A Puzzling Graph on eBook Prices and the DOJ Case

From a preliminary paper by Michael Baye, Babur De los Santo and Matthijs Wildenbeest:

Screen Shot 2013-06-06 at 10.10.25 AM


What it shows is average book prices over time for paperbacks and then eBooks sold under the agency model and the wholesale model. Now I should stress it is average book  prices and it is not weighted by quantity sold. As best-sellers are typically discounted this means that the prices involved are likely higher than what we normally observed.

The two relevant dates are when the DOJ first launched its case against the publishers and Apple and then when it settled with three of the publishers. Notice that the wholesale book prices jumped up around the time of the lawsuit. As the major publishers were all apparently operating under the agency model, the movement in wholesale model pricing, this suggests that either/and (a) smaller publishers saw the lawsuit and thought they were under pricing their books or (b) Amazon changed its retail pricing for books under the wholesale model. The latter seems to have a greater likelihood given that the prices then fell when the settlement arose and, in particular, the most favoured nation clauses were struck out.

Importantly, it should be noted that Apple and its actions are not part of any story I can think of for this very sizeable variation in prices observed in this graph. But what the precise story is, seems puzzling and worthy of more thought.

7 Replies to “A Puzzling Graph on eBook Prices and the DOJ Case”

  1. Have you got to the bottom of the figures? I can’t quite work out how the publishers were to be better off with the agency model.

    So Amazon was selling at $9.99 which is said to be at a loss (i.e. predatory) which means it was buying at or above $9.99. Which also means the publishers were getting more than $9.99.

    The revised price of, say $13.99, on the agency model was at a 70/30 split in the publishers favour but that still means they would be getting $9.79 per book. In other words less than they were getting with the wholesale model.

    What am I missing?

    1. You are missing the fact that without indie booksellers—who could not compete with Amazon’s predatory pricing—the publishers feared they would only have Amazon as a single customer, who would control every actual reader.

      I’m pretty sure that EVERYBODY who looked at Amazon’s business tactics assumed they were looking to lock up the entire book market. That may not have actually been true, but I’ve yet to see evidence suggesting otherwise.

  2. Sure, I can understand why the publishers would want to extract themselves from Amazon’s stranglehold. But the deal they struck with Apple hardly did that. It just ties them to two rapacious distributors rather than one.

    1. “Under capitalism, it’s dog eat dog. Under communism, it’s the other way around.”

      You assert that the publishers, institutions that know their business inside and out, are acting in a way that makes no sense. Sounds like a learning opportunity — for you.

      Virtually every economic theory assumes people act in their (sometimes, enlightened, sometimes social) self-interest. Monopsony (single buyer) power has been recognized for a couple of centuries as worse than multi-buyer situations. (We usually focus on monopolies, single suppliers, but the ability for a single actor to play his opposites against one another is virtually the same.)

      So the publishers traded the expectation that Amazon would destroy all the other sellers (a trend that seemed well on its way to being fulfilled) versus the desirable outcome that Apple and Amazon would compete against each other to sell more books, plus Apple’s explicit promise of not engaging in predatory pricing against brick-and-mortar or other e-sellers.

      It doesn’t take much thinking to see why the publishers went with Apple, once you drop the cant that Apple is somehow worse than other providers.

      1. My guess is that Apple is as bad a client as Amazon.

        That aside, price parity was a poor short-term option. Publishers didn’t need to impose that because it plays into both Amazon’s and Apple’s hands.

        Under the wholesale model the publishers could have raised Amazon’s prices to whatever they liked. Why not say ‘we don’t like your predatory pricing so, if you insist on that strategy, we’ll raise your buying price’?

      2. I have no idea what deals Amazon has with the publishers. But Apple merely asked the publishers to guarantee that they wouldn’t allow others (Amazon) to sell at a LOWER price.

        So-called retail price maintenance agreements are legal under US anti-trust laws, under the very theory that the publishers cared about: they allow sellers to compete on the quality of service accompanying a given item, rather than wiping out their distribution chain. You, of course must be well familiar with the Amazon app that quickly scans an item in your hands & gives you the Amazon cost, exactly that scenario: Amazon free-rides on the physical store’s marketing/display of an item, then takes the business for itself. It is a guaranteed way to eliminate all marketing effort for your items.

        I’m a fairly heavy user of Amazon — virtually all my music comes on CDs from them, that I rip onto my players and put on a stack in the basement. They offer me the best service and prices for many things. But while I kinda miss the record stores, I think the loss of bookstores would be a big problem until there is a better way for authors to get the word out about their work.

      3. I used to be something of an Amazon Fanboy but that dissipated even before Amazon was found to be one of the biggest tax avoiders in the U.K.

        You may or may not be aware that Amazon itself applies RPM on its marketplace products. That’s to say, sellers on Amazon are not allowed to sell their products at a lower price on other sites than they sell on Amazon itself.

        So, sure, you may get the best price for your purchases on Amazon but that’s because it has prevented you buying cheaper elsewhere whether you’d like to or not. It’s not quite the great service when you look at it like that.

        I’m hoping, if nothing else, this case against Apple will wake up the U.S. legislators and consumers to the pernicious effects of RPM.

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