Econ 101 and tech commentators, part 1 (Amazon monopoly edition)

As an undergraduate one of my highly science oriented friends explained how frustrated he was with Econ 101 because there were so many places in which calculus so obviously belonged but couldn't be used because the class was not geared towards that kind of audience.  

I feel the same way when John Gruber and Marco Arment (or any of a large number of tech commentators) discuss Amazon and ebook "monopolization."  There are gaping holes in the discussion where Econ 101 belongs but is absent.  

Gruber and Marco take it for granted that Amazon's now defunct $9.99 pricing for almost all (popular) Kindle books, even if Amazon itself paid $12.50 to the publisher for the book, was a "textbook example of predatory pricing," with the ultimate goal, presumably, being Amazon left as the only ebook provider getting to raise prices to monopoly levels.  

Missing is any consideration of what it takes to enforce a monopoly.  Anyone arguing that Amazon is capable of establishing a long standing monopoly by driving out competitors with below cost prices has to explain how Amazon could thwart new entrants after raising prices to monopoly levels.  It's literally impossible to say anything useful without first addressing this issue.  Marco makes some hand-waving references to the need to buy a dedicated device (i.e., the Kindle), but in a world awash in iPads, Nexii 7's, etc, etc, that's not a very compelling argument.

I have no special insight into Jeff Bezos' psyche.  Perhaps he is trying to create a monopoly by driving all competitors out with temporary below cost pricing, although I suspect he's much too smart for that.  Nonetheless, from a public policy perspective, the relevant question isn't what he is trying to do, but what he can do.  Creating a long-term monopoly in ebook sales just isn't in his arsenal.  

FWIW, I've always assumed that Amazon's strategy is some mixture of three things:

1)  Establish ebooks in the consumer mind as a standard mechanism for buying books.  Before the fanfare surrounding the Kindle (and, later, the iPad), ebooks were a decided niche product.  Now they are a consumer standard.  It seems reasonable to believe that it is worth it to Amazon to "pay" readers in the form of subsidized book purchases for a time to help develop that market.  

2)  Establish Amazon as the first place a book reader would think to go to to buy ebooks.  

3)  Illustrate to the book publishers that lower revenue from lower book prices would be more than offset by greatly increased book sales.  For me, anyway, the $9.99 price point was just on the right side of the impulse purchase line to make me buy on a whim.  But I tend to buy a lot of books.  

Personally I think that book publishers are too frightened of innovation and don't want to be shaken from their comfortable "release a cheap, paperback edition after all the highly motivated buyers already shelled out for the hardback" model.  I think Bezos is/was trying to slap them in the face to recognize a new, more profitable, reality…to be sure, one that also includes lower wholesale prices to Amazon, but still involves more income to book publishers through much higher book sales.  (In other words, I think book publishers are mistaken about what is in their own best interests.  No, I don't think government policy should be made on this basis.)  

Of course, those basic facts can be fit into two slightly different stories, each of which attempts to answer the biggest question that must be addressed:  Why would publishers object so strenuously to a reseller selling books for less than the price the resellers have paid for those books?  Normally one would expect the publishers to sit smugly in the corner wondering how they got so lucky.  


Story 1)  Publishers currently release hardback editions in advance of paperback editions to gain added revenue from buyers willing to pay extra for the benefit of reading the book now rather than 6 months from now.  This is an important aspect of the book publishing business model that ebooks disrupt.  I imagine publishers are struggling to figure out how to fit ebooks into their decades old hardback-paperback release schedule.  Amazon seems to have one thought about how they should fit in, and that thought seems to come pretty close to destroying the model entirely.  I don't know how the publishers think that ebooks should fit in.  I suspect they still don't know themselves, but I also suspect that they would like to make that choice themselves, rather than cede the choice to Amazon.  


Story 2)  The ubiquitous monopsony story.  Amazon becomes by far that largest seller of ebooks, which gives it some degree of monopsony power over the publishers.  One can easily imagine publishers being extremely concerned about this, but is this a bad thing for consumers? 

Amazon's hypothetical monopsony power would exist only because the publishers have some monopoly power themselves.  Amazon can, in this story, be seen as form of a consumer cartel negotiating better prices from publishers, which sounds good for consumers.  

But perhaps not.  Publishers have their monopoly power because of copyrights granted by the government.  By negotiating away some of the monopoly value of the copyright, this "consumer cartel" diminishes the value of the copyright, thus, reducing the production of books.  


I doubt that the government has the knowledge necessary to determine which of these most accurately describes reality, nor, in the case of the monopsony story, that it has the ability to determine whether Amazon monopsony power over publishers is good or bad for consumers.  So, I think the government should just leave it alone to play out on it's own.