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.
6 comments
Comments feed for this article
August 2, 2014 at 1:18 pm
Andy
It is incorrect that the supplier would always welcome a 16% revenue increase. If costs go up by more than 16% the supplier will not prefer the lower price. In the example given, if the marginal cost is constant then total cost would be going up 74%. A more realistic estimate might be a third of that, 25%, which would still place the supplier at a disadvantage at the lower price.
August 4, 2014 at 1:38 pm
Sandeep Baliga
MC=0 for e-books
August 10, 2014 at 5:44 pm
Sean
Surely Amazon’s analysis is partial equilibrium: Hold the price of other books constant, and a drop in price of one book from $15 to $10 increases sales by a factor of 1.74. People are (apparently) substituting to relatively cheaper books. But if all books drop to $10, sales will increase by a factor far less than 1.74. Amazon wants this, because it wants to undercut everyone and continue towards becoming the world’s monopoly retailer, current profits be damned. But for Hachette, this is a big net loser, thus the fight.
August 11, 2014 at 2:46 pm
Liad Wagman
Amazon’s revenue channels go way beyond a portion of the price of an e-book. It wants its ecosystem to thrive, including website, Kindles (hardware and software), tablets, and phones. Each additional e-book it sells helps boost a user’s utility from these platforms. In turn, users shop more on Amazon, particularly as these platforms nearly all place Amazon shopping as one of their core experiences. The more e-books consumers buy, and the more consumers transition from hardcovers to e-books, the more consumers benefit from Amazon’s platforms, and the more Amazon ultimately ends up selling. If it were up to Amazon, the price of an e-book would be even lower (and it is in fact lower via various Amazon KDP programs).
October 9, 2014 at 1:38 am
kamo
I am caught between the two veiws on one hand it is cheaper to supply e-books compared to printed books which in turn should make e-books cheaper, however most people still rely on prints and many Co. will go out of business if demand for their printed books declines
June 25, 2022 at 4:03 am
Lucas M
Great blog youu have