Last week, it was revealed that Valve would start allowing developers to set their own Steam sales, giving them freedom to change their games' prices at will. In a post on his Gamesbrief site yesterday, industry author Nicholas Lovell pointed to the move as a sort of starter's pistol, setting off a race to the bottom for PC gaming prices.
In his piece, Lovell cites economist Joseph Bertrand's idea that barring outside factors, competition will drive the consumer cost of a product down to its marginal cost. And because distributing PC games digitally is cheap and falling bandwidth costs will only make it cheaper, Lovell reasons that competition will push the cost of games down to virtually nothing as well.
"There is an issue with Bertrand Competition," Lovell acknowledged. "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 sees Valve's Steambox as a competitor to consoles, and pushing the price of games down as low as possible is in the interest of a company unwilling to employ the razors-and-razor-blades business model favored by the traditional console market.
"[W]hat if Steam's [unique selling proposition] was thousands or tens of thousands of games for free," Lovell asked. "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)."