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Competition

The competition within the video game console market as subset of the video game industry is an area of interest to economics with its relatively modern history, its rapid growth to rival that of the film industry, and frequent changes compared to other sectors.

Effects of unregulated competition on the market were twice seen early in the industry. The industry had its first crash in 1977 following the release of the Magnavox Odyssey, Atari's home versions of Pong and the Coleco Telstar, which led other third-party manufacturers, using inexpensive General Instruments processor chips, to make their own home consoles which flooded the market by 1977. The video game crash of 1983 was fueled by multiple factors including competition from lower-cost personal computers, but unregulated competition was also a factor, as numerous third-party game developers, attempting to follow on the success of Activision in developing third-party games for the Atari 2600 and Intellivision, flooded the market with poor quality games, and made it difficult for even quality games to sell. Nintendo implemented a lockout chip, the Checking Integrated Circuit, on releasing the Nintendo Entertainment System in Western territories, as a means to control which games were published for the console. As part of their licensing agreements, Nintendo further prevented developers from releasing the same game on a different console for a period of two years. This served as one of the first means of securing console exclusivity for games that existed beyond technical limitation of console development.

The Nintendo Entertainment System also brought the concept of a video game mascot as the representation of a console system as a means to sell and promote the unit, and for the NES was Mario. The use of mascots in businesses had been a tradition in Japan, and this had already proven successful in arcade games like Pac-Man. Mario was used to serve as an identity for the NES as a humor-filled, playful console. Mario caught on quickly when the NES released in the West, and when the next generation of consoles arrived, other manufacturers pushed their own mascots to the forefront of their marketing, most notably Sega with the use of Sonic the Hedgehog. The Nintendo and Sega rivalry that involved their mascot's flagship games served as part of the fourth console generation's "console wars". Since then, manufacturers have typically positioned their mascot and other first-party games as key titles in console bundles used to drive sales of consoles at launch or at key sales periods such as near Christmas.

Another type of competitive edge used by console manufacturers around the same time was the notion of "bits" or the size of the word used by the main CPU. The TurboGrafx-16 was the first console to push on its bit-size, advertising itself as a "16-bit" console, though this only referred to part of its architecture while its CPU was still an 8-bit unit. Despite this, manufacturers found consumers became fixated on the notion of bits as a console selling point, and over the fourth, fifth and sixth generation, these "bit wars" played heavily into console advertising. The use of bits waned as CPU architectures no longer needed to increase their word size and instead had other means to improve performance such as through multicore CPUs.

Generally, increased console numbers gives rise to more consumer options and better competition, but the exclusivity of titles made the choice of console for consumers an "all-or-nothing" decision for most. Further, with the number of available consoles growing with the fifth and sixth generations, game developers became pressured to which systems to focus on, and ultimately narrowed their target choice of platforms to those that were the best-selling. This cased a contraction in the market, with major players like Sega leaving the hardware business after the Dreamcast but continuing in the software area. Effectively, each console generation was shown to have two or three dominant players.

Competition in the console market in the 2010s and 2020s is considered an oligarchy between three main manufacturers: Nintendo, Sony, and Microsoft. The three use a combination of first-party games exclusive to their console and negotiate exclusive agreements with third-party developers to have their games be exclusive for at least an initial period of time to drive consumers to their console. They also worked with CPU and GPU manufacturers to tune and customize hardware for computers to make it more amenable and effective for video games, leading to lower-cost hardware needed for video game consoles. Finally, console manufacturers also work with retailers to help with promotion of consoles, games, and accessories. While there is little difference in pricing on the console hardware from the manufacturer's suggested retail price for the retailer to profit from, these details with the manufacturers can secure better profits on sales of game and accessory bundles for premier product placement. These all form network effects, with each manufacturer seeking to maximize the size of their network of partners to increase their overall position in the competition.

Of the three, Microsoft and Sony, both with their own hardware manufacturing capabilities, remain at a leading edge approach, attempting to gain a first-mover advantage over the other with adaption of new console technology. Nintendo is more reliant on its suppliers and thus instead of trying to compete feature for feature with Microsoft and Sony, had instead taken a "blue ocean" strategy since the Nintendo DS and Wii.