Breaking Street Date and Game Theory

A self-proclaimed video game connoisseur, I enjoy staying up to date on my latest video game news. One game that I have been following lately is the new Zelda game that was released today, "The Legend of Zelda: Spirit Tracks" for the Nintendo DS. About a week ago, while idly browsing some random video game new site, I stumbled upon an interesting piece of information. Supposedly, the nation-wide franchise corporation 7-11 had broken the street date for the new Zelda game.

Before I continue, I'd like to walk you through the process of a major video game release. Because the release date is the date when the game should be available in stores, the game must be shipped to vendors a week or two prior to the scheduled release date. The vendors then agree not to sell the game until this release date (aka "street date").There are no legal implications involved; compliance with the street date is completely voluntary.

This, of course, is called collusion, and allows us to analyze 7-11's decision with game theory. For simplicity's sake, and so that we can analyze 7-11's decision ceteris paribus, we will divide the involved parties into two firms: "7-11" and "All Other Vendors." The two choices these firms will have will be "Break Street Date" or "Don't Break Street Date." Let us consider first the benefits of breaking the street date. For one, breaking the street date makes you virtually a monopolist for the product until the scheduled release date. This will lead to increased profits and a bit of publicity to boot. However, the costs of breaking the street date is that the company probably won't be entrusted with shipments of another major release.

These findings are summarized below, assigning the arbitrary profits to each firm:

As you can see, the total profits generated from the sales of all copies of the game is $30 million in each case. The only difference is the distribution of these profits. It is immediately clear that both of these "firms" have a dominant strategy. Given that other firms don't break the street date, 7-11 will choose to break the street date. If the other firms do  break the street date, 7-11 will still break the street date to get a profit of $15 million instead of $10 million! The same is true for the other firms as they should theoretically choose to break the street date no matter what 7-11 does. This position is known as a Nash Equilibrium. Once the scenario is reached where both parties have broken the street date, or in other words, have taken their dominant strategy, neither firm has the incentive to change their behavior. Therefore, when one firm cheats by breaking the terms of the collusion, it is in the other firm's best interest to cheat as well, and to continue cheating, until a new collusion is formed... theoretically.

So why is it that 7-11 was the only company to break the street date for this popular game release? There are a few possible explanations. First of all, our model does not take into account the prospects of future profit. As we mentioned before, the company that broke the street date would most likely not be entrusted with another early shipment of a new game. Therefore, once 7-11 decided to break the street date, the prospect of future profits that these other companies would earn from future games sales probably exceeded the benefit of the $5 million of profit gained by following suit with 7-11. Also, remember that our model assumes "all other companies" as a single firm. It is immediately obvious that not all firms would break the street date in unison and this would detract from each firm's ability to generate extra profits.

So there you have it, our discussion of the economics of breaking street dates. This phenomenon is not a novel one; less than a month ago an Australian retailer broke the street date for the new Wii game "New Super Mario Bros. Wii." This phenomenon is not even limited to video games: the same occurs for movies, CDs, and even books.

But in the mean time, if any of you want a brand-spankin'-new copy of the new Zelda, you know where to go.