Paul Krugman has an op-ed today where he argues Amazon is abusing its power:
Which brings us back to the key question. Don’t tell me that Amazon is giving consumers what they want, or that it has earned its position. What matters is whether it has too much power, and is abusing that power. Well, it does, and it is.
Amazon is attempting to negotiate lower prices from the publisher Hachette and is slowing down sales of Hachette books on amazon.com in an attempt to force their hand. This is the main evidence.
But this kind of bargaining leads to lower prices for consumers not higher. Hence, from the perspective of welfare it is actually good. It is akin to the argument for reducing double marginalization via vertical integration. Double marginalization occurs because the primary producer (here Hachette) and the retailer (here Amazon) BOTH add a margin on to costs to maximize profits. Welfare would be higher and prices lower if they vertically integrated so some externalities are internalized. In fact, here is Krugman in 2000 explaining why breaking up Microsoft into Windows and Office is a bad idea:
In the last few days the Justice Department, outraged by the lack of contrition among Microsoft executives, has apparently decided to seek a ”horizontal” breakup of the software company — that is, to split it into one company that sells the Windows operating system (the upstream castle) and another that sells Microsoft Office and other applications (the downstream castle)….
even if you believe that Bill Gates has broken the law, you don’t want to impose a punishment that hurts the general public. And even strong critics of Microsoft have worried that a horizontal breakup would have a perverse effect: the now ”naked” operating-system company would abandon its traditional pricing restraint and use its still formidable monopoly power to charge much more. And at the same time applications software that now comes free would also start to carry hefty price tags.
As we know from ECON 101, integration is just one way to internalize externalities. Another would be for the retailer to negotiate lower prices from the producer so they are closer to production costs. Another would be for the producer to force the retailer to charge a lower margin. As both sides try to negotiate such deals which are good for them but bad for the other side, there is a war of attrition as we see currently. Sure Amazon’s tactics may be a bit crude but this is the typical kind of negotiation that lowers input costs and eventually prices. Hachette’s tactics are harder to observe but I would bet they are not so different.
(Update Oct 21: Spelled out some more details!)
Cheap Talk 
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October 20, 2014 at 11:25 am
Jared
Krugman does respond to this point:
So far Amazon has not tried to exploit consumers. In fact, it has systematically kept prices low, to reinforce its dominance.
So the idea is that once Amazon fully establishes dominance and pushes all the publishers out of business and incorporates their business model, then it can raise prices and charge whatever it wants for books because it has monopoly power. Whether we should preemptively prevent that behavior is not clear to me, but the implications are worrisome.
October 21, 2014 at 8:53 am
Tim
You are dead on – why should underhanded, unethical conduct be expected to suddenly stop once this alleged triumph for customer pricing is achieved??? Amazon is like any other predatory corporation – they want profits.
And this is where you needed to add one more item to the picture. There are two sides plus the publishers. Once the publishers are out of the way, it’s, for books, only Amazon between the authors and the consumers.
Whoever is naive enough to think that the authors’ cuts will not drop through the floor and consumer prices will increase is in for a[nother] rude awakening. Blind faith is always rewarded – in very bad ways.
October 20, 2014 at 11:50 am
Israel
Not sure, but I’d say that what Krugman is saying is that the Hachette case is worrying because of what it signals regarding Amazon’s behavior in the future
October 20, 2014 at 5:16 pm
For What It's Worth | Amazon and monopoly: encore (updated)
[…] UPDATE: Cheap Talk responds to Krugman, citing Krugman’s 2000 argument for why breaking up Microsoft (the […]
October 21, 2014 at 4:13 am
charles stahl
Krugman is talking about the abuse of monopsony power, not monopoly power.
October 21, 2014 at 8:04 am
Sandeep Baliga
My point: “abuse” of monopsony power leads to lower prices and hence is not abuse.
October 21, 2014 at 9:32 am
Jeff
Traditional publishers have had their time in the sun, and now it’s time for the new paradigm to overtake. I suppose greed overtaking Amazon is always a possibility, but I don’t think that’s what they’re about, with Bezos. Their model seems to be “take only as much at the margins to reinvest, and make it up in huge volume”. IOW, in the medium run Amazon and their customers’ interests will remain completely aligned. IMO of course.
October 21, 2014 at 9:48 am
codingmonkey
Lower prices absolves all abuses of power? I am not sure this argument has been well thought out.
October 22, 2014 at 8:09 am
DRDR
How do you know Amazon is lowering final good prices for consumers compared to the counterfactual in which the retail market would be more competitive?
You seem to imply Amazon’s market power is moving us toward the vertical integrated firm where there’s a single markup instead of a double markup. I have no idea why this would be optimal behavior from Amazon.
But a downstream monopolist could also replicate the integrated monopolist outcome by charging a two-part tariff that induces the monopoly quantity downstream and sets the fee to extract all the profits from the upstream firms.
Why is Amazon + Hachette more like he vertically integrated outcome rather than the monopolist outcome? Obviously the monopolist outcome is optimal for Amazon if this a static model and this is Amazon’s only market.
October 22, 2014 at 8:27 am
DRDR
Ok, that last post was incoherent — yes, the integrated monopolist is better than the double-markup outcome. But the relevant comparison is whether we’re better off with a more competitive retail market or not, not whether the integrated monopolist outcome is better than the double margin outcome.
October 22, 2014 at 8:39 am
DRDR
To clarify further, my initial comment was incoherent because the monopolist outcome is the integrated firm outcome. But the question in the first paragraph is still the relevant question and criticism. And the downstream firm replicates the integrated monopolist outcome with the two-part tariff I described in the third paragraph.
October 22, 2014 at 11:38 am
DRDR
Here’s an even simpler argument against the post — what if the upstream publishing market is approximately perfectly competitive? Then Amazon is approximately a textbook monopsonist leading to lower quantities of production and consumption, and higher prices, reducing welfare for consumers and publishers, and clearly a downstream oligopoly yields higher welfare than a downstream monopoly.
To address the two most obvious counterarguments (1) Just because there is margin-squeezing doesn’t imply that the upstream industry is not perfectly competitive — the “profits” being squeezed could be rents accruing to capital of the publishers. (2) We don’t really know that Amazon is lowering prices relative to the counterfactual of a more competitive retail market, and the observation that they’re lowering prices of the publishers is entirely consistent with the standard monopsony model in which the retail price would be above the first-best.
October 22, 2014 at 10:53 pm
kaleberg
As far as I can tell, this is a business dispute about pricing. Hachette has been granted a government enforced monopoly on selling certain works, and it wants to maximize its monopoly power, even if it runs afoul of the law. It has been slapped down at least once. Hachette is not the only publisher trying to maximize the returns on its monopoly, but it is the only one currently unable to come to terms with Amazon.
Is there any evidence that Amazon is offering Hachette less favorable terms than it has offered any other publisher? I haven’t even heard anyone claim this. Simon & Schuster recently reached a comprehensive agreement with Amazon. Clearly it is not impossible to do business with the firm.
Amazon may control a huge sector of the buying market, but Amazon’s problem is that it can be easily replaced. Worse, its own success has created the infrastructure by which it can be easily replaced. It has excellent logistics, but logistics are easy to copy. Look how quickly the Post Office, DHL and UPS copied Federal Express’s model.
It wouldn’t be that hard to bite off pieces of Amazon’s market if Amazon stops providing overall good prices and prompt, predictable service. Hachette could grab a piece of this if it wanted to. In fact, one of the big impediments to electronic book competition with Amazon is the publishers’ own insistence on DRM, but that’s another story. (Why shouldn’t my local indie bookstore be able to sell me electronic books?)
Meanwhile Amazon is experimenting with integration. It is already a rather indiscriminate indie publisher, but it would make a good platform for any number of more serious, more discriminating publishers.
November 10, 2014 at 2:50 pm
Yush
Its a simple case of value capture for the supplier vs the retailer. The retailer can use/has used the leverage that obtaining a cheaper input from supplier means that the end price to the consumer is lower- thereby the consumer is able to capture more value based on delta between the price and their willingness to pay. The supplier is doing what it has to – to maximize the selling price for its product to the retailer…..
Now if Hachette can diversify its retailer portfolio then perhaps they can claw back some leverage here – but to me Amazon is the prime provider for e-books and at the e-book prices that it offers- along with its willingness to protect the market cap at the expense of its own revenues- Amazon will be more likely to end up with relatively favorable terms
November 13, 2014 at 12:20 am
Augustin
Part of the argument against Amazon is that it reduces the set of books which are published. These all, I think, come down to the fixed costs of creating books. If this is so, then the welfare effects of lower prices are not as evident as you claim
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