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Summary:

In a letter to the Senate, Washington-based lobbyist Consumer Federation of America claims “this year the cost to consumers of e-book price fixing will likely exceed $200 million and the abuse will grow dramatically.” How did the CFA calculate that number?

tower of books_MLibrary

In a letter to the Senate subcommittee on Antitrust, Competition Policy and Consumer Rights, Washington-based lobbyist Consumer Federation of America claims “this year the cost to consumers of e-book price fixing will likely exceed $200 million and the abuse will grow dramatically.” How did the CFA calculate that number?

Mark Cooper, the CFA’s director of research and author of the letter, told me:

The number is a rock bottom estimate based on the assumption that 100 million e-books increased in cost by an average of $2. For 2012, we may hit almost 300 million e-books. One could also argue that the price fixing increased prices as much as $4 per book ($9.99 > $12,99 or $14.99.

But the five publishers named in the Department of Justice’s investigation offer fewer than 50,000 e-books combined. Penguin has 15,000 e-books available. Simon & Schuster has over 11,000. HarperCollins has around 10,000. Hachette has about 5,000.

We can’t say how many e-books each publisher has sold, but BookStats estimates that 114 million e-books were sold between 2008 and 2010.

The CFA’s calculation assumes that five publishers combined will sell 100 million copies of 50,000 or fewer titles in 2012 and that each of those books increased by at least $2 under agency pricing. In fact, while agency pricing increased the price of some bestselling e-books, Digital Book World showed recently that the average price of a bestselling Kindle book fell between 2010 and 2011.

Assuming Amazon is the only e-bookstore

Agency pricing advocates — including me — have argued that the model allows for a more competitive e-book marketplace because the largest e-book retailer, Amazon, can’t undercut smaller retailers — Barnes & Noble, Kobo — on price. The CFA doesn’t tackle this argument, but assumes publishers’ primary concern is saving brick-and-mortar stores that sell physical books.

“In the digital age there is a much more efficient way to browsers to examine many more books of many more authors,” Cooper writes. “They can use Internet browsers to search for books in cyberspace.”

To prove that Amazon practices predatory pricing, Cooper writes:

 a plausible case would have to be made that there is a pricing strategy to recover any losses in a time frame that makes predation profitable. The behavior of the e-book product space does not suggest that this is likely. Prior to the price fixing scheme, anticompetitive tactics, like demanding exclusive deals or most favor nation clauses were not prevalent. Economies of scale and clever marketing are not suspect practices. Digital markets frequently manifest winner-take-most outcomes.

“Antitrust authorities must move swiftly to protect nascent competition,” Cooper concludes. Amazon is hardly a nascent company, but smaller e-book retailers — the true “nascent competition” in the space — lose any protection that agency pricing offered if the model falls.

Full letter below.

Consumer Federation of America Antitrust Letter to Senate
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  1. Karen Kazaryan Tuesday, April 10, 2012

    Price fixing allows more competition. Also war is peace.

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  2. Laura, you state in the article, “Digital Book World showed recently that the average price of a bestselling Kindle book fell between 2010 and 2011″.

    But Digital Book world didn’t show anything in that article. In fact, all they do is refer to the WSJ report. So let’s go straight to the source WSJ article instead of using the DBW link spam.

    Reading the WSJ article in the original (http://online.wsj.com/article/SB10001424052970204336104577096762173802678.html) the story is that consumers ARE paying more for ebooks than physical copy (what all of us e-readers have been screaming). The irony is however, that publishers are making less, while charging more, given how the price sharing arrangements work.

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  3. Hey Ralph — DBW did not just refer to the WSJ report, nor is the link “spam.” It cited E-Book Market View research that analyzed the Kindle bestseller lists and showed that prices fell.

    The original WSJ notes that in some cases print book prices are lower than e-book prices but doesn’t explain why: In those cases publishers set the e-book prices but Amazon buys the print books wholesale so it can set their prices however it wants. Amazon is large enough to be able to take a loss on the print books (i.e., it can sell them to customers for less than the wholesale price). So when you see an e-book priced higher on Amazon than a print book, you need to think about what is going on behind the scenes. The publishers aren’t pricing e-books higher than print books; Amazon is.

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  4. “Agency pricing advocates — including me — have argued that the model allows for a more competitive e-book marketplace because the largest e-book retailer, Amazon, can’t undercut smaller retailers — Barnes & Noble, Kobo — on price.”

    How does this result in a better situation for consumers? The publishers have no incentive, as has been empirically shown, to ever lower their prices on a given book. And as they have the monopolies on particular titles — i.e., most books are not fungible for similar titles — there is no price competition between publishers. One could argue that if Publisher A has a particular bestseller at $11 and Publisher B prices its bestsellers at $10, that’s competition, but do consumers really see it that way and does the market actually function in this manner?

    Go back to the wholesaler model and let the market function in an unfettered fashion. If Amazon truly drives others out of business, then there’s an antitrust case to be had.

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  5. I think price fixing is pretty ridiculous. It is sad when a book is cheaper in brick and mortar store than it is digitally. My example is Abe Lincoln Vampire Hunter. I want it, but I ain’t paying $3 more to have it. Might consider just borrowing a regular book rather than pay a premium.

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  6. I’d actually argue that the cost to consumers was more than the $200 million cited. The agency model raised prices and removed much of the downward pressure on prices of non Big 6 titles. In a competitive market, especially with Amazon selling many titles at a loss, the overall pricing trends should have headed south and stayed south.

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  7. Hi Laura, You’re really making me work for the point, but that’s okay. The reason I called your original citation “link spam” is because that link you provided is not to any kind of original research. DBW takes research from others and tries to extrapolate it without context. One must always use original research/data in proper context in my humble opinion or readers must go on a treasure hunt ourselves (those of us who have the passion to do so, most don’t).
    So….I must do extra research myself because now I don’t trust how you’re sourcing your article. Looking at the DBW link, DBW quotes (on December 15th, 2011) that, “The average price of an AMAZON KINDLE best-seller on Christmas day 2010 (a year earlier) was $8.21 and 17 of the 100 books on the list were priced $2.99 or lower, according to data provided by e-Book Market View.”
    DBW is just referencing E-Book Market View and not providing enough context. So one now needs to go to E-Book Market View and answer proper context. The contextual questions important to find on EBMW would be:
    1) What were the Apple/Amazon dynamics 16 months ago when the original article was written by EBMV (certainly different than today, now that things have settled down in Apple’s/publisher’s favor), and even more importantly
    2) What is the AMAZON KINDLE best seller list comprised of? In my experience it is usually not comprised of popular titles (i.e., NY Times best sellers), but instead, books that Amazon itself was able to discount significantly in some way. In effect, the reason they were Kindle best sellers is that they were non-mainstream material that Amazon was able to market (i.e., discount and highlight) and THAT is what drives the AMAZON KINDLE bestseller list).
    In short, of course Amazon Kindle’s best seller list is cheaper, it is driven by Amazon’s ability to discount! The very thing they no longer can do with a significant portion of the book base do to the publisher/Apple collusion model.

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    1. FYI, the research was compiled for Digital Book World by Dan Lubart at iobyte. It was compiled at the end of 2011 (not 16 months ago). Lubart ran the blog E-Book Market View. He was recently hired by HarperCollins as their SVP, Sales Analytics. Agree that DBW should link back to Dan Lubart’s blog, but Lubart himself is a great source doing serious number-crunching on these issues. His blog is here: http://ebmv.blogspot.com/

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  8. Laura — thanks for the excellent article. I found the CFA claims outlandish. It is amazing how people can comment on something they know nothing about. There are thousands of titles from the Agency 5 that are not involved. This was just about the hardcover releases. Not the huge backlists or eBooks that were priced way below the $14.99/$12.99 issues. The CFA seems like another DC lobby agency that doesn’t worry about getting the facts correct. You did. Thanks.

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