Friday, November 13, 2009

Booksellers Association Accuses Retailers of Predatory Pricing

Toward the end of last month, the Booksellers Association accused Wal-mart, Target and Amazon of predatory pricing. To be clear, I am not a legal scholar or expert but rather a legal novice, so none of the following should be in any way considered legal advice. Rather, I am looking at this issue from an economic perspective. With that out of the way, let's look into the economic merits of the Booksellers Association's accusation.

Specifically, Wal-mart, Target and Amazon are selling new, hardback books for around $9 each, which is below the estimated per unit cost to these retailers of acquiring the hardback books. Thus the first component of predatory pricing is that the firms are selling below their costs, and for simplicity I am thinking about this in terms of unit variable costs. But firms can set prices below their costs and not be engaged in predation. What is needed is for the alleged predatory behavior to lead to the exit of their rival, and here is where it gets very difficult, since Wal-mart, Target and Amazon - whom I will refer to as the "three amigos" - are not competing in the same product market as book publishers. Thus it seems difficult that the book publishers are actually driven out of the market, when they are not in the same product market and since none - that I am aware of - have exited the market due to the "three amigos" new pricing strategy.

This could be a profit maximizing strategy if the "three amigos" are doing this to cross-subsidize in other areas of their business. I am unable to show this for lack of data on the firms business practices, but I did want to point out that it is theoretically possible for a firm to set prices below its unit variable costs and still behave as a profit-maximizing firm.

As for the claim that this is "is damaging to the book industry and harmful to consumers", this I am having a hard time figuring out. The book publishers set their price to the retailers, and the retailers then (usually) mark up the price to the final consumer. As I understand it - and I could be wrong - book publishers are still selling books to retailers and earning revenue from the sales of these books. So the retailer changing the price of the final product should have no effect on the sales revenue of the book publishers in the short-run.

As for the last part of the claim, that retailers selling books at lower prices is harmful to consumers, that is laughable, which even my 7th grader immediately found the fallacy of that statement. Then again, he really is a smart boy.

Finally, at least one book producer (David Young, chief executive of Hachette Book Group) hoped for a law outlawing the discounting promotions and emulate France’s prohibition against book publishers pricing books below cost. I think that regulating the lower bound on book prices would be a grave mistake. Given the industry typically over-produces many books - walk into a book store like Barnes and Nobles - and you can easily find the bargain book piles, regulating the lower bound for the prices of books would be a step in the wrong direction. Given our time with reduced reading by young people - typically due to a plethora of substitutes - increasing the quantity demanded for books (and thus reading) should be something that book publishers should seriously consider.

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