Game Theory in the Virtual Reality Headsets’ Price War
Virtual reality (VR) is a computer technology that uses a VR headset to create realistic images that stimulate one’s physical presence in an imaginative world. Currently, VR is growing more popular among video game players, but it can also be used in fields such as cinema, education, and clinical therapies. Many companies, including Facebook, Sony, HTC, Microsoft, Samsung and Google, have been dedicated to launch VR products, in the belief that VR is the next prevalent product in our daily life. Given the growing popularity and high potential of VR, it is notable that VR is not pervasive yet and companies have been cutting prices of VR headsets to attract more buyers.
Before I relate the VR headset’s price with game theory, I want to identify the market type of virtual reality because it determines how we calculate the Nash Equilibrium of strategic pricing. There are four basic models of markets in economic theory: pure competition, monopolistic competition, oligopoly, and pure monopoly. Pure competition features a large number of producers who are selling a standardized product such as corn. VR is not pure competition because the entry needs heavy funding in VR technology, and different VR headsets vary in weight, content and technology. A pure monopoly features a significant market power that determines the price of a product. Many big companies are developing VR products, so it is not a pure monopoly. I think the market is oligopoly instead of monopolistic competition because the entry barrier is high and in the past summer, one company’s launching price on VR headset triggered a series of VR price cut in the industry.
Since its release in late 2016, Sony’s Playstation VR (PSVR) had been sold over 1 million units by June 2017, which surpassed the combined sale of Facebook’s Oculus Rift and the HTC Vive. Not only did Sony own a more solid foundation of video game players than the other two companies, the price of PSVR was also only $399, which is relatively cheaper than Oculus Rift’s $499 + $99 (for controllers) and HTC Vive’s $799. In response, Facebook cut Oculus Rift’s price by $200 and made it $399 in July 2017. Following the huge price discount of Oculus Rift, HTC also made a $200 cut to their VR headset in August. Let’s put aside the unique appealing of each VR headset, and just focus on how the VR price war works in an oligopoly market. When firms decide their VR headset pricing, they knew their competitor’s price decisions in the past. If we model price choices as the prisoner’s dilemma, the only different situation is that second player knows the strategy of the first player. In the following graph, we already know that Sony set the VR headset price low. While Oculus Rift’s price remained high, its unit sale is 1:2 HTC Vive. The payoff below was merely a prediction in arbitrary numbers based on news. I apologize in advance if my model is an inaccurate description of the market. We can tell that lowering the price is Facebook’s dominant strategy. In this case, the Nash Equilibrium is (Low, Low) for both players. Despite that we don’t have any current data about why HTC lowered the price, it still makes sense to believe that a low price of FB and Sony VR headset will share a larger portion of the market, so the dominant strategy will also be lowering the price.
| Sony FB | Low | High |
| Low | (18, 24) | (14, 22)* |
| High | (10, 28) | (12, 20 )* |
(* is pure speculation b/c Sony only had one low price for PSVR; numbers in parentheses represent market share)
P.S. Reference 2-4 are news that helped analyze FB’s choice. The market analysis is original.
http://thismatter.com/economics/oligopoly-game-theory.htm
http://bgr.com/2017/06/07/playstation-vr-sales-ps4-sony/
https://www.theverge.com/2017/8/21/16176862/htc-vive-vr-headset-price-cut
https://www.roadtovr.com/htc-vive-sales-units-oculus-rift-comparison-compared-tim-sweeney/