There's no such thing as a foolish question! Games are a $42 billion annual global industry, and incredibly complicated, so you're not alone in wondering just how the heck the industry works. Here's the deal:

1. Currencies are the price of a nation's money, and they can go up or down, depending on how competitive that country is. If the currency is strong (like Switzerland or Japan), your economy is top-notch, but your costs are also very high. If your currency is weak, your costs are low. So companies try to produce things in countries with cheap currencies (China) and sell to countries with expensive currencies (US). Example: all consoles are manufactured in China, where the currency and wages are cheap.

2. Most analysts say on average 15% of the retail price tag goes to the console manufacturer, 20% to the retailer, and the rest is split between the developer and publisher (usually, the publisher gets more, but you never know - it depends on the contract the developer signed with the publisher). Developers often get a raw deal out of this, especially when dealing with greedy publishers who care only about making a fast buck, which is why digital distribution is a Good Thing - you cut out the retailer, and potentially the publisher, too! But more and more sales are moving to non-retail outlets - online sales at Amazon, things like that. So the retailer share is probably dropping - we don't really know by how much. 

3. All the consoles today are profitable, i.e. their price is higher than their manufacturing cost. The Wii was profitable from the start, the 360 was profitable since 2007, and the PS3 has been profitable since early 2008. Estimates vary, but the hardware folks I've talked with say the Wii probably costs $150 to make, the 360 costs $250, and the PS3 costs $300. Remember, this doesn't include marketing and shipment costs, which is why Sony is still losing small amounts of money on the PS3, while Microsoft is slightly profitable.

thanks that made it clearer :)

so you mean to say that if we buy digitally, we don't pay the retailer, so the developer gets more profit?

In a way the retailer....LOl when its ditrubuted digitally who ever distrubutes is going to take there cut.  Xbox takes a cut for every game digitally distrbuted by them.  Of course it should be less than the current 15% retailers get

1) Stronger local currency means that when they trade from dollar to yen in this case they get less yen. So when the yen gets weaker for each dollar they get more yen.

2) That depends on cost of making game and the deal the developer and publisher make and the marketing costs its individual per game agreement.

3)It has been reported that the Wii sithe only one that makes a profit the 360 might a small profit but not much.

2) Very often, if not always, the publisher has bought the rights to the software. This means that the publisher either has the game idea or gets the game idea from a developer. Then the publisher contracts the making of the game to a developer (which does not need to be the same developer that originally had the idea). The developer gets the money to make the game and is out of the foodchain forever (unless the rights fall back to them after n years). So the food chain looks rather simple after you lay down your $:

-store gets % of $ (5-35%)

-hw manufacturer gets % of $  (With console games only 0-20%)

-publisher gets rest of $

The percentages vary considerably and are unpredictable. There may be marketing contracts between any of the parties involved or special bundling deals or whatever makes the parties involved happier..

3) Production costs vary over time and are set by the companies because these costs contain a lot of positions that vary as time goes on. You are probably thinking of manufacturing costs and are wondering if the companies would make a profit by selling the consoles only. At this time, only the Wii is certainly profitable on the hardware level. All other consoles are more or less unprofitable (at this time) on the manufacturing level (and yes that includes the PS2 and the PSP). The XBox360 arcade model is probably the most unprofitable console as far as manufacturing goes.

Lewis Black said it... "Know one knows why this shit happens..."