LGJ: The Anti-Trust Game
by Mark Methenitis 
{ Jun 17th 2009 at 11:59PM }
Each week Mark Methenitis contributes Law of the Game on Joystiq ("LGJ"), a column on legal issues as they relate to video games:
I've mentioned before that both in the latter years of the previous administration and under the new administration, certain kinds of enforcement actions were increasing in number. Past commentaries in LGJ have focused on trade, but another one of those areas is anti-trust. What got my attention in this regard was a conversation I had the other day with a partner in the firm who has dealt with a number of anti-trust issues. We were discussing the game industry, and he asked what the price range was on games these days. My response was a range, with the caveat that for pretty much all new PS3 and Xbox 360 games, the price was $60. His thought was that had to be on someone's radar screen to investigate, even if there's no actual anti-trust violation going on.
Given the investigative climate, I would tend to agree, though based on what I know in the industry, I don't think there's any actual collusion going on. Instead, we likely have a case of 'conscious parallelism,' which isn't illegal per se, though a government official looking for their "big break" might just take on this case hoping to see a shift in the law from the higher courts. I'm getting well ahead of myself, though, since a better background in anti-trust needs to be set out before getting into the specifics.
The basics of anti-trust are rooted in economic theory, but I'll try to keep them brief. In general, monopolies and restraints on trade prevent the market from operating efficiently. Again, in general, a market not operating efficiently is harmful to the consumer. This is what gives rise to anti-trust law in the US, in the broadest sense. I've written about one aspect of anti-trust before, that is government control over mergers. In theory, this is to prevent the formation of monopolies through market consolidation. This is what we saw with the proposed EA - Take-Two merger. The other side of the anti-trust coin, and the main focus of this article, is the concept of "restraint of trade."
Restraint of trade, often referred to with the less pleasant term collusion, refers to a whole series of kinds of actions that theoretically prevent the free market from working. Some of these include vertical and horizontal price fixing, bid rigging, the formation of cartels, dumping, refusal to deal, dividing territories, and tying. In short, it prevents the price from being optimal because of some sort of agreement between the players in the market, much like a monopoly could single-handedly set the price higher than the point of equilibrium.
What would most likely be looked at in the game industry context would be horizontal price fixing. Horizontal price fixing is where companies who produce the same or similar products agree to a set price for the good (generally as high as the market will bear), and it is illegal per se in the United States.
From an outsider's perspective, the home console game market would certainly raise eyebrows in this respect. After all, the overwhelming majority of disk-based games are priced exactly the same on each console, and even across consoles. The entire previous generation priced new games at $49.99, and the current generation has kept or raised that price point to $59.99. There's far greater differentiation on other platforms, be that the PC or the Apple App Store or even the DS, which sees a pretty fair variety of releases between $19.99 and $39.99. In fact, even the PSN, WiiWare, and Xbox Live Arcade titles see more price differentiation than their disk-based cousins. The standardization of pricing across publishers and developers on the platform is itself the red flag.
What would make this illegal, though, would be any sort of agreements between the publishers to hold those prices. While it's certainly not impossible that such agreements exist, I find it highly doubtful. However, that's not to say that two other examinations of the industry might have slightly better footing for an anti-trust complaint. First, the very act of sharing price information can be imputed to be an anti-trust violation. Of course, with the market as it is, it's not as though price information is a well kept secret. The second, and potentially more problematic, is that given the relatively small number of publishers and their position in the supply chain, the fact that they deal with multiple developers, including subsidiaries of themselves and outside companies, and can actively control the prices of those releases might be seen as a restraint of trade. If EA suddenly said that every game they published would be priced at $69.99, they would be fixing prices for other developer's goods they publish, though the fact that other publishers are available suggests that the market forces could still work. Given the illegal per se nature of price fixing, though, it would be an interesting question, though one I don't think the government could succcessfully pursue.
I find it most likely that the game industry is a excellent model of conscious parallelism or price leadership. Both of those require an oligopoly, which the game industry is almost certainly on the hardware production and software publication side. In short, the theory is that one of the players opts to use or raise a price, and the other major players follow suit. There's no agreement between the parties, and no illegal price sharing. It's just the dynamic of responsive pricing in an industry with few players. The move from the last console generation to this one is a perfect example. As I recall, before the launch of the Xbox 360, word came out that one developer/published was raising their price on "next-gen" console titles to $59.99. Within a few weeks, pricing began to appear for many launch titles, and many of them were also $59.99. One party made a move, and others follow suit.
Of course, a simple explanation like that doesn't preclude government investigations and lawsuits. It's my opinion that potential risks like these be brought to light rather than ignored as "too implausible." Just because the government isn't successful in an anti-trust action doesn't mean the company incurs no expense or massive loss of time in defending it. Ask American Airlines, and I'm sure they'd be glad to tell you all about it. In fact, this is a road Microsoft has unfortunately been down before as well, but I'm sure most people remember that case. All that stands between us and the great video game anti-trust case of 2009 is the lack of a government official looking to make a name for themselves who wants to take this as their personal crusade.
Mark Methenitis is the Editor in Chief of the Law of the Game blog, which discusses legal issues in video games. Mr. Methenitis is also a licensed attorney in the state of Texas with Munck Carter, LLP, and a member of the Texas Bar Assoc., American Bar Assoc., and the International Game Developers Assoc., where he is a board member of the Dallas chapter. Opinions expressed in this column are his own. Reach him at: lawofthegame [AAT] gmail [DAWT] com.
The content of this blog article is not legal advice. It only constitutes commentary on legal issues, and is for educational and informational purposes only. Reading this blog, replying to its posts, or any other interaction on this site does not create an attorney-client privilege between you and the author. The opinions expressed on this site are not the opinions of AOL LLC., Weblogs, Inc., Joystiq.com, or Munck Carter, LLP. As with any legal issue that may confront you in a particular situation, you should always consult a qualified attorney familiar with the laws in your state.
Given the investigative climate, I would tend to agree, though based on what I know in the industry, I don't think there's any actual collusion going on. Instead, we likely have a case of 'conscious parallelism,' which isn't illegal per se, though a government official looking for their "big break" might just take on this case hoping to see a shift in the law from the higher courts. I'm getting well ahead of myself, though, since a better background in anti-trust needs to be set out before getting into the specifics.
The basics of anti-trust are rooted in economic theory, but I'll try to keep them brief. In general, monopolies and restraints on trade prevent the market from operating efficiently. Again, in general, a market not operating efficiently is harmful to the consumer. This is what gives rise to anti-trust law in the US, in the broadest sense. I've written about one aspect of anti-trust before, that is government control over mergers. In theory, this is to prevent the formation of monopolies through market consolidation. This is what we saw with the proposed EA - Take-Two merger. The other side of the anti-trust coin, and the main focus of this article, is the concept of "restraint of trade."
Restraint of trade, often referred to with the less pleasant term collusion, refers to a whole series of kinds of actions that theoretically prevent the free market from working. Some of these include vertical and horizontal price fixing, bid rigging, the formation of cartels, dumping, refusal to deal, dividing territories, and tying. In short, it prevents the price from being optimal because of some sort of agreement between the players in the market, much like a monopoly could single-handedly set the price higher than the point of equilibrium.
What would most likely be looked at in the game industry context would be horizontal price fixing. Horizontal price fixing is where companies who produce the same or similar products agree to a set price for the good (generally as high as the market will bear), and it is illegal per se in the United States.
From an outsider's perspective, the home console game market would certainly raise eyebrows in this respect. After all, the overwhelming majority of disk-based games are priced exactly the same on each console, and even across consoles. The entire previous generation priced new games at $49.99, and the current generation has kept or raised that price point to $59.99. There's far greater differentiation on other platforms, be that the PC or the Apple App Store or even the DS, which sees a pretty fair variety of releases between $19.99 and $39.99. In fact, even the PSN, WiiWare, and Xbox Live Arcade titles see more price differentiation than their disk-based cousins. The standardization of pricing across publishers and developers on the platform is itself the red flag.
What would make this illegal, though, would be any sort of agreements between the publishers to hold those prices. While it's certainly not impossible that such agreements exist, I find it highly doubtful. However, that's not to say that two other examinations of the industry might have slightly better footing for an anti-trust complaint. First, the very act of sharing price information can be imputed to be an anti-trust violation. Of course, with the market as it is, it's not as though price information is a well kept secret. The second, and potentially more problematic, is that given the relatively small number of publishers and their position in the supply chain, the fact that they deal with multiple developers, including subsidiaries of themselves and outside companies, and can actively control the prices of those releases might be seen as a restraint of trade. If EA suddenly said that every game they published would be priced at $69.99, they would be fixing prices for other developer's goods they publish, though the fact that other publishers are available suggests that the market forces could still work. Given the illegal per se nature of price fixing, though, it would be an interesting question, though one I don't think the government could succcessfully pursue.
I find it most likely that the game industry is a excellent model of conscious parallelism or price leadership. Both of those require an oligopoly, which the game industry is almost certainly on the hardware production and software publication side. In short, the theory is that one of the players opts to use or raise a price, and the other major players follow suit. There's no agreement between the parties, and no illegal price sharing. It's just the dynamic of responsive pricing in an industry with few players. The move from the last console generation to this one is a perfect example. As I recall, before the launch of the Xbox 360, word came out that one developer/published was raising their price on "next-gen" console titles to $59.99. Within a few weeks, pricing began to appear for many launch titles, and many of them were also $59.99. One party made a move, and others follow suit.
Of course, a simple explanation like that doesn't preclude government investigations and lawsuits. It's my opinion that potential risks like these be brought to light rather than ignored as "too implausible." Just because the government isn't successful in an anti-trust action doesn't mean the company incurs no expense or massive loss of time in defending it. Ask American Airlines, and I'm sure they'd be glad to tell you all about it. In fact, this is a road Microsoft has unfortunately been down before as well, but I'm sure most people remember that case. All that stands between us and the great video game anti-trust case of 2009 is the lack of a government official looking to make a name for themselves who wants to take this as their personal crusade.
[Image Credit: guiltysin]
Mark Methenitis is the Editor in Chief of the Law of the Game blog, which discusses legal issues in video games. Mr. Methenitis is also a licensed attorney in the state of Texas with Munck Carter, LLP, and a member of the Texas Bar Assoc., American Bar Assoc., and the International Game Developers Assoc., where he is a board member of the Dallas chapter. Opinions expressed in this column are his own. Reach him at: lawofthegame [AAT] gmail [DAWT] com.
The content of this blog article is not legal advice. It only constitutes commentary on legal issues, and is for educational and informational purposes only. Reading this blog, replying to its posts, or any other interaction on this site does not create an attorney-client privilege between you and the author. The opinions expressed on this site are not the opinions of AOL LLC., Weblogs, Inc., Joystiq.com, or Munck Carter, LLP. As with any legal issue that may confront you in a particular situation, you should always consult a qualified attorney familiar with the laws in your state.
Reader Comments (Page 1 of 1)
Pantsparty @ Jun 18th 2009 12:11AM
I remember when some MS was on MTV talking about the 360. He said the next generation of games wouldn't be 60 bucks. There would be $50 versions and $60 versions with more features. What a load. Do you think MS might have set the precedent for pricing of software on the current platforms? The 360 was the first available console...
evenkots @ Jun 18th 2009 1:35AM
When the 360 was first released, all Microsoft Game Studios games were priced at $50, though.
LameDuck @ Jun 18th 2009 3:38AM
It was a stupid thing to say since they really can't control what people charge for games, but it is sorta true. Atleast we're still not buying 100 bux cart games. Final Fantasy 6 anyone?
aaron @ Jun 18th 2009 12:15AM
Wasn't there some major parts manufactuers for HDTV's that got in trouble in an anti-trust case? And I think Horizontal price fixing was a part of it.
Anyway, Mark does a great job with these posts and I wish more people commented on them.
The Dark Wayne @ Jun 18th 2009 12:26AM
i like these posts, because I always misread marks name as Mark Mentholitis
Arnie @ Jun 18th 2009 12:27AM
Actually I dont know if there is an anti-trust issue here cause there are some games which cost more (Guitar Hero w/h Guitar or Rock Band) and some games which actually cost less at retail latest one I can remember is Banjo-Kazooie:Nuts & Bolts. Of course, one can argue that these games are fundamentally different from a large majority of the games. So the point also becomes what constitutes a next-gen game? The game in itself is becoming more of an organic entity that it would be hard for someone to pin-point that there is some collusion going on for a particular set of games. Also, we can see for some games there is a sudden steep decrease in retail price on just a few weeks into the release which I doubt would be possible without the publisher taking some kind of hit.
What irks me though is (and probably is completely unrelated) is that Microsoft forcing publisher to put some prices on DLC. I dont know if that is illegal or not(probably not). I mean its such a closed system and Microsoft controls all aspects of it thereby forcing prices to go up. Also, why is it not illegal for Microsoft to use the Point system, isnt that like trying to establish their own currency within the country?
cknblade @ Jun 18th 2009 12:32AM
An interesting article, as always with your column (can it be called that in a blog?).
An interesting study would be whether or not a company could sell more in a time span of say, a year, releasing decent-selling (I.E. No halos/gears of war/WoW, just average games with average sales), and seeing if profits shift if the price point is lowered to say, $50, or even $55, just to see if the price drop would make itself up in gained consumers. This would be very hard to do, as no two years are the same, though as I said, the restraints on what games could be included in the study would help things a bit. Still, the results would be interesting.
chililili @ Jun 18th 2009 12:57AM
Dropping the price to 55 would be a moot point it needs to be lowered to 50 or 40, in fact I would recommend 30 and see how much it moves (L4D did this). Also it is difficult to lower the price in the middle of a 60 dollar market, the average consumer's perception of the product lowers with the price (he thinks: why does this game cost 40 instead of 60 dollars? It must be worse than all the other games). Before you go thinking that this does not happen this is why apple maintains its iPod price points and calvin klein sells you 5 dollar jeans for 90 dollars, it is perceived value.
BigD145 @ Jun 18th 2009 1:16AM
It should be 50 with a drop to 40 or 30 after 6-10 months.
MarioSpitza @ Jun 18th 2009 2:03AM
@Chili
I think you are right regarding consumers' perception of quality being proportional to price, but I think that this has been helped by the fact that it's general true. Typically, low quality kids games, unusually short games, or general shovelware tends to start selling at a lower price vs games with much higher production values. Over time of seeing this, one does tend to get a perception that lower price means lower quality.
As someone who keeps up on gaming news and, I think, would qualify as a 'hardcore gamer', I myself admit that I am susceptible to the same perception. If a brand new MGS game were to be released and it is priced at $40 instead of the typical $60, the first question that would pop in my mind is 'Why?"
Bradwart @ Jun 18th 2009 1:09AM
To me, Sony charging 60 for PS3 games is easier to swallow (still not great) as they are on more expensive media, with heavy duty cases (why do the 360 cases suck so bad?), and Sony has a lot of console costs to make up. Microsoft is selling games for 60 printed on dirt cheap discs, with cheap cases, and have lower costs to make up. Having 1 or 2 games come out at 40 doesn't justify the rest. The 80 for a lot of LE's is just insane, Fable II included (before that LE got screwed up royally). Halo Wars should have been 70 max. 50 standard, then 10 extra for the LE and 10 for the Mythic Map Pack.
60x4=240. 50x4=200= 40 bucks saved for an older title that still brings in money. Would Microsoft prefer I bought 4 or 5 games? I might even throw in an extra 10 for 5 50 dollar games. Not that the bean counters there would ever see that.
Premature ejaculation man @ Jun 18th 2009 4:39AM
Not to mention that xbox games are supposedly cheaper to develop on too.
sam @ Jun 18th 2009 6:55AM
1) There isn't a large difference in media cost. Blu-ray probably costs around $1/disc in quantity, which is twice as much as dual-layer DVD but still a small proportion out of a $60 price.
To put it another way, if it's fair that PS3 games cost $60 based on the media difference, then it would also be fair for 360 games to cost $59.50.
2) Microsoft/Sony/Nintendo don't set prices (except for their own games). They charge a license royalty - I don't know if this is a percentage or fixed per-game - and other related fees. I also don't know who handles production; if that's not centralised, it might be the third-party publisher swallowing the extra cost in pennies for producing the Blu-ray disc on the PS3 version.
Sly [PSN SniperChameleon] @ Jun 18th 2009 1:50AM
i love these posts. thanks mark for the nice read.
pibs @ Jun 18th 2009 4:46AM
I wouldn't even mind if games where actually $60 flat, hell with taxes and everything we are talking about $65 a game.
Another thing that has me worried is the lack of games. Is it harder for developers to create games, or is it the cost of publishing/dev tools on 360/PS3, or what? We have all seen that higher budget doesn't necessarily mean better quality. So what's with the droughts? Of course nobody wants shovelware but damn I guess I'm just tired of all the over hyped sequels. Give us some new IPs more often! Or maybe I should quit complaining and go pre-order Lego Halo already :/ Exclusively at Gamestop!
Premature ejaculation man @ Jun 18th 2009 4:51AM
This is a very interesting concept that for some reason, did not ever consider before.
I do note however that game prices in Australia do have a more fluctual pricing range...Though the prices we pay are rather large anyway. It can range from $50 new releases to $120 for big new releases and $150 for super box set special edition++ superman mode versions.
The thing here is, is this a result of retailers pricing it at such a level or prublishers? Unless I've been taught wrong, I was under the impression that you can't force a price point i.e Activision could not tell Walmart that it has to sell Guitar hero ad $15,000 and never drop it.
las6 @ Jun 18th 2009 5:13AM
Just be glad it's only $60.
Around here (in Finland) the "standard" price is 69 €. I'll let you do the calculations yourself...
Premature ejaculation man @ Jun 18th 2009 6:13AM
Really, only America gets games cheap, UK gets a good deal in a way since their games go on sale very quickly. Every country really gets to complain...
But yes, buying games where you are kinda sucks. You got a ps3 or only buy major xbox 360 games? Because then you should just import!
mr mobius @ Jun 18th 2009 8:55AM
I don't see games going 'on sale' quickly in the UK. If I go into Game, there are 2 year old games still selling for standard price, or maybe £5 cheaper if anything.
Ashitaka @ Jun 18th 2009 3:07PM
One word for you: ebay (or for the matter, any online retailer).
In Portugal games cost 60€, which (to me) is still pretty darn much for a game! So I always buy my games online and end up paying 50€ at most.
Smithers @ Jun 18th 2009 9:31AM
What? Your Game obviously isn't getting the memos then. In mine, there are a tiny number of titles that keep value, COD4 and 5 being the only ones I can think of off the top of my head. Halo is £12, Resi5 £25, Gears2 £20... and thats before you look at the online retailers. In fact, if you look around its rare to pay more than £35 for a brand new title, and that will have dropped by £10 within 3 weeks. We have it good imo
uncle jesse @ Jun 18th 2009 10:16AM
I'm just glad we haven't had a situation where an extremely anticipated game was coming out and just because of its AAA status and demand, it costs 10 bucks more than all the other games out.
Honestly, say, for example, Halo 4 was coming out and when it finally released it was $69.99 while every other regular game was $59.99. Do you think that it would change it's sales? I doubt it. They could get away with that I bet, unfortunately.
lokar82 @ Jun 18th 2009 11:40AM
Good article, but I would also like to see the price of consoles mentioned as a possible antitrust violation. It has always seemed strange to me that no matter where you go to buy a console, the price for it is exactly the same. A PS3 will be $400 at Sears or Best Buy or wherever, just like a Wii is $250 wherever you go.
Ashitaka @ Jun 18th 2009 3:12PM
What would be strange was if the PS3 (or any other console for the matter) had a different price for every different store.
I don't get what you're saying.