Sunday, August 10, 2014

The Hachette-Amazon Battle: A Free Market Perspective

By Robert Wenzel

There is a  battle going on between Amazon and the book publisher Hachette.

Hachette is refusing Amazon's request to set most e-book prices at $9.99, rather than $12.99 or $14.99.

 At $9.99, Amazon says an e-book sells nearly twice as well. The company says that the lower price point results in a 16 percent increase in revenue:
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 $1,738,00.
As a result of Hachette's refusal to lower ebook prices, Amazon has taken a number of measures to slow sales of print copies of books published by Hachette. It has suspended pre-orders of new Hachette titles, raised prices on hard cover books and stopped re-stocking existing ones.

From am outsiders perspective, if Amazon's numbers are correct, then it would seem to make sense for Hachette to lower its prices. Amazon points out that:
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. 
Thus, all sales revenue pretty much falls to the bottom line, which can then be divvied up. More revenue appears in this case to mean more profit. If this is the extent of the battle, then Hachette appears to be pretty goofy not to go along with Amazon. That said, it is only a little less goofy for Amazon to escalate and slow sales of print copies of Hachette books.

There may be more to the matter, though. It seems that Amazon may be attempting, or did attempt at one time, to increase its take from ebook sales from 30% to 50%, from Hachette. If this is the case, then there is more meat to the problem. As a first step in an analysis of the situation, it comes down to who is more responsible for the sale of books in a certain network. Is it the author and publisher or the distribution network?

From a free market perspective that's simply a battle that has to be fought out. That publishers, such as Hachette, are negotiating at all with Amazon means they consider Amazon an important outlet for their books. Otherwise, they wouldn't negotiate with Amazon in the first place and just forget about that distribution network.

And, of course, Amazon is a powerful distribution network. But, it is unclear how powerful Amazon's hand is here. If Amazon really believed it had the complete upper-hand, it would simply tell Hachette, "We are not going to offer your ebooks unless they are priced at $9.99 or below and we are going to take 50% of revenues. Take it or leave it."

That Amazon isn't doing this, suggests that, to some degree, people come to Amazon because it will have a full line of all books and if they don't offer Hachette books, then those customers will go somewhere else, at least for Hachette ebooks. This is something that Amazon might fear. Does Amazon really not want to sell Hachette books and thus drive people to Barnes & Noble?

In other words, we have something of a standoff. Not surprisingly, Murray Rothbard, in a way touched on the situation here. In Man, Economy and State, Rothbard discussed such situations relative to direct exchange of products:
[T]he seller of a product tries to obtain the highest price, while the buyer tires to secure the lowest price. We cannot predict the point that the two will agree on...That depends on the data of each particular case, on the specific conditions prevailing. In particular, it will depend on the bargaining skill of the two individuals.
This is a fascinating battle to watch, but it is unclear who will come out on top. If it was clear as to the outcome, one side would have buckled already.

Robert Wenzel is Editor & Publisher of and author of The Fed Flunks: My Speech at the New York Federal Reserve Bank.


  1. I disagree with Rothbard.
    The seller of a product tries to obtain the highest profit, not the highest price. There is a difference.

    1. When exactly would the sale of a produced product result in a higher profit if the price is lower?

    2. When the lower price results in increased volume. Just like the Amazon example. Maximization of profit is the goal. There are many examples where lowering price results in increased volume thereby increasing profits.

    3. This doesn't apply either to Amazon-Hachette or Rothbard. Rothbard is discussing an individual sale, In Amazon-Hachette, the discussion is about a percentage of given sales, regardless of the final sales price. The higher the percentage that Amazon gets, regardless of the price, the higher the profit. Setting the retail price is a separate question from the problem at hand, the split between Amazon-Hachette. Thus, the problem is similar to Rothbard's single product example.

    4. I don't know. It seems to me that Amazon is setting the retail price at 9.99 in order to increase profits regardless of whether they get 30% or 50%.
      "At $9.99, Amazon says an ebook sells nearly twice as well".
      It seems to me the primary discussion was about the retail sales price.

    5. Bob, you are right. I re-read your post and now agree that it is a bargaining skills problem. Sorry to waist your time.

  2. What is the free market perspective on Amazon's partnering with the CIA to build a datacenter exclusively for the intelligence community? Funny, I haven't even seen this mentioned on any of the 'anti-state' blogs. Do you think that the fact that they are nearly all Amazon affiliates has anything to do with that?

  3. Vox Day has blogged on this subject many times over the past few months.

    He just posted something today on the subject:

    He is a published author and is now involved in a new publishing effort himself (Castalia House) so he understands all sides of the issue: Amazon's, authors', and Big Five publishers.