Prima Facie Evidence of a Lack of Competition:the case of e-books

Have you noticed how expensive e-books are? There might be a good reason, according to the US Department of Justice: collusion to fix prices (via MA).

Penguin has settled with the Department of Justice in the e-book price-fixing case brought against Apple and five publishers this year. Three of the other publishers involved: Hachette, Simon & Schuster and HarperCollins — have already agreed to settle.

Penguin and Macmillan were holdouts, insisting that the case had no grounds. "We did not collude," said Macmillan CEO John Sargent in April, when the DOJ brought its case.

They may not have colluded, and unless there is "smoking gun"-type evidence, we may never know for sure. However we do know from all our theoretical models that if the e-book industry were competitive, prices would tend to reflect the costs of publication. But when e-book prices exceed the prices of paperbacks for the same titles, and when paperbacks are more costly to produce, it's an indication that competition is not driving prices down to even approximately reflect publication costs. 

Higher prices for e-books probably reflects price discrimination across different consumers with different price elasticities of demand. But that type of price discrimination can occur only when there is a lack of competition.

Comments

[Dan Maas]

Different book titles aren't perfect substitutes for each other, so I don't see how competition will necessarily drive price all the way down to marginal cost. Each publisher has a monopoly on its own library of titles. Or is the argument about this "agency pricing" model more subtle than that?

[EclectEcon]

But if there are four or five sellers of the same title [e.g. Amazon, Kobo, Barnes & Noble, iBooks, Stanza, Google, etc.], it would generally be more difficult for them ALL to practice this type of price discrimination without some sort of agreement. One of them or a newcomer would have an incentive to shade the price a bit on ebooks, especially since the marginal costs of producing and selling one more ebook must be a dollar or so less than for ebooks.

I'm not saying prices would be driven down to marginal costs. But I would expect the prices to tend toward reflecting cost differences.