Thursday, October 29, 2009

Low Prices Are Harmful to Consumers?

Click to enlarge.

From the American Booksellers Association letter to the Antitrust Division of the U.S. Department of Justice:

We ask that the Department of Justice investigate practices by Amazon.com, Wal-Mart, and Target that we believe constitute illegal predatory pricing that is damaging to the book industry and harmful to consumers.

As reported in the consumer and trade press this past week, Amazon.com, WalMart.com, and Target.com have engaged in a price war in the pre-sale of new hardcover bestsellers, including books from John Grisham, Stephen King, Barbara Kingsolver, Sarah Palin, and James Patterson. These books typically retail for between $25 and $35. As of writing of this letter, all three competitors are selling these and other titles for between $8.98 and $9.00.

The retailers are, in fact, taking orders for these books at prices far below cost. (In the case of Mr. King's book, these retailers are losing as much as $8.50 on each unit sold.) We believe that Amazon.com, Wal-Mart, and Target are using these predatory pricing practices to attempt to win control of the market for hardcover bestsellers.

Authors and publishers, and ultimately consumers, stand to lose a great deal if this practice continues and/or grows. If left unchecked, these predatory pricing policies will devastate not only the book industry, but our collective ability to maintain a society where the widest range of ideas are always made available to the public, and will allow the few remaining mega booksellers to raise prices to consumers unchecked.

We urge that the DOJ investigate and request an opportunity to come to Washington to discuss this at your earliest convenience.


MP: In other words, according to the booksellers, the "sky is falling," and the very foundations of our civilization are about to be destroyed by the rapacious book pricing policies of Amazon, Wal-Mart and Target. Where to start?

1. How exactly are low book prices "harmful to consumers?" Consumers love low prices, but have several remedies at their disposal to combat "predation" whenever they feel harmed by low prices: a) refuse to buy the book from Amazon or Wal-Mart for $9 and instead pay full price from an independent bookseller, b) refuse to buy the book at all, or c) offer to pay more than the "predatory" price from the "predator." That last option might not work so well at Amazon or Wal-Mart (if the book is priced at $9, it might be hard to actually pay $20 instead - how would the cashier ring it up?), but there might be some cases where a consumer could pay more than the listed price to combat "predation."

2. Keep in mind that about 90% of antitrust investigations involve one firm or group of firms complaining about one of their more efficient, low-cost competitors, like in this case.

3. Assuming that the predation worked and Amazon, Target and Wal-Mart were able to successfully drive all of the independent booksellers out of the market, there would be two problems:

a) They would still have to compete against each other and it could remain an intensely competitive book market even without the independents, to the continued benefit to consumers and

b) if the three oligopolists (Amazon, Target and Wal-Mart) did conspire to raise book prices to "book scalping" or "book gouging" levels, they could then: i) face antitrust charges, this time for high anti-competitive "monopoly" prices, and/or ii) face new competition from firms re-entering the market from the attractive "smell of profits" emanating from the monopoly pricing.

4. Notice in the Amazon listing above (click to enlarge) that Amazon offers "free shipping" on orders over $25, which is obviously below its actual cost. Isn't that then "predatory shipping?" Should that be investigated by the Dept. of Justice?

5. Also notice in the Amazon listing that there are more than 30 new copies of the Grisham book available from small, private booksellers at prices starting at $4.25, or more than 50% below Amazon's price of $9.59. Aren't those small booksellers engaged in predatory pricing AGAINST Amazon?

Bottom Line: "Predatory pricing," as the ABA describes it, is a myth and fairy tale, with virtually no real-world examples of it ever being successful, harmful to consumers, or leading to anti-competitive behavior in the long run.

It's only in the bizarre world of antitrust that any price you charge can be considered illegal. If your price is lower than your competitors, you could be charged with being a "predator" for anti-competitive "predatory pricing." If your price is "too high" you could be charged with anti-competitive monopoly pricing, "price gouging," or "ticket scalping." And if your price is the same as your competitors, you could be charged with collusion and anti-competitive price-fixing.

See Jeff Jacoby's excellent column about this issue "
The War Against Affordable Books," which concludes that:

The ABA does its members no favors by painting them as helpless victims, undone because Amazon, Wal-Mart, and Target are discounting some popular books. The best neighborhood booksellers inspire affection and allegiance from customers that no online superstore can match. Prices are important, but they aren't all-important. And not everyone is looking for the latest Stephen King.


24 Comments:

At 10/29/2009 5:44 PM, Blogger Highgamma said...

Well, we can always be more life the Europeans who ban discounting of books.

http://online.wsj.com/article/SB10001424052748703697004574497862933592856.html?mod=WSJ_hps_LEFTWhatsNews

 
At 10/29/2009 6:19 PM, Blogger QT said...

If left unchecked, these predatory pricing policies will devastate not only the book industry, but our collective ability to maintain a society where the widest range of ideas are always made available to the public..

The authors cited are all novelists with the exception of Sarah Palin. That seems to leave Mrs. Palin's writings as the only representatives in the "idea" category...somehow, I doubt that was the intended message. Did love the irony, however.

Walmart, Target etc. have miniscule book sections populated by novels, cookbooks and Manga cartoons. Somehow doubt that this can seriously compete with Indigo, Chapters, etc. or specialty bookstores that unique books. Hey..you can't even get an expresso in there.

 
At 10/29/2009 6:30 PM, Blogger like such as said...

I'm sorry. I really thought this was a joke until halfway down. Unfortunately not.

People are such whiners. The only people who ever talk about "our collective ability" are the ones who don't have any individual ability.

 
At 10/29/2009 7:45 PM, Anonymous Anonymous said...

Actually, as an antitrust lawyer, and also an adjunct, this is an interesting matter. I doubt a plaintiff would prevail, but there are some interesting issues.
First, if a competing seller were to sell below average variable costs, you could one element of a violation is present. But, each book is different, and the publisher has a unique book, so it cannot be said to be in competition with another publisher for the same book!
Now, the only issue would be under Robinson-Patman--are prices to competing retailers discriminatory. Who knows whether the discounts offered to Wal-Mart are cost justified or not.

 
At 10/29/2009 10:18 PM, Anonymous http://michigantaxes.com/wordpress/ said...

It hardly requires federal action if indeed the implied "value" is being harmed.

Seems to me that the publishers of such works might have their own method of dealing with those who lower the saleability of such things. IF they thought it really mattered. It sometimes does.. mostly not.

I have competition in my business which does 5% mark ups on items I sell at 30%. Sometimes it gets under my skin, but sometimes I laugh as they go belly up forgetting the cost of credit cards in a transaction. They come and go, and I'm still kicking.

But if you are set up as an "Amazon" or "Walmart " and price your books too high you will lose. If you are a Daltons, or Borders, the atmosphere is different, and the whole sales element has its own "flavor." Your sales depend less on price alone.

God bless America for making it this far...

 
At 10/29/2009 10:27 PM, Anonymous Steve said...

Content continues to become more of a commodity with cheaper distribution channels and a proliferation of online sources. The publishers will have to make the correct decision to hold the value of their product at a higher level when it deserves to be.

 
At 10/29/2009 10:53 PM, Blogger Michael said...

Amazon, Walmart and Target are all retailers. Why doesn't the ABA take up the issue with publishers. The ABA can threaten the publishers that sell to the above retailers that the ABA shops won't carry that publishers full line of books in their stores.

Better yet, lets get the DOJ to go after bizrate for finding the best price for products on the web. If we could double the cost of a consumer goods, just think what it would do for GDP. <-sarcasm guys.

 
At 10/30/2009 2:59 AM, Blogger juandos said...

Hey Professor Mark, let's say for sake of argument that the American Booksellers Association doesn't get their collective way, will that impact the prices of books needed for college classes at sometime in the future?

 
At 10/30/2009 4:17 AM, Blogger PeakTrader said...

Amazon.com drove off many of its competitors by selling its products below costs. Years ago, Amazon.com had strong revenue growth and negative earnings. Selling below costs increased market share and brand recognition. Now, it has strong earnings growth with a market cap over $50 billion. It's stock price is over $120 a share (see AMZN).

It seems, China followed the Amazon.com business model, and became the world's low cost producer. However, China has many Third World competitors who can easily take away its market share. So, China needs to keep prices low, and maintain product standards.

 
At 10/30/2009 5:10 AM, Anonymous geoih said...

Quote from Anonymous (anti-trucst lawyer): "Now, the only issue would be under Robinson-Patman--are prices to competing retailers discriminatory. Who knows whether the discounts offered to Wal-Mart are cost justified or not."

How in the world is a price "discriminatory"? The books are Wal-Marts. They can sell them for whatever price they want, including free.

My god, what a demented view of reality.

 
At 10/30/2009 6:35 AM, Anonymous Anonymous said...

@geoih,
You must not have read the post correctly.
If Target and Walmart receive a discount that other competing retailers do not, and there are not any defenses, the publisher would have an antitrust problem. Google Robinson-Patman Act.

Bill

 
At 10/30/2009 8:15 AM, Blogger Andy said...

Why don't the independent booksellers just buy 1,000 copies at Amazon/Walmart/Target and then sell them for $10.00? Most people would probably pay an extra $1 to get a book right away, and if in fact the big retailers are losing money on each sale it's a double win.

 
At 10/30/2009 8:32 AM, Anonymous Anonymous said...

Herbert Hoover has been reincarnated as a book publisher.

 
At 10/30/2009 8:44 AM, Blogger QT said...

Great solution, Andy.

Juandos,

Unfortunately, university textbooks are unlikely to EVER be discounted let alone sold at Walmart or Target...nice thought though.

Women account for over 60% of sales which accounts for the pre-dominance of novels and self-help books. Chances are pretty good that no man with a functioning cerebral cortex is ever going to read "Eat, Love, & Pray" or "The Guernsey Literary & Potato Peel Pie Society"....these are chick pics.

The ABA's beef is about novels. I can understand their angst however, there is no law against lost leaders...Walmart does the same thing with orange juice, coffee, tea & soft drinks.

 
At 10/30/2009 9:44 AM, Anonymous Anonymous said...

@Andy,

You'll appreciate this: if the retailers banded together to purchase the same volume as Amazon, the coop buying group would not qualify for the discount because it did not perform the "function" of a reseller under Robinson-Patman.

 
At 10/30/2009 9:48 AM, Blogger bix1951 said...

Amazingly, many great books are available for borrowing at the library and it is FREE!

 
At 10/30/2009 9:59 AM, Anonymous Rand said...

I buy more books from Amazon than I would from an independent bookseller, because I spend the same number of dollars. If I had to pay "full price", I would buy fewer books.

 
At 10/30/2009 10:04 AM, Anonymous Rand said...

Amazon, Wal-Mart, Target, and Barnes and Noble all get significant discounts from the publishers based upon volume. Do they have to eliminate quantity discounts also?

 
At 10/30/2009 10:38 AM, Anonymous Anonymous said...

Amazon, Wal-Mart, and Target can sell items below cost because they probably make a good deal of profit on other items they sell, even other books. No one I know goes into a Wal-mart or a Target and comes out with one book and nothing else, and Amazon snags quite a few extra sales with their "Customers also bought this..." recommendations.

Perhaps this will open up book publishing, especially as more an more books are delivered in a digital format. Customers can choose from a much wider variety of independent musical artists on Amazon than they could at any brick and mortar store. Perhaps the same thing will happen with authors.

It may not be better for publishers, but it certainly will be a hell of a lot better for consumers and probably a little better for the unknown independent authors.

 
At 10/30/2009 11:08 AM, Anonymous gettingrational said...

Zogby International published the results of a poll done for Random House entitled The Reading and Book Buying Habits of Americans. The poll revealed that respondents most often bought books on-line (43%) vs. independent booksellers (9%). 53% of the people bought 1-5 books and 35% bought no books at all.

The people who bought from independent book sellers were more likely democrats. Those who bought on-line indicated 66% of purchases were from Amazon. Paperback outsells hardcover 48% to 43% but men prefer hardcover and women paperback.

What does this all mean? The favorable on-line pricing for hardcover books favors republican men. Thus a case of discrimatory pricing could be made and Amazon will be ordered to give free books to the 35% of Americans who don't buy books -- HA HA, but these days it could happen.

 
At 10/30/2009 12:58 PM, Anonymous Anonymous said...

I don't know if predatory pricing applies to retail. Mostly the law has to do with producers selling to others. If a publisher were selling books to a retailer below cost to drive out competition or with an exclusive agreement with one retailer there might be a case. However, the publisher runs the risk of losing money or going bankrupt. Why would anyone want to intentionally lose money?

 
At 10/30/2009 1:03 PM, Blogger stevedp86 said...

I buy all my books off Amazon.com because of the price, and I prefer the ease online shopping. The best strategy in my opinion is the Free Super Saver Shipping. I always find myself a couple dollars short of it...and then I'll add something else to my cart and now I'm $10 over! Such a smart strategy to gain market share.

For instance today I pre-ordered Sarah Palin's book, Kris Allen's CD...which forced me to purchase another book...I Hope They Serve Beer in Hell.

So the low prices combined w/ the "free" shipping always make me spend more...but this is good for me because I have 3 items instead of 1 at face value!

Anyway, this book association is ridiclious. I can't remember the last time I stepped in a book store (besides Borders or Barnes & Noble)...and have they ever heard of a library?

 
At 10/30/2009 1:36 PM, Blogger BoyNamedGoo said...

By this logic wouldn't any retailer that issues a store coupon or buy one get one free type of promotion also be guilty of predatory pricing?

 
At 10/31/2009 4:42 PM, Blogger juandos said...

"Unfortunately, university textbooks are unlikely to EVER be discounted let alone sold at Walmart or Target"...

Yeah QT I guess I sort of knew that but hoping against hope isn't going to bring any changie...:-(

I think the colleges, universities, and professors are missing a bet by only having a small but coerced market on campus when there's a possibility of enlarging their market via other venues...

 

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