TO: Board of Directors
FROM: CEO
DATE: November 11, 2021
SUBJECT: The Platform Wars
Determine the price of the video game console
| Console price | Net profit ($ millions) | Market Share (%) | ||||
| Year | Our Company | Competitor | Our Company | Competitor | Our Company | Competitor |
| 1 | 270 | 259.73 | 46.4 | 93.9 | 44 | 56 |
| 2 | 270 | 248.69 | 94.0 | 168.3 | 40 | 60 |
| 3 | 270 | 247.03 | 165.5 | 279.1 | 36 | 64 |
| Console price | Net profit ($ millions) | Market Share (%) | ||||
| Year | Our Company | Competitor | Our Company | Competitor | Our Company | Competitor |
| 1 | 300 | 283.09 | 67.2 | 131.7 | 40 | 60 |
| 2 | 300 | 269.23 | 97.1 | 200.7 | 36 | 64 |
| 3 | 300 | 267.39 | 159.7 | 341.8 | 31 | 69 |
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Based on the above data, it is evident that our competitor is playing unhealthy competition aggressively. The competitor is rapidly fluctuating their prices yearly to increase their market share and make more profits. That being said, the best prices we can offer for the console range between $270 and $300. Any price below or above this range would affect our company’s profitability adversely. As it stands, going with the $270 seems the best viable option for our company to match the profitability of our competitor.
Determine the number of video games that your company will subsidize to enhance the development of new video games.
| Game Titles to Subsidize | Console price | Net profit ($ millions) | Market Share (%) | |||||
| Year | Our Company | Competitor | Our Company | Competitor | Our Company | Competitor | Our Company | Competitor |
| 1 | 2 | 1 | 270 | 259.73 | 62.6 | 93.9 | 44 | 56 |
| 2 | 4 | 4 | 270 | 248.69 | 77.8 | 161.3 | 40 | 60 |
| 3 | 3 | 4 | 270 | 247.03 | 165.5 | 278.2 | 36 | 64 |
It is evident that the competitor has been playing mind games with us. In year one, when we decided to offer two-game title subsidies, the competitor chose to offer one on the other hand. Therefore, whereas we incurred $32.2m in subsidies, the competitor only incurred $16.1m. As much as this strategy helped us stay afloat and make profits, it adversely affected our profitability margin. Likewise, during the second year of doing business, the competitor decided to offer four-game subsidies similar to our business model. This further increased the competition within the gaming industry, leading to a decline in our market share. Moreover, an attempt to reduce the number of game titles subsidized in the third year led to increased profits but did little to help address the declining market share. The company should maintain the game titles to be subsidized at two to have a larger market share and maintain its profitability.
Determine the royalty percentage you will require game makers to pay you.
| Royalty rate (%) | Console price | Net profit ($ millions) | Market Share (%) | |||||
| Year | Our Company | Competitor | Our Company | Competitor | Our Company | Competitor | Our Company | Competitor |
| 1 | 20 | 18 | 270 | 259.74 | 70.2 | 94.2 | 44 | 56 |
| 2 | 10 | 17 | 270 | 248.69 | 88.4 | 179.2 | 40 | 60 |
| 3 | 25 | 17 | 270 | 246.83 | 239.7 | 295.8 | 36 | 64 |
It is evident that asking for higher royalties (25%) from game makers will lead to increased profits within the third year. However, this will cost us the market share as it will decline sharply. This could be caused by the game makers perceiving that our company is exploiting them. As witnessed in the trend, the competitor decided to remain stagnant once our company decided to increase the royalty rate sharply. Likewise, our competitor did not react when we decided to decrease our royalty rate. This perhaps explains why the competitor had a steady net income as compared to our company. Therefore, the firm should stick by the 20% royalty rate to have a balance between profitability and the market share.
