Today on Grinnell plans, someone asked why in comparison to movies tickets are video games so expensive. For example you can see the new Indiana Jones movie for $10-$12 or you can purchase the Lego Indian Jones video game for $40. As the person who asked the question points out the budget for top video games is about 1/10 to 1/5 that of a top movie.
The price difference is caused by a couple of things. First, there is a strong
connection between both movies and video games in the type of good they are. In some sense a movie studio or video game company has a monopoly on any movie or game, but there are many movie and video game choices so it is not quite a monopoly. Economists call this monopolistic competition, which just means at some point a video game company or movie studio has to worry about competition if they price the product too high.
So now how is price determined? Prices will be influenced by the number of people willing to buy it at a given price (demand) and the cost of production. However, for movies and video games most of the cost are up front. Once a video game is developed another copy can be produced for the cost of the packaging and the CD, probably a couple of dollars. A movie at a movie theater is a little different in that there is the cost of running a theater and the employees, but once a theater is running the cost of one more patron is low. Video games companies will maximize the difference in the money coming in from sales and the cost of making another CD. As long as they make profits the game’s development cost should not impact price.
On the demand side I think there is another factor at play. Although I have not played video games regularly, since a brief minor addiction with Grand Theft Auto and MLB 2006. I do know that someone who buys a video game will likely play it for more than the couple hour run time of a movie. In that sense the price per hour of enjoyment may be lower than the movie.