Do books compete with one another?

In a very interesting post, Geoffrey Manne makes the case that the Judge in the Apple eBooks trial got it wrong and that a successful appeal is possible. His analysis in lengthy but this hits at the central premise of his argument:

While the opinion asserts that each publisher

“could also expect to lose substantial sales if they unilaterally raised the prices of their own e-books and none of their competitors followed suit,”

it also states that

“there is no evidence that the Publisher Defendants have ever competed with each other on price. To the contrary, several of the Publishers’ CEOs explained that they have not competed with each other on that basis.”

These statements are difficult to reconcile, but the evidence supports the latter statement, not the former.

Manne takes the view that the evidence did not illustrate that the publishers competed on price and, therefore, any conspiracy to raise price collectively would not have done anything more than their own efforts to raise price unilaterally.

As I wrote the other week, in my reading of the judgment, Apple were found guilty of “conspiring in their heart.” That is, they understood that their actions would help coordinate the publishers on something they valued — price control — and that it was the publisher’s intention to use that to raise eBook prices. I also argued that no one ended up profiting from this relative to the alternatives of not conspiring but it appears it is a more detailed version of that story that Manne takes up. In particular, Manne argues that to be guilty Apple (and the publishers) need to be plausibly guilty of “conspiring with their (hypothetically rational) head.” In other words, it is not sufficient that a group of firms believe that a set of actions will lead to higher prices but that those beliefs have to have a grounding in competitive economic theory. Manne didn’t say that but what he believes should not be per se illegal is when a butcher in one town has a meeting with a baker in another town and agrees “on Tuesday we should raise price to stop competition between us” because the notion that the agreement was required for them to do that was pure fantasy.

It is hard to argue with that but the issue here is whether Apple and the publishers were similarly clueless about the state of competition between different books. So here in this post I want to explore that issue a little more carefully — possibly more carefully than it was actually explored in the eBooks trial.

The basic competitive story goes like this. JK Rowling (aka famous author) releases new book, fans flock to buy book, fans don’t care about the prices of any other books when choosing whether to buy book or not. Note here that fans may care about the price of Rowling’s book and shop for deals. But the key point is that they care only about that and not about the prices of any other book. Hence, books don’t compete with one another and especially across publishers.

Now the remainder of this story makes the publisher’s behaviour even more strange because it says they can set prices to Amazon, Apple or whomever and act like a monopolist even if those retailers do something like sell their books at a loss. But we should also recognise that for as long as anyone can remember publishers have been worried about retailers pricing books too low and selling them at a loss. That behaviour is, as I believe Manne would agree, completely strange from the perspective that they have a monopoly.

While it is tempting for us to believe that people buy books to actually read them, as I argued in Information Wants to be Shared, their behaviour suggests otherwise. Most books aren’t being read right now — for physical books, they appear to be displayed. Moreover, there are many books that are purchased but have not (yet or maybe ever) been read. If you look at the time path of physical book sales, they are steady and low throughout the year except for Father’s Day, Mother’s Day and Christmas. Indeed, today, their demand more than follows the same seasonal structure as costumes and suggests that physical bookstores should emerge once a year rather than exist as permanent fixtures. My point here is that books are overwhelmingly purchased as gifts and, therefore, (a) they are not necessarily ever read and (b) the gift purchaser may actually compare prices of different books when deciding which one to buy.

This same consideration can also occur at the Airport bookstore. In that situation, the scarce commodity is person’s attention, and they may well pick up a lower priced book to fill their attention now. This, however, relies on us understanding that choosing when to read a book is a choice variable. Books are not ice cream, you don’t have to read them as soon as you buy them. You can take your time and wait for specials to acquire them and put them in a pile on your night-stand. In other words, they act more like durable commodities.

When it comes to eBooks, this ‘option value’ theory of book purchasing is even more pronounced as you don’t have any storage costs in purchasing a book at a time different from when you are going to read it. In that world, an email that an eBook is temporarily on sale can trigger a purchase. The sale is a jog to memory to not forget that a book exists and to move it from the store to your own eLibrary. And it is at that moment that you make a purchase. So if one publisher holds a sale, this may trigger lots of purchases of their books. But if, at the same time, another publisher also discounts, then it is at least believable that a consumer may pick and choose between them in their immediate purchases. This potted theory also contains a grain of the notion of a reference price (like $9.99 or $12.99); that is, how do consumers know if a deal is a deal? If it is below the usual expected reference price. Change the reference price and what is a deal changes too.

The story I have outlined here has some advantages. I think it is grounded in actual behaviour. I think it can also lead us to understand why publishers appear to have the concerns they have about pricing. And I think it allows for some price competition between publishers. But I will admit, it is way more complex and difficult to state than the basic competitive theory discussed by Manne and seemingly articulated or considered by the Judge in the eBooks trial.

In any case, all this is about the publisher’s place in the new world. My book was published by Harvard Business Review as an eBook (you can buy it here from Amazon for around $4) but they didn’t want to publish it as a physical book. So they let me go on my own there and I ‘self-published’ it through Lulu. It was a dramatically easy process and you can see that, as of the time of my writing this post, it was their No.1 best selling book. That would look really impressive if you didn’t understand demand and thought people were buying the book to read it. But as a self-publisher I have lots more information about demand and know that it was driven by (a) me wanting physical copies to hand out to friends and (b) the Rotman school wanting to give the book to new students; neither groups of which we can presume will read the book. Anyhow, if you want to purchase the physical book to read it, display it, or use its 7mm span to balance your wobbly desk, you can buy it here for $8.99 plus shipping.

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