Agency pricing costs consumers $200 million a year? Yeah, right

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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