Problem
Market Structure and Competitive Strategy - Monopolistic Competition and Oligopoly
The Independent Games Industry
In 2011, a video game was released which went on to become one of the best-selling video games of all time. It was not originally produced by one of the big video games firms, but by an independent video games provider, Markus Persson. Independent video games, or indie games, tend to be produced by individuals or small teams without large financial backing. Distribution is primarily through the Internet, meaning that barriers to entry and exit are relatively low. there are many buyers of these games and many sellers. to this extent, the indie games industry exhibits some facets of the perfectly competitive market model. Each game is different, of course, which would imply that the products are not homogeneous, although it could be argued that while the contents are different, the concepts behind indie games do have some similarity. these elements might include a willingness to experiment, innovate, and create which can mean that gamers find something different in indie games from those produced by the large games developers.
Because entry into the industry is relatively low, there are now thousands of small developers offering products to the market. Because supply is so high, the price of an indie game is relatively low. Observers of the market argue that the structure of the market is such that prices are too low. In some cases, developers must operate at a loss. the availability of low-priced games is of benefit to consumers, but clearly producers cannot continue production indefinitely if price continues below aVC. Marginal producers who make losses will leave the industry and, in theory, firms which remain will return to equilibrium and be making normal or zero profit. this, however, is based on the assumption that the motive for production is profit maximization; games developers in the indie games market may be in the industry for other reasons and so continue producing games, meaning the balance between supply and demand continues to be out of equilibrium in the longer term. Once this disequilibrium arises, it is difficult for the industry to reverse it, because consumers come to expect supply to be extensive and prices to be low, zero, or even to be paid to play the games. the case of the indie games market highlights the importance of recognizing the importance of the assumptions that are made in a model, and how those assumptions result in long run outcomes that are invariably in economics, based on the idea that an equilibrium will be restored.
Independent Game Industry. Answer and explain how the barriers to entry into this industry are according to the theory in this chapter and add graphics if needed to clarify your answer!