I think piracy is an important economic factor in the price point of gaming. It all goes back to demand again though, because the supply curve is so elastic. In a normal market, consumers have two options:
1. Demand the product at price $X
2. Don't get the product.
In a virtual industry like gaming, music, television, et cetera, you get a third option:
3. Demand the product for free (pirate it)
With some systems, piracy is easy. For instance, almost anyone (let's say 60%) can pirate a PSP game. But it's much harder with the 360 (let's put it at 10%).
So let's hypothetically release a game to the market.
Also, let's use these
sales figures:
PSP = 55.9 million sold
360 = 39.0 million sold
And let's make another assumption here:
25% of people who own a 360 also own a PSP.
10% of all people who own these systems are interested in this game.
39,000,000 x 0.25 = 9,250,000 (number of people who own both a PSP and 360)
39,000,000 + 59,900,000 = 99,800,000 (total PSP and 360 sales combined)
99,800,000 - 9,250,000 = 90,550,000 (number of people who own a PSP and/or 360)
559/390 = 1.5359 (ratio of PSP owners to 360 owners)
90,550,000 x 0.1 = 9,055,000 (number of people interested in this game)
If x% people are interested in playing the game, y% of people demand the game at $n, and each copy of the game costs $m per copy to produce and publish, ignoring sunk costs, our formula for gross profit looks like so:
P = 9,055,000[n(x/100)(y/100)-m]
Now let's say for every $5 increase in price, 10% of consumers will not demand the game, and 5% of the people who would demand it but can pirate it will decide to pirate it, while 100% of the people who don't demand the game at its price point, but can pirate it for free, will do so.
At $0, 9,055,000 people (3,570,000 360 owners; 5,485,000 PSP owners) will demand the game, GP = $0
For PSP:
At $5, 10% of consumers will no longer demand the game. 60% of those 10% (329,100) will pirate the game. Additionally, 30% of the remaining 90% (1,481,000) would choose to pirate the game instead of buying it. The remaining 63% (3,456,000) would purchase the game for $5. GP = 17,280,000
At $10, 19% (1,042,000) don't demand. 60% of 19% (625,300) pirate. 30% of 81% (1,080,000) pirate. 56.7% (3,110,000) purchase @ $10. GP = 31,100,000 [[+13,820,000]]
At $15, 27% (1,481,000) don't demand. 60% of 27% (888,600) pirate. 30% of 73% (1,201,000) pirate. 51.1% (2,803,000) purchase @ $15. GP = 42,050,000 [[+10,050,000]]
For 360
At $20, 34% (1,865,000) don't demand. 60% of 34% (1,119,000) pirate. 30% of 66% (1,086,000) pirate. 46.2% (2,534,000) purchase @ $20. GP = 50,680,000 [[+8,630,000]]
At $25, 41% (2,249,000) don't demand. 60% of 41% (1,349,000) pirate. 30% of 59% (970,800) pirate. 41.3% (2,265,000) purchase @ $25. GP = 56,630,000 [[+5,950,000]]
At $30, 47% (2,578,000) don't demand. 60% of 47% (1,547,000) pirate. 30% of 53% (872,100) pirate. 37.1% (2,035,000) purchase @ $30. GP = 61,050,000 [[+4,420,000]]
At $35, 52% (2,852,000) don't demand. 60% of 52% (1,711,000) pirate. 30% of 48% (789,840) pirate. 37.1% (1,843,000) purchase @ $35. GP = 64,500,000 [[+3,080,000]]
At $40, 57% (3,126,000) don't demand. 60% of 57% (1,876,000) pirate. 30% of 43% (707,600) pirate. 30.1% (1,651,000) purchase @ $40. GP = 66,040,000 [[+1,460,000]]
At $45, 61% [61.3] (3,346,000) don't demand. 60% of 61% (2,008,000) pirate. 30% of 39% (641,700) pirate. 27.3% (1,497,000) purchase @ $45. GP = 67,380,000 [[+1,240,000]]
At $50, 65% (3,565,000) don't demand. 60% of 65% (2,139,000) pirate. 30% of 35% (575,900) pirate. 24.5% (1,344,000) purchase @ $50. GP = 67,190,000 [[-190,000]]
Thus, the MSRP would be set at $40-$45 for the PSP release.
However, for 360, we know that less people will be able to pirate the game, so we know that the 360 title can definitely be more expensive than the PSP version without losing consumers' interest.
Let's start it out at $55 then...
At $55, 69% don't demand. 10% of 69% pirate. 5% of 31% pirate. 29.45% (1,051,000) purchase @ $55. GP = 57,830,000
At $60, 72% [71.8] don't demand. 10% of 72% pirate. 5% of 28% pirate. 26.6% (949,600) purchase @ $60. GP = 56,980,000 [[-850,000]]
To be on the safe side, let's check where $50 would put us:
At $50, 65% don't demand. 10% of 65% pirate. 5% of 35% pirate. 33.25% (1,187,000) purchase @ $50. GP = 59,350,000
Okay WTF. Now I've managed to baffle myself with a mathematical error of some sort which I can't seem to identify. Well anyway, point still stands: if it's easier to pirate, price point is lower.
The moral of this story: don't try to argue using lengthy mathematical sequences at 5 in the morning.
