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One oft-expressed fear many hold about Amazon is that if it manages to drive other companies out of business with its “predatory” loss leader pricing on new e-books, it will then raise its prices, drop its royalties, insist on lower wholesale prices from publishers, and stick it to consumers, authors, and publishers all at once. But is this really likely to happen? According to Tim Worstall, a Senior Fellow at the Adam Smith Institute in London, basic economics says no.

The thing about Amazon is that absolutely nothing prevents new competitors from entering the market, now or in the future. Unlike with the post office or utilities, there is no law preventing someone from starting their own book-and-e-bookstore business and out-Amazoning Amazon. If Amazon raises its prices or lowers its rates, there’s room for someone else to come in with better ones. So even if Amazon does drive all its competitors out of business, it still has incentive to keep prices low and rates high because it’s still competing with any book business that hasn’t entered the market yet.

As an example, imagine a Bezosian fantasy in which Amazon did in fact manage to close down every bookshop around the world and drive out of business every competing online retailer. Jeff Bezos honks with glee as his plans come to fruition and starts to demand vast margins from the publishers simply because he can. Is there any shortage of capital for someone to try and enter that business? No method by which someone could lash together a website and hire UPS to do the deliveries? Imagine that Amazon starts trying to charge 70 percent margins on books: Seriously, how long do you think it would be before there are a half a dozen people clutching VC checks with the aim of gnawing on some of that monopoly profit?

Because people can still enter the business, Bezos cannot exploit that monopoly that he’s created. He’s got to continue to act as if there will be competition to ensure there isn’t any. That is, you can’t exploit a contestable monopoly.

This seems like a compelling argument to me. Given how much sales fell off after the publishers made Amazon raise its prices, it seems pretty clear Amazon knows what side its bread is buttered on. Sooner or later, we’ll see what happens.

 
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