Wii Got a Hold of You?  Well, when I first played it, the Nintendo Wii instantly grabbed a hold of me.  Nintendo's latest innovation represents an entirely new approach to the video game industry.  Nintendo has succesfully incorporated physical activity into one of the most stereotypically "lazy" activities around.  Furthermore, they've also introduced a system that the entire family can enjoy, thus expanding their customer base to include not only the 6-16 year olds, but also Mom, Dad, Grandma, Grandpa, Aunt Betty, and especially SANTA. On top of all that, Nintendo has successfully lured many customers away from rivals by introducing their product at nearly half the price!!  What does this mean for Nintendo?  One word, Demand. I am a graduate economics student set to graduate in December. (Hooray!)  My graduate studies have coincided with the recent popularity of the Nintendo Wii.  Such a phenomenon has provided me with an excellent opportunity to not only observe real world economic forces at work, but also to make some from money it too!! 

First of all, I want everyone to know that the profits that people are making on eBay off of these Wii's can only be a good thing.  Here is why.  Sound economic analysis tells us that the market price for the Wii is not the $250 as we see in stores, but probably a bit higher, say around $300-$350.  Since its release, the demand for the Wii has consistently exceeded the available supply, I'll explain why later.  The shortage of Wii's is the culprit behind the high prices we observe on eBay, which are probably our best approximations of a true market price.  This is common sense when you really think about.  What doesn't make sense to people, however, is Nintendo's decision to only charge $250.  Waiting in line for many Wii's, I've overheard many customers ask why Nintendo doesn't just charge a higher price?  Based on Nintendo's bottom line (profits), it appears that they don't even need to.  Of course, to be true profit maximizers, they should charge a higher price, but consider this.  The true equilibrium market price for the Wii is what it is regardless of the price Nintendo requires retailers to charge (no more than $249.99 at any licensed retailer).  If Nintendo did charge the true market price for their product, then the profits that people are making on eBay would be shift into the pockets of Nintendo and its many business partners like Wal-Mart, Gamestop, etc.  Instead, eBayers like myself are capturing these profits.  I believe that such a strategy can only benefit our economy in the long run as thousands and thousands of people throughout the world who previously didn't have the finances to start their own business now have the chance to become entrepreneurs on $250.00.  Entrepreneurship breeds innovation in the economy, and innovation is what brings us the goods and services that enrich the quality of our lives, as well as the jobs that allow us afford such standards of living.  We should be thankful to Nintendo for sharing their potential profits with millions of average Joe's throughout the world, as well as eBay for providing a marketplace where such transactions can occur.  I don't know exactly why Nintendo has selected such a strategy, but I certainly will not complain about it.  It is important to note, however, that Nintendo does make a profit off of the Wii console, which is unheard of in the industry.  Competitors typically rely on the sales of games and accessories to generate profits. Nintendo has essentially doubled its source of profits.     

So why is there such a shortage of Nintendo Wii's throughout the world?  If you think that Nintendo is withholding their inventory to create this shortage, then you are wrong.  Allow me to present an economic analysis.  As mentionded above, the market for the Nintendo Wii is largely driven by demand.  There are 4+1 primary forces that are collectively driving up demand for the Wii.  In order to understand these forces, you must view the video game industry as a competition between Microsoft, Sony, and Nintendo to "win" the dollars of potential customers.  Each individual (video game) consumer will spend their hard-earned dollars on the video game system which they deem the most "valuable".  The company that gets the most dollars "wins" market share.  The goal when you are a profit-maximizing firm is to win it all...legally, of course. Keep in mind that each person's perception of value is completely independent of another's perception of value.  What might be a bargain for Tom can also be a rip off to Joe.  Generalizations about a population's perception of value can only be made by looking at what we actually buy, or demand.  The first factor that is driving up the demand for the Wii is the price of the (XBox360, PS3) nearest competitor, a substitute product, which happens to be nearly double that of the Wii. Simply put expensive alternatives drive customers to the Wii.  Second, the Wii's customer base has expanded due to Nintendo's extremely successful "family-oriented" marketing strategy.  Encouraging Mom, Dad, Grandma & Grandpa to play video games can have the effect of potentially doubling or tripling the number of people in the average family (or possibly just increasing the overall number of families) that enter the market for the Wii.  Third, the innovative, yet simple design of the Wii has particularly appealed to the Tastes & Preferences of potential customers.  People like new stuff, plain and simple. Nintendo has begun to transform the video game industry away from the "push-button era".  Such innovation on the part of Nintendo can only breed innovation from competitors if they ever desire to regain rapidly declining market share (win their old customers back).  Finally, Nintendo has successfully influenced our expectations, although unintentionally.  The inability to actually find a Wii in the store has caused consumers to expect a shortage of Wii's, and has a created a "Buy It Now!' mentality in the average consumer.  The +1 represents the Christmas season. Demand across all industries is always greater during the Christmas season. 

Demand alone can drive up the price of an item, but in the case of the Wii, we also are observing supply problems on the part of Nintendo.  No, Nintendo is not holding back their inventory of Wii's.  Nintendo is actually cranking Wii's out of its factories at maximum output.  Nintendo built its "factories" anticipating a certain level of maximum annual worldwide demand, say 15 million units.  Nintendo can only produce Wii's as fast as its facilities and resources will allow it to.  Since worldwide demand has greatly exceeded even Nintendo's expectations, they just simply aren't able to produce enough Wii's to meet the demand. (Note that Nintendo could increase output beyond current levels, but they do incorporate stringent quality control standards which slow down the production process.  As a result of this, very few people need to send their Nintendo in to get fixed, unlike certain competitors.)  In order to fullfill worldwide demand, Nintendo would have to expand its current facilities' capacity, or build entirely new ones.  Either option costs a lot of money and requires a lot of time.  Just think how much time it takes to acquire land, clear the land, build a factory, install machines & equipment, hire & train employees, and then start the production process.  Such a task certainly couldn't be completed in the year since the Wii's initial release.  The problem has arisen as a result of Nintendo's inability to accurately forecast demand for their product, which is exactly why they should hire an economist like me :)  Furthermore, the decison to undertake such an expensive project (expanding production capacity) should only be undertaken if it will be worth it.  If Ninendo is building a new factory now, and demand for the Wii decreases (in some future time period) such that the Wii's produced by that factory will not generate enough revenue to cover the cost of operations, then Nintendo will essentially be left with a multi-million dollar set of walls, not so good for profits.  The decision to undertake such expansion can only be made using sound financial decision making and demand forecasting, another reason why Nintendo should hire an economist like me :)  My guess is that Nintendo is currently in the process of expanding capacity, but the only way we will be able to know this is when we finally see the average price of the Wii (on eBay) begin to decline.  This will indicate that the excess demand has been fulfilled by Nintendo's expanded supply. 

So to all of you that hate paying such a high prices on eBay, it is important to understand the real world forces that drive prices to such levels.  There is no conspiracy going on, rather a simple case of supply and demand.  Also, remember that if you think the price is too high, then DON'T PAY IT.  Your judgement of value should only be based on the potential enjoyment that you'll be able to extract out the item, and even more, realize that every single person is entitled to, and has their own unique personal judgement of value.  My goal in providing these products on eBay is to maximize value for the potential customer.  Purchasing a Wii should be an exciting experience, and that is what I seek to bring to my auctions.  Finally, realize that you don't have to pay any more than $250 for a Wii!!  Even though you can't find a Wii when you happen to go to the store (odds are currently 1.2%), the information on how, when, and where to find one is out there, its just up to you to extract it.  I've done it for the past 6 months, and I've been able to find and sell over 150 Wii's.  Information is essentially what will allow the average consumer to save money when purchasing a Wii.

~imirish11