Loss Leaders, Predatory Pricing, and Why Amazon Isn’t the Defendant Today
So Apple finally lost the price fixing lawsuit today, an event that surprised almost no one. What with Apple’s 5 co-conspirators having already settled, a settlement already in place in Europe, and the solid case presented by the DOJ, there was little chance that Apple was going to win.
But there is one question that seems to still be circulating today. A lot of people, including one in my comment section, wonder why Amazon was not on trial today. After all, Amazon’s pricing policy is clear evidence (in some minds, at least) of their nefarious plans to destroy their competition.
Today I thought I would take some time and point out the difference between what Amazon’s actual pricing policies and what many assume to be those policies.
First, a couple definitions.
- A loss leader, or simply a leader, is a product sold at a low price, at or below its market cost to stimulate other sales of more profitable goods or services. Using a loss leader, often a very popular good or service, is a type of sales promotion—a marketing strategy that focuses on pricing strategy.
- The practice of selling a product at low prices in order to drive competitors out, discipline them, weaken them for possible mergers, and/or to prevent firms from entering the market. It is an expensive strategy. In the United States there is no legal (statutory) definition of predatory pricing, but pricing below marginal cost (the Areeda-Turner test) has been used by the Supreme Court in 1993 as a criterion for pricing that is predatory.
The thing is, many people are pointing at Amazon offering loss leaders and proclaiming that Amazon is engaging in predatory pricing. I have lost count of the number of times that I have heard or read that Amazon is trying to drive their competition out of the ebook market, with the subsequent goal of raising ebook prices.
There are several problems with that claim, the first of which is that there is absolutely no evidence to support the allegation. In fact, if this really were Amazon’s goal then for the past 5 plus years they failed utterly to accomplish it.
Rather than see competitors abandon the ebook market, we have seen many, many companies get into ebooks since Amazon launched the Kindle Store in November 2007. Amazon has largely pursued the same ebook pricing policy since they opened the Kindle Store (with the exclusion of agency ebooks), but in spite of Amazon’s predations they now have more competitors than before, including:
- Baker & Taylor
Update: A reader reminded me that Samsung, Sony, Apple, and Google are not in the ebook market to make money from ebooks but to support their other businesses. I have said that before, but I’m bringing it up again because these are competitors that Amazon won’t be able to drive out of the ebook market. Here is why.
Another issue with the claim that Amazon is engaging in predatory pricing is that Amazon is continuing to pass up an opportunity to sell Epub ebooks. Surely if Amazon wanted to drive out the competition then they would pursue the potential customers that own non-Kindle ereaders, right?
Funny how that hasn’t happened in the 3 years since Amazon stopped trying to turn a profit on hardware, isn’t it?
But never mind the evidence of your own eyes; let’s instead look at what the Dept of Justice concluded after investigating Amazon, Apple, and the price fixing conspiracy.
As you might recall, last September Judge Cote issued a ruling that signed off on the proposed settlement between 3 of the conspiring publishers and the DOJ. In that ruling (PDF) Judge Cote dismissed the many claims made by publishers and others that Amazon was engaging in predatory pricing:
Second, the Complaint asserts that Amazon’s e-books business was “consistently profitable.” Moreover, to hold a competitor liable for predatory pricing under the Sherman Act, one must prove more than simply pricing “below an appropriate measure of . . . costs.” There must also be a “dangerous probability” that the alleged predator will “recoup its investment in below-cost prices” in the future. None of the comments demonstrate that either condition for predatory pricing by Amazon existed or will likely exist. Indeed, while the comments complain that Amazon’s $9.99 price for newly-released and bestselling e-books was “predatory,” none of them attempts to show that Amazon’s e-book prices as a whole were below its marginal costs.
The tl;dr version is that Amazon has always made at least some money on ebooks, and that means there’s no proof that Amazon’s pricing policies meet the definition of predatory.
And that, my dear, is the short answer for why Amazon isn’t on trial.
image by edenpictures