The Volokh Conspiracy - Why has there been a shortage of Xbox?

Tim Harford writes:

...supply shortages are a fact of life. The puzzle is somewhere else: Why don't companies raise prices when supply is short and demand is frenzied? Leaving aside oxygen and a few other essentials, there is no such thing as an absolute shortage of anything: There is only a shortage if the price is too low. At the moment, Microsoft is easily selling out the half-million or so Xbox 360 units (there's no official number) for prices starting at $300 for the basic package. Why doesn't Microsoft price them at $700 instead?

Tim despairs:

Over dinner with a friendly local economics department [TC: hmm...], I challenged them to explain the puzzle of why prices stay low in the face of such shortages. They cited a number of ingenious explanations, all of them unlikely.

Surely the legal mind can do better than these economists, comments are open.

	[Tyler Cowen, December 16, 2005 at 4:56pm] Trackbacks Why has there been a shortage of Xbox? Tim Harford writes: ...supply shortages are a fact of life. The puzzle is somewhere else: Why don't companies raise prices when supply is short and demand is frenzied? Leaving aside oxygen and a few other essentials, there is no such thing as an absolute shortage of anything: There is only a shortage if the price is too low. At the moment, Microsoft is easily selling out the half-million or so Xbox 360 units (there's no official number) for prices starting at $300 for the basic package. Why doesn't Microsoft price them at $700 instead? Tim despairs: Over dinner with a friendly local economics department [TC: hmm...], I challenged them to explain the puzzle of why prices stay low in the face of such shortages. They cited a number of ingenious explanations, all of them unlikely. Surely the legal mind can do better than these economists, comments are open.