Last week Valve decided to start allowing developers to set their own Steam sales. Industry author Nicholas Lovell believes that this has signaled the start whistle for PC games price race to the bottom.
According to economist Joseph Bertrand's theory, when isolated from outside factors, competition should drive consumer prices to their marginal costs. Steam makes distributing games digitally practically free, just like Google's Play Store and Apple's iStore, so it makes sense that Steam games can go down in price to those platforms' levels. In turn, this should give Steam Box a competitive edge over consoles in the living room.
"There is an issue with Bertrand Competition," acknowledged Lovell . "It excludes the impact of marketing; it assumes that one pair of shoes is as good as another pair of shoes; it doesn't factor in the cost of comparison, or the cost of switching, all of which are real. But what it does say is that the thing that drives the cost of products down, particularly in the case of digital products with low marginal costs, is competition, not piracy. And by removing itself from the pricing process on Steam, Valve has just made its platform hyper-competitive."
Lovell believes that Steam Box competes directly with traditional game consoles. While traditional consoles are sold at a loss that is made up for later through game sales, Steam Box is sold at a profit from day zero.
"[W]hat if Steam's [unique selling proposition] was thousands or tens of thousands of games for free," Lovell mused. "What if it competed with consoles by taking the Steve Jobs approach of an open platform with the price set by developers (and hence likely to tend to free, according to Bertrand Competition)? What if Steam wants the PC market to go to free because it will be a powerful competitive weapon as it battles the console manufacturers? Then I would expect [Valve] to open Steam to many more developers (Greenlight), to make games available fast (Early Access) and to give the market control over pricing (developers set their own sales)."
