If Amazon drives competitors out of business, will it raise its prices?

One oft-expressed fear many hold about Amazon is that if it manages to drive other companies out of business with its “predatory” loss leader pricing on new e-books, it will then raise its prices, drop its royalties, insist on lower wholesale prices from publishers, and stick it to consumers, authors, and publishers all at once. But is this really likely to happen? According to Tim Worstall, a Senior Fellow at the Adam Smith Institute in London, basic economics says no.

The thing about Amazon is that absolutely nothing prevents new competitors from entering the market, now or in the future. Unlike with the post office or utilities, there is no law preventing someone from starting their own book-and-e-bookstore business and out-Amazoning Amazon. If Amazon raises its prices or lowers its rates, there’s room for someone else to come in with better ones. So even if Amazon does drive all its competitors out of business, it still has incentive to keep prices low and rates high because it’s still competing with any book business that hasn’t entered the market yet.

As an example, imagine a Bezosian fantasy in which Amazon did in fact manage to close down every bookshop around the world and drive out of business every competing online retailer. Jeff Bezos honks with glee as his plans come to fruition and starts to demand vast margins from the publishers simply because he can. Is there any shortage of capital for someone to try and enter that business? No method by which someone could lash together a website and hire UPS to do the deliveries? Imagine that Amazon starts trying to charge 70 percent margins on books: Seriously, how long do you think it would be before there are a half a dozen people clutching VC checks with the aim of gnawing on some of that monopoly profit?

Because people can still enter the business, Bezos cannot exploit that monopoly that he’s created. He’s got to continue to act as if there will be competition to ensure there isn’t any. That is, you can’t exploit a contestable monopoly.

This seems like a compelling argument to me. Given how much sales fell off after the publishers made Amazon raise its prices, it seems pretty clear Amazon knows what side its bread is buttered on. Sooner or later, we’ll see what happens.

5 Comments on If Amazon drives competitors out of business, will it raise its prices?

  1. Long term this may be true, but short term, it will wipe out publishers and self-published authors by the score. This has happened every time Amazon or another major distributor like Ingram has made a policy shift like this which cuts into the profit of the suppliers.

    Traditional publishers survive on very short margins, and the smaller traditional publishers will be the worst hit as they always are in situations like this. Many won’t be able to sustain profit and will disappear.

    The hobbyist self-pubbed who are in it for the glory/ego boost of being read will stay, but the pro writers who must make some profit to justify remaining in writing will leave so the quality of the self-pubbed books available will fall even further than it is now.

    Readers are the poorer when things like this happens so I doubt any of us will be happy with the results.

  2. Actually this analysis is not exactly true. Even where barriers to entry are low, if Amazon has the capability to quickly reduce its prices nobody will ever enter because they won’t make money for more than a few hours or days. Price comparison websites will enforce this as Amazon can just ensure it has the lowest prices in real time.

    Basically Amazon can keep its prices lower longer than any potential entrant can stay solvent. Therefore no competitor will enter.

  3. The online shopping industry is just as fickle as the social network industry. Here’s a comparison –

    Facebook comes in and drives everyone out. People are happy with the service and enjoy it. Soon, FB starts changing things. People grumble but keep using it, to this day, privacy concerns be damned. A VC comes along and throws some money at Instagram, Glancee, Onavo, WhatsApp and Branch. Hey, it’s a low barrier to entry, high returns market, so why not? Soon, the service makes waves and gets bought by Facebook.

    In the above, did anyone question monopoly? No. Did anyone ask about competition and whether Facebook can be easily brought down? No.

    You see, when a company gets that big, it does everything to beat the competition, or to join them. When Amazon is done with eBook competitors, any new ones that come along will just get bought, if not for any other reason than the greed of the VCs to make a quick buck.

    So when basic economics says that Amazon will not raise prices (and Facebook will not invade our privacy), basic economics is being exactly that, basic.

  4. What you’re talking about as a hypothetical and saying may not happen already exists and already is happening. Amazon is already getting away with paying authors substantially less with their price-dependent royalties and hugely inflated download fees. Compare it with Apple at various price levels.

    99 Cents (a common price)
    Amazon: 35 cents
    Apple: 70 cents
    Twice the Gross Profit

    $2.99 to $9.99 (assume $4.99 and a 4 meg book file)
    Amazon: $3.50-$0.60 = $2.90
    Apple: $3.50
    20% More Gross Profit

    $14.99 (bestselling novel)
    Amazon: $5.25
    Apple: $10.50
    Twice the Gross Profit

    $49.99 (college textbook)
    Amazon: $17.50
    Apple: $35
    Twice the Gross Profit

    Notice several things in particular:

    1. Amazon’s market share is so large, despite paying 20-100% less in royalties authors still feel they must distribute through Amazon. That’s market lock-in. If you’re an author, every time you get a money transfer from Amazon think: “If Amazon wasn’t such a jerk, I’d be getting at least 50% more than that.”

    2. In each of those situations, Amazon can cut prices substantially and still earn the same profit as Apple. It could discount that $49.99 textbook to $32.50 and still make the same profit as Apple makes selling at $49.99. Remember, when it comes to ebooks, Amazon is not being generous with customers. They’re simply using their market dominance to rip off authors and publishers.

    3. Forget that nonsense about new competitors arising. At present Amazon probably using those high profits to subsidize the cost of Kindles in order to destroy the Nook and all but one other competitor. If a retailer as large as B&N can’t afford that competition. Two Guys in a Garage will never be able to do so. Once these ereader competitors are gone, they’ll be gone for good. Amazon’s hardware lock-in will be almost complete.

    4. That leaves only Apple and guess who it is who put the DOJ onto suing Apple? A law firm that happens to have its offices just a few blocks away from Amazon’s corporate headquarters. Suspicious! You ought to be.

    Forget abstract economic theories, whether from Adam Smith or anyone else. The present is the best guide to the future. If you want to know what Amazon will do in the future, look at what it’s doing now. Amazon is ripping off authors and using that money to destroy its ebook reader competitors. It will continue to rip authors off even when those competitors are dust. The best guess is that it’ll simply use that money for other purposes, probably to go after independent online ebook retailers.

    And yes, Two Guys in a Garage can set up a file server to sell your ebooks online. The barriers to entry aren’t that high there. But the barriers to being an effective competitor remain as high as ever. Do you really want to be dependent for your sales on readers locating Two Guys obscure website when most readers think that, “if it’s not on Amazon, it doesn’t really exist.” And would you slash your royalties down to what Amazon is paying at that time (probably 35% at all prices), in the vain hope that’ll let Two Guys take on Amazon.

    In that sort of market, you’ll find yourself getting very hungry.

    The only real hope for authors is educate their readers and:

    1. Steer as many of their readers as possible to download sites such as Smashwords, which pay 85% royalties. At some prices for every $35 Amazon pays you, Smashwords will pay you $85.

    2. Steer as many of their other readers as they can to alternatives such as Apple and Kobo.

    3. Don’t be ashamed to stress to your fans that, at the same retail price, you’ll earn more at websites other than Amaaon and that greater income means you’ll have more time for follow-up books.

    J. R. R. Tolkien did much the same in the 1960s when a loophole in U.S. copyright law allowed a publisher to release bootleg copies of The Lord of the Rings. He spread the word to his American fans and their response brought that publisher into line.

    The same change of mind could happen with Amazon. It’s far too large to go away. But it can be forced to treat authors fairly and to pay market-rates. And if that happens, market competition will stay alive and healthy.

  5. “J. R. R. Tolkien did much the same in the 1960s when a loophole in U.S. copyright law allowed a publisher to release bootleg copies of The Lord of the Rings. He spread the word to his American fans and their response brought that publisher into line.”

    Did not know that. Wow. Yup, that’s totally needed for Amazon. Self-publishing and all are great incentives, but authors shouldn’t get ripped off by the market leader.

    Time to investigate if that PandoDaily writer was paid by Apple for the article.

The TeleRead community values your civil and thoughtful comments. We use a cache, so expect a delay. Problems? E-mail newteleread@gmail.com.

wordpress analytics