii will now retail at $199, a 20% reduction in price. They are timing the price cut to coincide with the release of a new Super Mario Brothers game - a smart strategy. One might ask: How can these gaming companies reduce price so substantially? Are they eating into their profits in a significant way? Well, we have to remember two things. First, to some extent, we have a razor and blades business model here. You want to get those consoles into people's homes so that you can them sell them a stream of games at a healthy margin. Second, a substantial cost reduction takes place during a video console technological generation, as firms come down the learning curve and achieve scale economies. Those cost reductions can be very substantial. Thus, prices may be falling, but margins may actually be stable or even improving over time, because the costs come down as cumulative volume of production rises.