Publishers and Ebooks: Innovation, Drm, and Resale Price Maintenance

Lynne Kiesling

I hope all of you economists out there are following the current brouhaha between Amazon and the publisher Macmillan, because the number of fascinating economics issues is stunning. In brief, Macmillan is one of the publishers working with Apple on the iPad and Apple’s ebook store. At the same time (I remain agnostic on any causal association), Macmillan proposed to Amazon a shift in pricing and ebook availability to a so-called “agency” model, which involves dynamic pricing over time as the book’s release date recedes (starting at a higher price on release); they also said that if Amazon did not agree to such agency pricing and wished to leave the retail ebook price at $9.99, then Macmillan would start “windowing” their ebook releases, and would allow Amazon to issue ebooks only 7 months after the hardcover release. As described by Engadget,

Macmillan claims that its new model is meant to keep retailers, publishers, and authors profitable in the emerging electronic frontier while encouraging competition amongst new devices and new stores. It gives retailers a 30% commission and sets the price for each book individually: digital editions of most adult trade books will be priced from $5.99 to $14.99 while first releases will “almost always” hit the electronic shelves day on date with the physical hardcover release and be priced between $12.99 and $14.99 — pricing that will be dynamic over time.

Then, on Friday Amazon removed all of Macmillan’s ebook and print book products from their site, leading to a host of reactions, including this selection:

• Cory Doctorow’s reaction on finding his Tor-published works removed from Amazon
• Peter Kafka at the Wall Street Journal’s All Things Digital blog, discussing the implications of Apple’s iPad and ebook store in conjunction with this
• Author Jay Lake takes a strong position against Amazon’s removal of Macmillan’s print products: Bug off, Bezos. And take your damned bookstore with you.
• Author John Scalzi’s reaction, which I have to say most closely approximates my own personal assessment

Then on Sunday, after Macmillan’s CEO issued a statement about their proposed change in terms with Amazon, lots of authors complained to Amazon, and many blog and web site editors de-linked Amazon from their sites and thus reducing traffic to Amazon. As of Sunday evening, Macmillan’s products were again available at Amazon, and Amazon had published a carefully-worded apology.

Accusations of bullying and the exercise of market power are flying against both parties: Amazon has market power as a leading book retailer, and they are bullying Macmillan by removing their print products to keep retail ebook prices low and sell more Kindles! Macmillan has, as the Amazon “apology” puts it, a “monopoly over their own titles”, and thus we have to capitulate to their bullying! Macmillan is trying to tell Amazon the retail price at which to sell their products, abominable!

This last accusation hints at one of the two particularly interesting economics topics involved in this episode — consumer welfare and resale price maintenance. I do think that this situation will raise some interest in and attention to the competitive or anti-competitive RPM implications of Macmillan’s proposal and Amazon’s response. First, is it really the case that Macmillan is trying to set Amazon’s (or Apple’s, for that matter) retail prices for their products? Second, would Macmillan’s proposed agency model and dynamic pricing benefit consumers or not? As it happens, there has been something of a revival of interest in resale price maintenance in the antitrust literature since 2007, when a longstanding precedent in the area was revised to more of a “rule of reason” approach. Here are some recommended readings on RPM to get you thinking about this:

• Thom Lambert at Truth on the Market, discussing existing RPM-related antitrust policy
• Thom’s paper referenced in the above post
• An RPM overview from Ken Elzinga and David Mills

The second important economic issue is digital rights management and how both Amazon and Apple restrict the use rights of their ebook customers. That will have to wait for another post.