Explaining why authors should support Amazon in its dispute against Hachette, Amazon says:

A key objective is lower e-book prices. Many e-books are being released at $14.99 and even $19.99. That is unjustifiably high for an e-book. With an e-book, there’s no printing, no over-printing, no need to forecast, no returns, no lost sales due to out-of-stock, no warehousing costs, no transportation costs, and there is no secondary market — e-books cannot be resold as used books. E-books can be and should be less expensive.

It’s also important to understand that e-books are highly price-elastic. This means that when the price goes up, customers buy much less. We’ve quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000.

The important thing to note here is that at the lower price, total revenue increases 16%. This is good for all the parties involved:

* The customer is paying 33% less.

* The author is getting a royalty check 16% larger and being read by an audience that’s 74% larger. And that 74% increase in copies sold makes it much more likely that the title will make it onto the national bestseller lists. (Any author who’s trying to get on one of the national bestseller lists should insist to their publisher that their e-book be priced at $9.99 or lower.)

* Likewise, the higher total revenue generated at $9.99 is also good for the publisher and the retailer. At $9.99, even though the customer is paying less, the total pie is bigger and there is more to share amongst the parties.

Thanks Amazon for giving me a great example for class. But no thanks for really solving the puzzle about the terms of your dispute with Hachette because, as you say above, if you are right, the drop in price is “good for the publisher”. Hachette should be into your strategy too. Why aren’t they? Some say that the drop in e-book prices cannibalizes hardcover sales so you are not telling the whole story. This is true but if try to expand your story we do not reach an Aha moment because Amazon also sells hardcovers as well as e-books. Amazon should also care about cannibalizing hardcover sales just like Hachette. So they should have similar interests when it comes to e-book prices even taking hardcover sales into account.

So, is Hachette, a French company, confused because in France they put price on the x-axis and quantity on the y-axis so marginal revenue is upside down? Surely Jean Tirole can sort that out for you.

I suppose there is some long run issue. If hardcovers die off as e-books become cheap, why will authors need Hachette? Amazon can just cut out the middleman and publish authors directly. Would be great of some journalist can get an answer out of Hachette not the authors whom they publish.