Why Aren’t Kindles Free-Marketed?

In all the hullaballoo over agency ebook pricing and how terrible it is to not allow ebooksellers like Amazon to discount ebooks and sell them at whatever price they want, even if it is at a loss, ebookers haven't questioned the lack of dynamic pricing of ereaders themselves, especially that of Amazon's Kindles.

Consider this: Every store that sells an Amazon Kindle sells it for exactly the same price as Amazon and every other retailer. And when one retailer has it on sale for $20 off, so does every other retailer. (This is also true of the Sony, Kobo, and Nook devices.)

Why aren't ebookers complaining about this price-fixing? No, I'm not suggesting there is collusion between the companies to prohibit discounting of the devices. Rather, I find it disingenuous that agency pricing, which is a form of price-fixing, is so disliked among some ebookers that they complain about it and want it banned, yet no one has complained about the lack of price competition when it comes to the device to read the ebooks. Why is it OK for Amazon to price fix but not Macmillan?

I'm sure the immediate response will be that there is no complaint because the prices on these devices have dropped to where they are now half or less of the original cost. If that is the key to salvation, then all Macmillan needs to do is drop the price of an ebook from $12.99 to $10.99 and ebookers should be satisfied -- after all a drop in price is a drop in price -- but I know that would not satisfy. Why? Because the argument would be made that the ebook price would be even lower if true free-market competition were allowed.

So why isn't that the ebooker argument when it comes to the devices? I could see, for example, Staples offering a free Kindle with the purchase of a $150 paper shredder, or Target offering a 50% discount on a Kindle with the purchase of Stephen King's newest novel. But we don't see those sales because Amazon is not ready to sell at those prices itself and no one is allowed to undersell Amazon.

If the argument against agency pricing is legitimately one against price-fixing, why doesn't the argument carry over to the devices? What makes it OK in one category of product but not in a related category of product? When agency pricing is attacked, it is usually on the basis that it has caused ebook prices to rise.

There has been no comprehensive pricing study done, that I am aware of, to determine whether the cost of ebooks has risen, fallen, or stayed the same since the introduction of agency pricing across the entire spectrum of ebooks published by agency-pricing publishers. I know, for example, that many of the ebooks I buy cost less under agency pricing and I also know that the prices of bestsellers that Amazon sold at $9.99 have risen under agency pricing. What I don't know is whether across the spectrum of agency-pricing publishers' ebooks, as opposed to niches, prices have risen, fallen, or stayed the same. I think this is important information to have so that we can intelligently determine whether agency pricing is consequential or inconsequential.

It seems fairly clear to me that opponents to agency pricing fall into a few groups. There is a small group of ebookers who are free-marketers and believe everything should be priced elastically, based on demand -- the libertarians of the marketplace who oppose agency pricing because it is controlled pricing. A second group of opponents are those whose reading now costs more because they only read/buy books that fall into the niches where agency pricing has caused prices to rise, such as the Amazon bestseller niche. It isn't so much that they are opposed to agency pricing as they are opposed to the increase in pricing and assume that Amazon would, if it could, charge a lot less for the books they want to read and buy in the absence of agency pricing. The third group assumes that because prices in one niche increased under agency pricing that all prices increased and thus are opposed to agency pricing because it caused a rising tide of prices.

These same arguments can be made when it comes to the devices: In the absence of Amazon price-fixing its Kindles, WalMart would sell the Kindles for less; there would be a Kindle price war between WalMart and Target; Staples would offer package deals; and so on. On this, I would think all of the anti-agency-pricing ebookers would unite to lambast the device price-fixing. But here silence reigns.

I'm sure someone will point out to me how different these products are; how one doesn't have to buy a Kindle to read an ebook bought from Amazon; how, instead, one could download a free app and read the ebook on one's computer or tablet. I'm sure the point will be made that you don't need the Kindle but you need the ebook in order to read it. It's all true, but doesn't change the fundamental points:

  1. There are no objective data to demonstrate whether agency pricing overall has raised, lowered, or done nothing to ebook prices except in niches.
  2. There are no objective data to demonstrate that in the absence of Amazon's device price-fixing that the Kindle would not be available for less, even free.
  3. Whether price-fixing is OK or not OK should not be dependant on who is doing the fixing; that is, OK if Amazon is doing it, not OK if the big publishers are doing it.

Never discussed are what obligations the price fixers have, if any, to the consumer. Do publishers have an obligation to sell ebooks at price points that consumers want? Does Amazon have an obligation to free-market its Kindles?

Isn't it interesting that without meeting ebooker demands as regards agency pricing the sales of agency-priced ebooks steadily grow? Isn't it interesting that the freedom Amazon wants to price ebooks as it wishes Amazon isn't willing to give to retailers of its Kindles? Isn't it interesting that ebookers see no conflict in their demand for the end of agency pricing and their willingness to accept Amazon's control of Kindle pricing?

We live in fascinating times!

15 Comments on Why Aren’t Kindles Free-Marketed?

  1. There could be a simple answer. I’ve been told that electronics like the Kindle are sold on a razor-thin margin. The retailers likely cannot afford to put them on sale.

  2. Electronics like the Playstation, X Box, I Pods and Ipads, and a variety of software and movies are contracted that in order to sell them, you have to agree to sell them at a certain price. They too don’t want competition and have one place dominate the market. So what companies do is offer gift cards with the purchase of items. Take a look at Target and Best Buys ads this Sunday. There usually are a few of these.

  3. When Steve Jobs wrote “Join us in creating a market at x and y price points” and sent that, secretly, to direct competitors, who then raised prices to get to those points, that was the illegal part. You can’t secretly negotiate price points with direct competitors.

    “Agency model” vs. “wholesale model” is entirely irrelevant. This exchange would have been illegal and resulted in higher prices to the consumer either way.

    “Agency Model” or resale price maintenance- banning third party retailers from varying the price of your products- is perfectly legal, the supreme court said so in a 2007 case.

    This is because it doesn’t automatically result in higher prices to the consumer. As long as somewhere on the value chain direct competitors are pitted against each other in free market competition, prices should come down. And in the case of e-books, the agency model theoretically SHOULD result in lower prices than the wholesale model because e-book publishers have higher margins than e-book retailers- there’s more fat to cut.

    The thing is, most people don’t appreciate the subtle difference between the agency model itself and the actual price fixing that took place. The baby gets thrown out with the bathwater.

    • One more little legal rub with the particular case-

      There’s a good chance Apple and the publishers may be able to defend themselves by using math to claim they simply don’t have market power. In anti-trust civil cases the DOJ needs to prove that the cartel or monopoly had sufficient influence over the market to set or influence prices across the board. Courts often look at mathematical market share to determine this.

      Monopoly power is assumed above 75% market share, and inconclusive between 50-75% market share. Apple had- and continues to have has- less than 10% market share of the ebook market, the defending publishers combined have less than 50%, probably less than 30%, divided five ways. The Herfindahl index for publishers is probably somewhere around 0.08- vs. 0.25, which is typically considered to be the threshold for cartel industries.

      The case would be much stronger had Random House been a co-defendant, as they have about 17% market share. I suppose the DOJ can argue that copyright law makes the publishing industry special and market share is irrelevant.

      This has nothing to do with the subject of this post, though.

      “Not guilty due to incompetence” probably won’t win you any points with the ebookers.

  4. While the products (ebooks vs. ereaders) are quite different I agree wholeheartedly with your article. I don’t think the point that electronics have a thin margin is the answer. Many products at WalMart have thin margins yet they still compete on prices. Especially bundling with other (high-margin) products makes sense even with the low margin.

    I think the key is that Amazon wants as much control over pricing on its platform as possible. It controls the prices of its own products, products from other suppliers it sells and even has a certain amount of control about the prices on the marketplace due to the most favoured nations clauses in the contracts with sellers. In order to achieve this any reasoning is valid. This is not necessarily evil. Virtually all listed companies have the goal to maximize shareholde value.

    Other opponents of agency pricing ally with Amazon on this cause because it helps them build a stronger opposition to the publishers. I doubt they are as passionate about pricing of electronics. They probably don’t care too much about Amazons reasons for opposing agency pricing. And why should they?

    It’s up to the press, bloggers, and publishers to point out flaws or inconsistencies in their argument.

  5. Rich Adin’s latest rant against Amazon was so strange that Nate had to hide it under his own name as author… hmmm…

  6. I think I’ll go elsewhere for the latest ebook news.

  7. I’m sorry that readers think it was a rant against Amazon. It was not. Amazon was simply an example.

    The question asked, which was the focus of the article, and not answered, except by Tim, is why do ebookers find price-fixing by publishers wrong but not price-fixing by the device sellers?

    Although I didn’t raise it in the article, it is worth noting that many authors favor agency pricing. With authors supportive of it, and ebookers always clamoring for the demise of the BPHs so that authors can get their fair share, one would think that ebookers would favor agency pricing as a way to insure that authors receive fair payment, especially as the authors support the method themselves.

    Finally, in Nate’s defense, these articles are not written by me for Nate’s blog. They are written for my own blog and those that appear on TDR are reblogged and do not represent Nate’s views. Nate reblogs them, I assume, so that his readers have an opportunity to read views other than those that parrot their own views. Whether you take that opportunity is up to you.

    • The economics of the ereader and ebook markets are not the same. If I want to read an author’s book I have to buy the copy put out by his publisher. Due to their monopoly I have no other choice because there is no substitute.

      But there are alternatives for ereaders. If I don’t like the price of one model I can always go get a different one and it will likely fill the same purpose. Even if you limit my choice to a single brand like Kindle or Nook there are multiple price points for multiple devices, some of which have the same abilities and fill the same needs. And if I don’t like the price of the new or refurb ereaders I can always buy a used one – much like I used to buy paperback books.

      • Sorry, Nate, but that doesn’t address the issue. Your argument is basically that 1 book is not interchangeable for another but 1 ereader is interchangeable for another. Yet neither is true. The point is that if you want the cheapest Kindle available you will pay the same price no matter the retailer; similarly, under agency pricing, if you want Stephen King’s The Stand, you will pay the same price no matter the retailer.

        If you want a color reader tablet, you can buy a Nook or a Fire. If price is the only criterion then you choose between the two but you pay the same price for your choice regardless of whether you buy it at Amazon or at Target. If price is not the criterion, then you choose based on specs, yet still pay the same price regardless of retailer. Why? If you decide that The Stand is too pricey, you don’t buy it and you look for a substitute book that is priced at the the level you will pay. No different than buying a device.

        Ultimately, if price-fixing is unacceptable for books it should also be unacceptable for the devices needed to read the books, yet most ebookers do not view device price-fixing as problematic.

        • “The point is that if you want the cheapest Kindle available you will pay the same price no matter the retailer; similarly, under agency pricing, if you want Stephen King’s The Stand, you will pay the same price no matter the retailer.”

          Given the used and refurb markets for ereaders, the first part of your statement is not true. Unlike ebooks, ereaders have a first-sale doctrine. This makes it possible for used products to compete with new. For any given product there are several price points, not one. The ebook market lacks the price competition, and that’s a fundamental difference.

          And I think you underestimate the interchangeability of ereaders. I’m going to let someone who knows more about (big E) economics fill in the details, but most ereaders fill the same purpose so they are interchangeable. I believe the correct term is that they lack exclusivity (?).

          eBooks have a higher degree of exclusivity because if I want a Steven King novel then the latest Harry Potter won’t cut it. Even an earlier King novel might not cut it. What’s more, the ebook market is also artificially limited to an even greater degree thanks to DRM. The less tech savvy are limited to just the ebookstore that came with their device (Kindle, Nook, Kobo), a fact which is especially galling considering that we remember being able to buy paper books from everywhere. That difference grates on some of us.

          At least under the old system Amazon tried to attract readers by offering the best prices, which forced everyone else to do the same. Now they cannot.

  8. I am libertarian and would prefer elastic pricing on the kindle, and for that matter all electronic devices. That being said, the outrage the populace has is not over agency model pricing but collusion to set those prices. If Amazon Kindle at one point had elastic pricing and then at some point amazon ceo sat down with the ceos of walmart, bestbuy, target etc and hammered out a deal to fix the price of the kindle then people would be just as outraged and the doj would be suing them.

    But that’s not what happened.

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