Friday, March 30, 2007

Should Used Game Sales be Legal?

A frequent argument between gamers is whether or not games should be resellable. Stores such as Gamestop/EB Games frequently buy used games (console games only--Playstation, Xbox, etc.) and resell them at a discount. Some gamers argue that this is immoral, harmful, and/or should be illegal. The argument usually presented is that game developers and publishers do not make any money off of used game sales, so sales of used games does nothing to promote game development. As a result, we get fewer games (and possibly poorer games, as only big budget titles can survive).

This argument is probably wrong. I'll let Steven Landsburg explain why, in this quote from The Armchair Economist (a book well worth reading):

I have an op-ed piece from the Chicago Sun-Times calling for a law that would protect artists by allowing them to collect royalties when their paintings are resold at a profit. The writer ignores the question of how his proposal would affect the price of original artwork. Let me fill in the gap for him. If the original buyer expects to pay a $100 royalty at resale time, then his willingness to pay for the original painting--and hence the price collected by the artist--is reduced by approximately $100 ("Approximately" because of an adjustment for the fact that $100 today is worth more than $100 in the future.). What artists gain in royalties they lsoe on the sales of original artwork.
Actually, it's worse than that. Some artists have careers that fizzle unexpectedly. Those artists accept depressed prices for their original work but never collect enough royalties to compensate. Other artists do much better than expected; their royalties more than compensate for the depressed price of their originals. So the op-ed writer's plan is a prescription for making unsuccessful artists poorer and successful artists richer. (Landsburg, Steven E., Armchair Economist, The Free Press 1993, page 123)

The second part of his argument probably doesn't apply to games--they either succeed or fizzle in their first year. Seldom do games maintain popularity or "get discovered" ten or twenty years after their creation. Also, when he says he "has" an op-ed, he doesn't mean that he wrote it. He means that he clipped it out and saved it because it made an interesting economic error.

The first part of his argument does apply to games, however. If people cannot resell their games, then the value of the game to them will be reduced by the amount of the lost resale. They will be willing to pay less for the game in the first place. This reduced demand for games will be felt by the game developers and publishers.

This doesn't just apply to games or painters. It also applies to any durable good--cars, ovens, refrigerators, houses, etc. They're all competing with the preexisting stock of goods. Should we make it illegal to resell houses, because then the builders of houses aren't making money off the resale, and therefore they have insufficient incentive to build houses? Of course not. Making it illegal to sell a house would make a house significantly less valuable, so fewer people would buy houses--and this would harm homebuilders.

So why, then, does Valve Software use Steam, an online content distribution system that prevents resale (because games are tied to your Steam account, rather than a physical disc)? They may believe that benefits them because it prevents resale, although they are probably wrong. I think a better explanation is that it offers convenience that increases sales. With a Steam account, I can download my games onto any computer, without having to worry about discs. I don't even have to go to a store to buy them (and I don't have to worry about Steam going out of stock of the games carried there). Steam is also probably slightly better at preventing piracy than other distribution methods (although only slightly better).

I am lucky that there is a Gamestop near me with employees who are not idiots, who actually know games, and who make good recommendations. I buy both new and used games from them. The last time I went the guy at the counter reminded me that I should try Trace Memory if I liked Hotel Dusk: Room 215 (which I did). The only copy they had was used, and I gladly bought it without feeling guilt.

So go ahead. Buy and sell used games, and don't feel any more guilt than you do when you buy and sell your used car.

Sunday, March 25, 2007

Economics in Trading Places

This Tuesday a colleague and I will be showing the Eddie Murphy/Dan Akroyd movie Trading Places to our economics classes. In addition to this being a pretty good comedy, it also has some fantastic economics in it. In fact, I think it's more densely packed with economics than any other film. Topics covered in the film include:

-The importance of private property for stewardship: When Billy Ray Valentine doesn't believe the house is his, he breaks a valuable vase. When he does believe the house is his, he gets angry at partygoers for damaging it. Private property is important because it gives people an incentive to protect and conserve valuable goods and resources.

-Property Rights and Credit: When Winthorp tries to sell a valuable watch at a pawn shop he is unable to demonstrate title--that is, he can't prove it's his. Therefore he is unable to sell it for anything close to its true value. The risk averse pawn shop owner adjusts his payment downward to account for the risk of prosecution.

-Futures Markets: The market for Frozen Concentrated Orange Juice futures is central to the film's resolution. A futures contract is a promise to deliver a good or service at some point in the future at a price agreed upon now. Winthorp and Valentine profit by making everyone think that the price of orange juice is going to go up. In fact, they know it will go down. So they sell frozen concentrated orange juice futures that they don't even own at high prices, and then once everyone finds out that orange juice prices will be low "cover their position" by buying cheap futures contracts. It's brilliant. Of course, it only works because they have inside information (and because they have ensured that their rivals, the Duke Brothers, have false inside information). Futures contracts are a very valuable mechanism for incorporating expectations about the future into current prices.

-Racial discrimination is costly to employers: Employers who make personnel decisions on the basis of the race of their employees, rather than their productivity, do so at the expense of profits. In the case of the film, the Duke Brothers lose everything to indulge their taste for racism. This is not to say that racism does not or cannot exist; it does, of course. The point is that employers who act on their racist preferences forego some profits.

I could elaborate on these and a couple other points, but instead I'll just encourage you to see the film. There are a couple scenes of completely gratuitous, unnecessary, and tasteless nudity, but it's an 80's comedy, so I guess it's to be expected.

(Full disclosure: Art Carden and I have an educational note under consideration at the Journal of Private Enterprise on the economics in this movie. This blog post briefly discusses some of the points which are discussed at length in the article.)