Why Penny Arcade is wrong about GameStop being a pawn shop

Penny Arcade recently ran a comic that compared GameStop to a pawn shop.  And in the post accompanying the comic, Jerry equated the two.  While we're no fans of GameStop (honestly, one of our goals at Dawdle is to put them out of business), it's patently unfair to compare GameStop to pawn shops. 

It's unfair to pawn shops and their patrons.

A large majority of items taken into pawn shops - somewhere between 70 and 90 percent of items - are redeemed by the people who bring them in.  The majority - perhaps a vast majority - of people go to pawn shops to get loans to live their lives, not to unload stuff that they don't want any more.  Pawn shops are lending institutions, first and foremost - they're not, at their cores, retailers.  Their interest rates are regulated and they inspect the merchandise that comes in.  If we've learned anything over the last twelve months, it's that access to credit is a critical part of keeping the economy humming.  Pawn shops serve a vital economic interest.  (The splattered blood in the comic is, in my opinion, pretty unfair, however.)

GameStop's not a pawn shop.  They don't lend money.  No one trades in a game at GameStop with the intention of repurchasing it in 30 days.  GameStop takes advantage of people's desire to realize some measure of residual value for their games by offering a significant discount to an item's true value (by definition, the price GameStop sells a used game or system at) and giving them store credit (which, by definition, is worth less than cash money).

GameStop provides a service, no doubt - they allow gamers to reduce the total cost of ownership for a game.  It is clear that lower prices drive sales - the NFL 2K5 experiment resulted in a five-fold sales jump over the previous installation - and drove EA Sports to lock up an exclusive on the NFL license.  Valve's recent price drop experiment also resulted in a net gain in revenue.  But those examples are the equivalent of Kia reducing price on its cars to jack up sales volume; the path the gaming industry has chosen has been to maintain premium pricing for premium products.  That's a completely rational path - but if and only if the proceeds from used games go into buying new games, a process I like to call the "money multiplier".  (In this political environment, I'll refrain from using the name Keynes.)

GameStop locks in those who trade games into spending their proceeds at GameStop stores.  Then they subvert the "money multiplier" process by pushing used games on buyers looking to buy new.  (That's the part of the GameStop model that gets Dave Perry the most upset.)

At the end of the day, the game publishers and gamers need to divorce their feelings about used games from their feelings about GameStop.  If the sales of new games resulting from the "money multiplier" process are greater than the forgone new game sales lost to used games, then used games, by definition, are good for the industry.  But it's pretty clear that, because of GameStop's economic structure, their lock-in via the use of store credit, and their incentives to push used games at the expense of new games, that GameStop as a company is not good for the gaming industry. 

That's where the misplaced hate comes in.  So be nice to the pawn shops - at least they give their patrons cash, not store credit.

Comments

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They don't lend money. No one trades in a game at GameStop with the intention of repurchasing it in 30 days

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