Sunday, May 20, 2012

Research: GME Prevention of used games does not necessarily hurt Gamestop

To start off, there's a big misconception about what Gamestop does. Gamestop's business model is not that of a normal retailer. It operates like a pawn shop. They would sell antiques and vintage clothing if they had an advantage in doing so. However, Gamestop specializes in pawning video games. All of their business infrastructure, employee training, and operations revolve around selling video games. If you go to a Gamestop and they don't have your game, they will have it ferried from another store that has it, probably within a day.

This is why Best Buy could not break into the business of selling used games. Best Buy is a regular retailer, not a
pawn shop. They do not have an accumulation of used games. If you want a game and the particular store doesn't have it, chances are they can't ever get it for you. You'd have to do something like go on Amazon or Ebay for it, which is not what people who go to pawn shops do. There are a couple of reasons that people go to pawn shops. One of the biggest reasons is because those people are cash buyers. People with no credit cards or cannot get credit cards will always be dealing with Gamestop. Another reason is because they are impatient and want it right away. I admit to buying Diablo 3 from Gamestop on the release date even though I could have paid a little less buying it from the internet.

With that out of the way, I'd like to discuss why the prevention of used games might not be an issue for Gamestop. GME has a much higher profit margin from used game sales. At first glance, it seems like a stop to the sale of used games will increase the profits of video game publishers by cutting out the middle man. Video game publishers can accomplish this by including a game key (like a cd key), which can only be used once. This will effectively prevent the sale of the game since the lack of a unique key makes the game useless. However, this guarantees fewer copies of the game being sold. This is actually another example of the Broken Window scenario. People are not looking at the other side. The fact of the matter is that consumers as a whole have allocated a fixed budget to buying video games. If they were prevented from selling their game after they are done, they will simply have less money to buy another game.

Imagine the teenager holding the 70 dollars he has saved over a few weeks. He buys a new game for 50 bucks, then sells it for 20 dollars, and then uses his 40 dollars to buy another game. If he cannot sell his used game, his 20 dollars would not be enough to buy another game. By not allowing him to sell his used game, the cost of gaming has effectively increased in price. And as basic supply and demand dictates, a rise in price means he will simply have to consume less.

Video game publishers will sell fewer games as a whole if they prevent the sales of used games. Whether or not they actually make more money is a more complicated analysis. The only way they can really know is to test it out, which is an extremely experiment to try if it doesn't work out. Thankfully, their motivation is to make money and not to destroy Gamestop. As a result, there is a very good chance the publishers will not go down this route. Ultimately though, I believe Gamestop will prevail. They saw an opportunity to make money buying and selling used Apple products so they added them to their inventory. I have confidence that they will continue to adapt to changing market conditions.

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