Cory Doctorow has an article in Publishers Weekly (linked and discussed on BoingBoing) looking at the Amazon and Macmillan pricing dispute in economic terms. Doctorow feels that there are good points on both sides: Macmillan is right to fear Amazon’s domination of the e-book field, but Amazon’s pricing might not be as bad an idea as Macmillan thinks.

Doctorow talks about price discrimination (the idea that segmenting the market maximizes profit—in this case, the publishing industry practice of releasing a more expensive book first, then a cheaper one later) and demand elasticity (the idea that lowering prices brings in new customers) and how they apply to books.

He points out that, since digital items like e-books have almost no marginal cost, this could allow taking advantage of that elasticity to a greater degree than is possible with physical products.

Could the pool of people willing to buy books—the total number of regular readers—be increased by dropping the price? And could that increase in new customers be large enough to offset losses from smaller margins? Amazon clearly thinks so.

The problem, Doctorow says, is that Amazon’s desire to lock readers into using its Kindle may be at odds with the publishers’ own best interests. He compares the Kindle to a roach motel (“books can check in, but they can’t check out”) in this respect. Even when publishers want to allow consumers to move the Kindle editions of their e-books to other devices, Amazon will not allow it—and Apple probably won’t be much better.


  1. I often find myself disagreeing with Doctorow but this time I think he’s dead-on.

    I think Amazon was, wisely, trying an Apple iStore (remember…all songs, 99 cents) to persuade people to give eBooks a try. From my perspective as a low-cost publisher, they nevertheless discounted my books while paying full royalty on sales. Other retailers pay royalties only on what they sell for, which is definitely not as good a deal for publishers.

    That said, we publishers are paranoid about any one distribution arm owning the market. If Amazon, or Apple (or Sony or BN for that matter), can monopolize eBook distribution, we’ll have precious little leverage when that monopolist lets us know they’re changing the terms and conditions. And it’ll be too late for us to wish there remained active competition among distributors. So, Macmillion and the others are playing them off. They’d rather take a little less profit on their Amazon books to encourage Apple to enter the market.

    As far as price elasticity, I believe in low prices but I’m not sure we have as much elasticity as some assume. The total cost of reading a book is the purchase price, a pro-rated share of the reading device (if any), plus the hours spent reading. In just about every situation except super-expensive academic reads, the purchase price will represent a minority of this total cost (I buy a Harry Potter novel for $15, spend four hours reading at, say, minimum wage of $8.00, and my total cost is $47. Lower the price to $10 and my total cost drops to $42. So, my 50% reduction in list translates to a 12% reduction in total cost. Demand would have to be extremely elastic to generate incremental profits even if we assume (incorrectly) zero marginal costs.

    Because reading involves substantial time investments, books tend to be only moderate substitutes. Certainly I wouldn’t read a cheap bad book over an expensive good one. Reading a bad book is worse than no book at all.

    Rob Preece

  2. Rob, that’s a finely detailed analysis of price elasticity but not how it works in the real world. As Nobel prize-winning economist Dan Ariely and many others have shown, human psychology plays a huge role in the attraction of goods at different price points. Consumers are not purely rationale and a 50% price hike may cause demand to fall by far more than a simple linear calculation might suggest. If your analysis were on target, longer books would have to be either much cheaper or much better than shorter books because the time “cost” of reading them is so much higher but they are typically priced higher. I also doubt book buyers calculate the time involved as part of the cost too precisely — I sometimes buy more books that I can easily read at one time and I think that’s pretty common behavior.

    It has long been considered bad economic policy — and an illegal practice until a recent (and controversial) Supreme Court — for wholesalers to dictate retail prices. Amazon surely knows quite a bit about the real-life implications of setting retail prices to maximize revenue and expand the pool of buyers. Unlike what you sometimes read on publishing and author blogs, Kindle prices are highly flexible and all over the map, with almost one-third of ebooks priced about $9.99.

    As for Amazon’s lock-in potential, I think this is much overblown, particularly in the realm of books where most tomes are not read more than once or twice. Music publishers discovered an easy way around iPod lock-in: abandon the DRM. There are no significant barriers to entry in the ebook selling business, hence we see B&N, Google, Apple and others entering. And, as demonstrated in the huge iTunes music price hike last year, even the threat posed by smaller digital goods vendors can force the market leading retailer to kowtow.

    Major publishers are willing to take less money on ebooks for a very simple reason-they prefer selling print books.

    We’ve been reading an awful lot of analysis of the Amazon-Macmillan spat from publishing insiders and scifi authors with an axe to grind. Might I suggest some more objective and knowledgeable folks, like antitrust expert Geoffrey Manne, Pulitzer-winning Washington Post columnist Steve, VC and former eMusic CEO David Pakman, or a Virginia Postrel post citing various economists (particularly on-point about digital demand and pricing).

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