Before I begin, I must clear a few things up. Firstly, I’ll leave my judgement upon the actual price rises themselves: this is merely looking at it from a business point of view, using basic Microeconomic theory. Secondly, I’m not going to wow you with how much, or how little, actual qualification I have in the field of economics. After all would you believe me? I merely ask you to read my argument, and then, if you think I’m a rabbling idiot, move on. Finally, all my grapths are not based on actual data, and they don’t need to be, as they are merely visual aids. I looked up few figure while writing this hypothesis, as they are unneeded: I’m merely explaining why the price rises are happening and why its good for GW and why their profits continue to rise, even with price rises. With all that out of the way, to begin:
I will start from the ground up, so don’t feel I’m insulting your intelligence with the first few paragraphs. Several misconceptions exist in the subject, so I must start at the beginning. Even if you you think you have a grasp on economics, but you’ve spent no actual time studing (over estimating your knowledge of the subject can get you lost in my hypothesis, as the first person who read this found out.) it then read on: you may learn something which can be applied outside of merely your hobby life. Otherwise skip to my following post.
One of the first rules of microeconomic theory is to assume that firms and businesses strive to achieve maximum profit. I think there is now no argument as to Games Workshops (hereafter known as GW) been amongst these firms. This not a bad thing: nearly all firms belong in this area. This is important to bear in mind though this
Supply and demand rule a free market economy (and a free market economy doesn’t truly exist anywhere, but I digress). This much is taken for granted. You likely know that high demand leads to low supply, and vice versa. Well this is simply a gross oversimplification, and I want you to forget this. Supply and demand operate independently. Here's the a basic example of a supply and demand graph that I shall use several times throughout this hypothesis, and a basic explanation:
This graphs shows the market for one good. It matters little which. Also, figures and scales are unnecessary for all examples in this hypothesis: the graphs are merely an aid to help me present my argument.
Firstly, you see that as the price of a good increases, the quantity supplied increases. However, the quantity demanded falls. So, if the price levels are at point X on the graph, supply exceeds demand, as companies are willing to supply more, as profits will increase for the firm. However, the amount demanded by people is drastically under the amount supplied. This leads to a supply surplus. The opposite, leading to a excess demand, is seen at price level Y.
However, point Z is the goldilocks point, known in microeconomics as the equilibrium point, this is where demand and supply meet. There is no excess supply, as all of it is used and no one is left out, as there was enough to meet everyones needs. This is the aim of free market economics: to achieve perfect allocation of resources. Generally at this point, firms will have achieve maximum profit from this good, profits of course been the amount sold multiplied by the price. Changing price to X or Y will lower this amount made, where the curve have a gradient of 1 and -1 where they are completely diagonal
We will assume that price level Z is where the good will be sold then. The position of the curves are in no way fix. A successful advertising campaign for this good can increase demand, represented by the curve moving rightward, with the same gradient. This is shown in this grapth:
As we can see, not only is more of the product wanted, but the price people are willing to pay for it has increased. They can charge price X and still perfectly use stock. This is what companies want. They will have larger profit, which is the aim of all firms.
This graph and set of scenarios is oversimplified. However, with basics established, I can move on to something much more relevent. A supply and demand curve for miniatures.
Ok, heres where it get allot more complicated. The last post assumed we were operating in a free market, where there was no government intervention, such as minimum wage laws. Or even no unions. Nothing. Just pure supply demand. Well, as I said before, no free market exists in the world any more. Also, the supply and demand curves are never that straight. Ready for the hobby we all know and love to get involved? Here we go:
Ok. Thats a big change from the example graphs, but hopefully you can see that it works in roughly the same way. So why are the curves drastically different? Both curves show that a change in price has a disproportionate effect on quantity, the change in quantity and price are not parallel, like our example graph. This particular graph shows the market for plastic 28mm miniatures, such as the ones which workshop make most profit from.
Supply show that as price increases, quantity produced does not increase as drastically. This is due to the large cost to enter this market on a large scale: plastic injection machines are well known to be a significant investment, as well as designing the miniatures for use with this takes time for smaller companies. This means that extremely high prices must be achieved for companies to start investing in this. This is shown at the higher price level, as supply begins to swing the other way, with quantity supplied beginning to increase higher than price increasing.
Demand shows that as price increases, demand for the product falls by little. Why? Because of many reasons, the main two been people enjoy and commit to their hobbies and will accept a slight price increase and that they are unwilling to swap hobbies completely, they will continue using 28mm plastic figure for one thing or another. Again, as the extremely high price levels, this begins to fade, as quantity demanded falls disproportionately to price levels increasing.
So what does this mean?
Well, again price level Z exsists. This is where everything is nice and fair. However, in this case, this is not where GW will achieve most profit. For you see, here we have a rare occurence which happens in few other products, the most notable example of similar correlation between demand and supply is petrol (however petrol is much more drastic). As the price increase, quantity demanded falls by so little. Let me give you a quick example with very basic figures (again, I never use official figures during this hypothesis.)
If price is 2, amount sold is 100, then profit would be 200. So, price increases to 3, however demand only falls to 95. Profit is now 285. Sure, demand has fallen but the increase in price been higher makes total profit overall higher. And I know what your thinking. What about production costs and taxes? Profit will, in this case, increase just as faster then tax levels. So point Y, with higher prices, is better for Workshop in this case, despite losing customers.
However, the future looks bright for us, the hobbyist. Why? Firstly, I refer you to the curves “flatlining” towards the head of the graph. This shows when hobbyist all start dropping out of the hobby at higher levels, but also new companies joining the market with the supply. We are beginning to see this happening. This is this theory coming to life.
So I hope this briefly shows, using economic theory, why the company is not been run into the ground, as popular opinion would have you believe, and why they continue to find profits rising (demand shifting to the right thanks to Space Marine last year also helps). I’m sure there is a much more qualified economist working somewhere with GW, with full figure able to show where the exact point to stop increasing prices is. This is why GW is continuing to be a show of perfect business and economic technique, whether you like, or believe, it.
One final note: this is simplified, and many more arguments can be made. It is impossible to put the whole argument down, so I lay down this foundation to build off, and I may return to expand this hypothesis. I encourage questions and debate over this subject.
This entire Hypothesis was authored by me, Jo-Jo, please ask before you steal it at very least.
Personally, I don’t like the prices rises, before you get the idea that I do.
TL;DR: Games Workshop is doing the right thing increasing their prices. Not the right thing for you though.