I knew I’d use my economics studies at some point: My Perspective on Paul Krugman’s Article and Amazon’s Announcement

Today I read this article by Paul Krugman. He’s one of the giants in Economics. One of the rock-stars, so to speak. He won the Nobel Prize in Economics in 2008.

And, believe it or not, economics still interests me, so when his name popped up on my Facebook Timeline and I saw that he’d written about the whole Amazon/Hachette dispute, I immediately clicked over to read. 
My response can be summed up as follows: 
“We are not amused.”
Now before I launch into why, I must warn you that this is going to dig into economics a bit, but I’ll be trying my best to keep things jargon-free or at least to explain things so we’re all on the same page. This will be a long post (because I could take all week to write about this but don’t want to), but I do hope at least some of you will bear with me. 
First, let me define a few things (although I will be simplifying things so as to hopefully not bore everyone): 

Market Efficiency: 

A market condition under which all prices reflect all market information. Since I’m not writing an academic article, I’m just going to come out and say that this is the fair market condition. Every supplier knows what their clients want, and how much they’re willing to pay for it. Each client knows what each supplier in the market for a specific product sells, what prices the suppliers are selling at and which product’s price will match his/her specific value for the product. 

Today’s product up for discussion: Books. 
In an efficient market, prices are determined by supply and demand. Supply and demand are both determined by price and quantity. So for every dollar price increase, suppliers are willing to produce more units of a product. Clients, on the other hand, buy more for every dollar price decrease. 

Equilibrium Price: 

At a specific price, all books will be sold to everyone who wants that book. There will be no surplus or deficits in books. This price, known as the equilibrium price, is where the most books are sold to the most people.

If you increase the market price, more books are produced, but fewer people are willing to buy them. (Which results in say… paperbacks being pulped. But I’m getting ahead of myself.) 
If you decrease the price, more people will want the books (come on, don’t tell me you wouldn’t buy five books if a shop declared a half-price sale on everything), but fewer people will be willing to publish, because the profit might not be high enough. 
Which brings me to Amazon’s Announcement on what its dispute with Hachette is about:

Price Elasticity: 

The increase/decrease in quantities isn’t related to price on a one-to-one basis. Let’s assume that a book costs $2. If a book price could increase with one dollar, a publisher would most probably produce more than one book extra. If a book price decreases by a dollar, readers will probably buy more than one book extra. 

Ever walk into a shop to buy one book, only to find that everything is marked down to half price? Will you only walk out with two books? I wouldn’t. I’d probably walk out with as many as I can carry/afford. 
This is what Amazon is blaming the dispute on. They (quite correctly, in my opinion) surmise that more people will buy books at a slightly cheaper price, which will result in everyone on the supply side making more money. This basically comes down to the argument that it’s better to sell a thousand items at $1 each, than one item at $100. 
“But,” one might say, “if the equilibrium price has been reached, messing with it will result in either the supplier or the client losing.” 
Here’s the thing, though: We’ve never reached the equilibrium price in the first place, because the publishing market isn’t efficient. But I’m still getting to that point. 

Middlemen: 


Because I think you need a bit of a rest from reading, and because this guy explains middlemen and what they do in a market better than I do, I’m going to ask you to watch this.

To link this back to my argument: Middlemen are proof that the real world is, well, real and my nice ideal of an efficient market isn’t all that realistic.

See in the real world, book suppliers don’t have access to their clients. (I.E. Readers) And the clients have no way to actually know all the awesome and amazing books that are out there to read. Middlemen’s jobs are to bring books to the readers and readers to the books. They then charge a price for this service, paid for by either the client, the supplier, or some combination of both.

But this is where I’m going to rock your world. It’s also where my main problem with Krugman’s article comes in.

Krugman sees Amazon as a monopsony (a buyer that buys so many products from a supplier that it can in fact determine the price at which it buys from the supplier, most often to the supplier’s detriment.) This, I think we can all agree to be true, to an extent.

Amazon is a middleman. It connects the publisher to the readers, by creating a place where a huge amount of readers go to buy books. Because so many readers buy through Amazon, Amazon is now in a position to charge more for its service, and Amazon wants to make books cheaper while Hachette doesn’t. Which, from Hachette’s point of view, is to Hachette’s detriment. (An yes, I can admit that they’re not wrong.)

However, Krugman has basically made a big mistake by saying the following: “By putting the squeeze on publishers, Amazon is ultimately hurting authors and readers. “

My problem with this comes down to a fact that everyone seems to forget:

The publisher isn’t the supplier. The author is. The publisher is yet another middleman. 

A middleman who’s out to increase market efficiency to everyone’s advantage.

You hear that sound? Like distant thunder? Yep, that’s the sound of disillusioned authors everywhere laughing.

Why? Let’s look at some market realities, shall we?

Monopsonist: 

A buyer that has so much market power that it can influence the market price. This is because it can threaten to stop buying from a given suppler if he/she/it doesn’t lower prices.

Pretty much since the first printing press was invented, people who’ve wanted to be widely read wanted to be published. After all, the more copies of something exists, the more people have a chance to read them. As time went on, publishers started gathering readers as well. People liked reading high-quality books and if a publisher was known for producing those, people kept buying from them.

Which is a dream come true for any writer. Not only does the writer now have a chance to see his works printed in volume, but there are actually people who want to read them.

However, there are many writers, and only a select few publishing houses with access to nice, big readerships. Readerships who would not read something unless it was, let’s say… printed by the writer him/herself.

This resulted in publishing houses being able to cherry pick what they thought would satisfy their readers’ wants/needs. Then, these few publishing houses became fewer. Some picked the wrong cherries. Others melted together into fewer, bigger publishing houses with more market power.

Who lost here? 

The author. Industry standard at the moment is 25% royalties. Which means that they are paying 75% of profits from books they wrote for covers, editing, printing and distribution. They actually make less, because there’s a third middleman, the agents, which our big publishers force on writers. (“If you don’t have an agent, we ain’t even looking at your book.”)

The publishing houses offering bigger loyalties don’t have enough market power to actually be of much use to a writer. Yes, it’s getting the book published. But read? Not so much. And besides, these guys aren’t the ones Amazon has a problem with. Because most of them already seem to understand the value of selling books for cheaper. Especially e-books.

Ah. Yes. E-books. See Amazon wants publishers to decrease prices on e-books. Not all books. e-books. Where there is no technical cost to carrying copies. Because there are no copies to carry. No printing costs. No warehousing. No transport. And yet big publishing houses usually charge more for them than physical books, and give writers the industry standard of: 25% royalties.

Yep. The same amount as for print books. But the expenses are less.

Which means that basically, big publishers created market ineffiency in order to benefit themselves.

But wait. There’s more.

Oligopoly: 

A market condition where the market or industry is dominated by a small number of sellers. These sellers have market power to influence buyer activity and price, since it’s easy for a few companies to band together and collude to fix prices.

So big publishing charges 75% of a book’s net price for covers, editing, printing and distribution. Marketing? Weeeeeeeelll…. No. See they put all their money together, and then decide who to spend their marketing budgets on. They choose which books gets displays in stores. They choose which books gets placement at airports and other premium selling spots. They choose which book gets the big mural at underground train stations in London and which ones get advertised in big readership magazines.

In other words: These companies influence which books get seen by their readership. Which means that the readership thinks they’re seeing everything out there to buy, but really, they don’t.

On top of this, the publishing house artificially inflates the price as described above. (Google Agency Model.) Or even worse, the big publishing houses collude.

So what this means is that publishing houses actively withhold information from their readers through manipulating which books the reader is aware of, and further adds to this by not charging the equilibrium price. In fact, they’re not even trying.

This results in readers losing, and either buying fewer books or not buying any books, because they don’t see anything that appeals to them. And because they’re less likely to find something where the price matches the reader’s perceived value for the book.

Who loses here? Actually… everyone. Readers lose for the reasons stated above. Writers lose because the potential amount of books sold isn’t realized, which means they’re not making the money they could have. (Even Lee Child and James Patterson.) Amazon loses for the same reason, because they can charge selling costs on fewer sales. And so do the publishing houses.

Why then, would publishing houses continue to act to their own detriment?

A move toward market efficiency and why this is unattractive to Hachette and publishers like it. 


First, I want to say that I don’t for a moment think that Amazon is the guardian angel to all writers everywhere. I know that they’re motivated by their need for greater profit, not for some particular goodwill toward writers.

However, Amazon has been leveling the playing field between publishers and writers. They’ve collected a huge amount of readers to themselves. And then basically gave writers free direct access to those readers. This in itself has brought about a huge and long over-due innovation in the publishing industry.

Yes, the traditional industry is still cherry picking, but those who didn’t get picked simply went to Amazon and got published anyway. And Amazon, through their use of algorithms, keywords and search engines made it possible for readers to be more likely to find the book they want to read, even if they never knew it existed.  They’re creating ways for authors to at least try to get books before their readers. Something that cannot be underestimated, but that publishers aren’t at all that keen on. You see that bit where Krugman talks about Amazon being able to kill the buzz for a book?

Publishing houses have done this through spending one book’s income on another’s marketing, and then blaming the author of the former for not writing a good enough book and then all but destroying that author’s career. And for good measure, holding onto the book rights forever, just in case the author wanted to sell it elsewhere and actually make money with it.

Before, authors had to sigh and say “oh well.” Now, they don’t. Now, they can buy their own covers. They can find their own editors (who often free-lance with big publishers as well). They can hire their own PR firms. And they can publish both e-copies and paperbacks on their own terms.

Amazon brought in print-on-demand, which means that only the amount of paper books that are wanted at a specific price need be printed.

Which means that publishing houses, once in a position of supreme bargaining power, aren’t actually as necessary to writers to be published and seen.

Which means that more and more people aren’t even interested in being traditionally published any more.

Which in turn means that publishing houses are clinging more to their industry standard royalty rates. They thereby “maximize” (and I use this term loosely) their profits by taking their own profit and most of the value taken from readers and writers, while delivering less and less of the benefit they might have had before. Marketing money? Gone to cover over-heads. Huge advances to help author cash-flows as they write the next one? All but gone, or otherwise part of a punitive system where authors who don’t even get marketed, get dumped and made out to be bad writers if they don’t earn out their advances. Editors? Still there, but I can find quite a lot of them by googling. What’s more, writers can hire more and more of them as publishing houses lay them off to lower overheads.

My point and the elephants in the room. 


I’ve been watching what’s going on for a while, and what I’ve seen and experienced have turned me off traditional publishing. However, from what I’ve written above, I want to point out the following:

Elephant #1

No matter how many times Paul Krugman and other traditionally published writers might call Amazon wrong, it doesn’t make Big Publishing Right.

Elephant #2

Amazon isn’t the cancer destroying the publishing industry. The publishing industry’s unwillingness to innovate is.

Elephant #3

The sooner publishing houses realize that writers now have more bargaining power and act accordingly, the sooner everyone wins.

Elephant #4

There will be a point where no one will be willing to pay 75% of a net book price for what will basically amount to the old publishing world’s diminishing prestige and validation that no longer means anything to the readers.

Elephant #5

No one wants Amazon to be the only connection between writers and readers, but it’s obviously happening.

Elephant #6

Amazon is starting their own publishing imprints. These imprints offer services AND higher royalty rates. If publishing houses want to survive, they should stop blaming Amazon and start competing with them.

 Elephant #7 

Competition between Amazon and Publishing houses benefit everyone. Amazon will get those lower e-book prices. Writers get more sales. Readers buy books they want for prices they want and those publishing houses who are able to efficiently do their jobs while turning a profit will survive. Unlike the current ones who refuse to budge off their own business models. Those are doomed to fail thanks to the vicious cycle they refuse to get out of.

Elephant #8

The sooner writers realize that they should start pushing more to call the shots, the better for all of us. Assuming that big publishing dies. Amazon will be alone to shove us around. Alone, we’ll be easily shoved. Together, on the other hand… Honestly, I’d prefer a perfect market, but given that we could end up with Amazon as a full-blown monopoly, we need to figure out how to balance market power.

Because:

Elephant #9

Amazon isn’t writers’ big savior. But then, neither are publishing houses. Clearly.

To those of you who actually read to the end. Thanks so much for reading! Let me know in the comments if you have any thoughts/questions. 

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