As I think about the below question–and I know nothing about the case in point–video games might have been just the most conspicuous victim of the overall business cycle in the early eighties. The boom bust might have affected this industry more than others simply because it was the fashion, as with dot comes in the late 90s and housing today. However, the timing doesn’t quite work out, since the recession is dated to end November 1982.
See what you think:
I’ve been looking around but can’t seem to find a decent explanation of the North American video game crash of 1983. As I love video games and economics, I simply cannot accept the superficial explanations offered for its occurence. Economists haven’t spent much time with this subject, but since Mises.org recently published a reinterpretation of the Tulipmania, I thought I would ask you what do you think about the crash, or even if you can forward this question to someone more able to answer it.
The conventional story goes like this: Before 1983, the video game market was in its second generation of consoles. Since it wasn’t yet a “mature” industry, producers flooded the market with consoles and games. This saturated the market and led to consumer disorientation, which then led to the bankruptcy of most console manufacturers and game developers.
While it is certainly possible that there was a general cluster of entrepreneurial errors in the industry, I don’t think it is likely. For one thing, the conventional story states that, because of heavy competition, the quality of the games being released then was getting poorer, instead of better. This strikes me as at odds with conventional economoic theory. The only explanation I can see for developers making such cheap cash-ins en masse was that they were responding to some extraneous incentive. Unfortunately, I’m not able to verify this myself.
Anyway, eventually the prices of consoles and games plummeted and this was the end of the “Atari age”. The industry would only rise again with the Nintendo Entertainment System (NES), launched in 1985.
Recently there’s been some talk about another video game crash in games journalism. It is said that, because Nintendo is apealling to a different demographic than the usual gaming enthusiasts and putting out a large number of casual games, this can lead to another situation like that of 1983. But, again, I believe this is nonsense.
So, can you help me find a good, economics-compliant, explanation for the crisis?