Question

A news article about virtual reality headsets observed, "For any hardware platform, it is critical to attract outside developers and build a virtuous cycle in which popular software titles drive hardware sales, which in turn brings in more software developers." The article referred to two types of software: games, such as Final Fantasy, that were already available for video game consoles, and software intended only for use with virtual reality headsets. As both these types of software become available, are they likely to make virtual reality headsets closer or less close substitutes for video game consoles? Briefly explain. Source: Takashi Mochizuki, "Sony's Virtual-Reality Headset Confronts Actual Reality of Modest Sales," Wall Street Journal, February 27 , 2017

Short answer

The availability of games such as Final Fantasy that can be played on both VR headsets and video game consoles makes them closer substitutes. However, software intended exclusively for VR headsets makes them less of substitutes. The overall substitution effect thus depends on individual user preferences.

Step-by-step solution

Understanding the Market

We have two goods - VR headsets and video game consoles, and we need to inspect how the availability of certain software influences their use. Games like Final Fantasy can be played on video game consoles, but they're also compatible with VR headsets. Additionally, there are softwares intended only for VR headsets.

Considering the Role of Games

Because games like Final Fantasy can be played on both platforms, this might drive customers to buy VR headsets instead of video game consoles as VR provides a more immersive gaming experience. This would imply that VR headsets and video game consoles can be close substitutes for gamers.

Considering Exclusive Software

With the introduction of software exclusive to virtual reality, VR headsets become less of a substitute for video game consoles. These exclusive softwares offer unique experiences that can't be substituted by video game consoles.

Concluding the Influence

Both the shared games and the exclusive software for VR headsets affect the level of substitution between VR headsets and video game consoles. While shared games make these two goods more of substitutes, exclusive software for VR makes them less of substitutes. Therefore, the net effect is ambiguous and depends on individual user preferences.

Key concepts

Market Competition

In the context of virtual reality (VR) headsets and video game consoles, market competition is the driving force that incentivizes companies to innovate and offer products that attract consumers. With both VR headsets and video game consoles vying for the attention of gamers, the competition extends from the hardware itself to the array of software titles each platform can support.

The availability of popular games like Final Fantasy on both platforms intensifies the competition, as each seeks to provide a unique gaming experience. The immersive nature of VR headsets could sway some consumers in their direction, thereby affecting market competition dynamics. If VR headsets manage to provide a significantly different or enhanced experience compared to traditional consoles, they could potentially carve out a substantial market niche.

Market competition in this sector also depends on factors like pricing, game quality, and technological advancements. Companies must balance these elements to maintain or grow their market share in an industry where consumer preferences can be fickle and trends change rapidly.

Product Differentiation

Product differentiation is a critical strategy in markets like those for VR headsets and video game consoles, where companies seek to set their offerings apart from competitors'. In the case of VR, the differentiation is partly achieved through exclusive software that leverages the technology's unique capabilities.

• Hardware Differences: VR headsets provide a different physical experience, using head tracking and 3D graphics to immerse players in the game world in a way that traditional consoles typically do not.
• Exclusive Software: As noted in the exercise, software that is exclusive to VR headsets augments the differentiation aspect. These unique games and applications can justify the purchase of VR technology beyond what is possible with a standard console.
• Usage Context: VR also creates opportunities for different use cases, such as educational or simulation software, which further distinguishes it from conventional gaming platforms.

Overall, product differentiation in VR doesn't solely rely on the exclusive software but is also enhanced through the innovative use of technology to create new types of user experiences.

Consumer Preferences

Consumer preferences play a pivotal role in determining the success and market position of products such as VR headsets and video game consoles. These preferences are influenced by a variety of factors, including the desire for novelty, the quality of immersion, and the specific types of gaming experiences a user is seeking.

While some gamers may prefer the traditional gaming experience offered by consoles, others might be drawn to the novel and immersive experience provided by VR headsets. The exclusivity of certain VR games could sway consumers who are looking for unique experiences that can't be found on other gaming platforms.

Additionally, consumer preferences can be affected by price sensitivity, brand loyalty, and the perceived value of the product. In the evolving landscape of gaming technology, understanding and catering to these preferences is key to the adoption of VR headsets. As the exercise suggests, the level of substitution for video game consoles by VR headsets is not clear-cut and will largely depend on individual preferences that shape demand in this highly competitive market.