The Authors Guild recently posted a blog entry called, “The Justice Department’s E-Book Proposal Needlessly Imperils Bookstores; How to Weigh In.” To give a quick summary of the article: the Justice Department should back off their anti-trust lawsuit against Apple and the publishers being accused of collusion, because Amazon was using “predatory pricing” to eliminate competition from bookstores. Or to put it another way, even if there is illegal collusion of pricing fixing by the defendants, turn a blind eye to it, because Amazon is so much worse.
Every article I’ve read on this issue has hinged on accusing Amazon of predatory price fixing. What is that, exactly? The short answer is predatory price fixing is one company with deeper financial reserves and capital, lowering their prices on product or services they sell to below cost, with the intent to outlast their competition. Once the competition has been driven out of business, they can once again raise prices much higher than cost to recoup their losses caused by selling at below cost.
So has Amazon been guilty of predatory pricing? That would be hard to prove, because for predatory pricing to work, there has to be three conditions in play.
One, Amazon would need to have market controlling power. And most people would consider that they did and do. When the Kindle came out in 2007, Amazon blazed a new trail, combining a usable ereader with a vast selection of books easily bought on the ereader. Because they were the first to break in this market (previous attempts never had gained a significant foothold or combined a good ereader with the supply) effectively by giving the book-buying public what it wanted, they naturally had a high share of the ebook market initially. That is true of any innovation a company does that catches on. Then inevitably, more companies hop on the bandwagon and start competing with them, and market share takes a dip, maybe even sinks.
Publishers and The Authors Guild would like you to believe that it is because of agency pricing they had put in place that lowered Amazon’s market share and power. But what happened is what would be expected to happen in the normal course of competition. You can’t prove a “what if.” How do publishers know that Amazon’s market share and power wouldn’t have naturally shrunk with competition if it weren’t for agency pricing? Answer: they don’t.
However, the fact is that Amazon had, and probably still has, enough market power to pull off predatory pricing if that was their goal. But that isn’t all they need to pull off predatory pricing.
Two, Amazon would need to have a larger reserve of capital than its rivals. And by all indications, Amazon could probably outlast most, if not all, its competitors in an all out price war. Especially independently owned bookstores. Having worked for one, I know what slim margins they operate on. The overhead cost and the labor alone usually mean bookstore owners work large amounts of time so they don’t have to hire too many employees. The one I worked for lost several thousands of dollars every year it was open. It is this same reason why Borders, and Barnes and Noble put most of them out of business long before Amazon came on the scene.
But even with Barnes and Noble, the money is on Amazon to outlast them if Amazon’s purpose was to drive them all out of business. They could most likely take sustained losses for longer than the rest. But there is one last condition that needs to be present for predatory pricing to work.
Three, there needs to be solid barriers that prevent new competing businesses from starting up. For a company to use predatory pricing, it would only work if the company had dominance over the market, the capital to outlast their competitors, and they had a barrier that prevented others from coming in and starting new businesses once the competition had been eliminated.
For example, a grocery store in a city might drive their competitors out of business through predatory pricing. Perhaps the store owner has a friend on the city council, that keeps any competition from getting permits to build. So no new stores can easily enter the market. This allows the grocery store to charge as high a price as they think they can get away with because there is no competition, and they have secured a monopoly within that city. But without the ability to raise prices high without fear of anyone else coming in and undercutting them, the company would never make back the money they lost during the predatory pricing period. They would eventually go out of business themselves unless they found some way to recover that lost money and more. For predatory pricing to work, there has to be the expectation that there will be a period when the same company can raise prices artificially high to recoup their losses.
And there’s the catch. Predatory pricing is hard to prove because you have to show that the business would likely raise prices to high levels at some point to make the risk worthwhile. And the question is, does Amazon have the security to know that there are sufficient barriers to new start-ups once it could drive everyone else out of business? I think the answer would have to be a resounding no. We’re talking the Internet here. Worldwide region. There are scads of online ebook retailers still going today, most have grown since the Kindle paved the way for e-retailing. And not just because of the forced agency pricing, but due to the natural flow of capitalistic competition. It has happened with each company who has innovated new roads to travel.
What makes it additionally hard to prove predatory pricing is that there is a fine line between that and competitive pricing. Competitive pricing uses loss leaders to get people in the store in the hope and expectation that while there, they will buy other things that make a decent profit and will, overall, make the company a profit. Grocery stores have been doing this for years and years. It is focused more on getting customers into your store than it is trying to bankrupt the other stores to put them out of business.
The problem is, if Amazon was intentionally using predatory pricing to eliminate its competition, the minute they raised their prices back up enough to recoup their losses, it would open the doors for others to come in and undercut them. Then they would have to lower them back down again. It would never work, because they’d never be able to keep their prices super high without losing their market share and power to some new upstart. And Amazon knows that.
Meanwhile, there are solid facts as to why the DOJ is filing an anti-trust lawsuit. And it has nothing to do with whether Amazon is using predatory pricing or not, or will drive bookstores out of business. The publishers didn’t seem so concerned about that when they gave Barnes and Noble better deals on books than they did the independent bookstores, effectively putting hundreds of bookstores out of business. But the DOJ isn’t filing this lawsuit to help Amazon or kill bookstores.
They are doing it because there is evidence that the publishers colluded to force on eretailers agency pricing with a “favored nation status” clause that prevented Amazon or anyone from selling at a lower price than anyone else, effectively giving the publishers control of the prices and creating an oligopoly. That demonstrably resulted in the rising of prices for ebooks they controlled, to much higher levels than they had before. Meanwhile, selling product for a low price isn’t against the law. And to my knowledge, no country with a competition law has attempted to prosecute Amazon for predatory pricing. There is no evidence that Amazon has done anything illegal.
Now tell me, is it a smart defense to point to Amazon and say, “But if we didn’t do it to them first, they were going to do it to us”? That would never stand up in court. It’s the equivalent of me saying, “But judge, if I didn’t steal that car, the greenhouse gases it would have produced may have been the final straw to kick global warming into high gear.”
If that’s the total defense the publishers have, they are in for a very long dose of reality in the next few years, and they’ll probably have sunk their own boat once it is said and done. If they are right, that Amazon is trying to get total monopolistic control over the book market through predatory pricing, the publishers may have actually helped them toward that goal rather than hinder it. By breaking the law before Amazon did, the publishers may have given Amazon another potential monopoly: the supply of writers. The only result the publishers have accomplished here is the acceleration of their own demise.
If you were the CEO of Amazon, would you try to use predatory pricing to drive your competition out of business? Would it make economic sense to do so?
Your #3 falls apart when you take into consideration the first two points. If the barrier to entry means competing against a company with ostensibly unlimited resources (Amazon profits across multiple sectors, selling direct and through third parties), then there is a very real and solid barrier there. You might be able to make your product and enter the market, but a very real businessman would see Amazon as pretty much in control of the market by dint of having the financial resources to cut out competition (which they had been doing through aggressive pricing models that saw greater shares being taken out of publisher’s coffers via ebook pricing reductions and other practices for their eReaders).
The rest of your logic also collapses under scrutiny. If you say “they did something wrong, so I had to do something wrong to counter it,” that does not necessarily mean it won’t hold up in court. You provide one example, but in an alternative example, one might say something like this: X threatened to kill my family if I didn’t do a line of coke; so I did a line of coke. Or perhaps something like: X stole my car with my baby inside, so I took someone else’s car to pursue. Both incidences involve someone breaking the law to do something right, and in a court of law it is quite likely that such individuals would be given slaps on the wrist *at worst* precisely because of extenuating circumstances.
That said, it is entirely possible from a legal standpoint to argue to the DoJ that the agency model is a response to undercutting efforts by Amazon that effectively forces publishers to lose more and more resources just to remain in the market (since a huge chunk of the Market is tied into Amazon’s ebook and print book market, losing that resource over disputes of pricing means losing revenue either way). In that sense, you could say it’s collusion and punish them for it, but you’d also have to punish Amazon for similarly changing the pricing scheme in its advantage (for a time, Amazon was intentionally taking a loss on eReaders to sell Kindles, which in your little scheme is predatory pricing at its finest, since it is the only eReader company with the financial resources to do that without damaging its bottom line). You also have to take into account Amazon’s aggressive efforts to *become* a publisher, which only points to Amazon’s very real attempt to take further control of one of its most lucrative markets.
You also run into the biggest problem of all: producers have every right to price their products as they wish, provided it doesn’t engage in predatory pricing. To call this collusion is perhaps reasonable, but that would assume that the publishers colluded to increase profits (i.e., to help themselves), which isn’t exactly how the agency model works. It simply allows publishers to have control over their products, external from a third party.
Anywho. It’s all a mess. The DoJ. The publishers. Amazon. And in all of it, the ones getting really hurt are the authors, who get screwed by Amazon, screwed by publishers, and screwed by all the crap going on between the two parties.
I agree, SMD, that authors tend to be caught in the middle of this. And it is a mess, for sure.
I appreciate your points. But I think unless one can posit a situation where Amazon could effectively raise ebook prices to a high level at some point to recoup their losses on selling below cost, the objective of predatory pricing would never work. Which is to get to the place, before you run our of capital, where you can charge high prices. That’s the main reason to put others our of business and keep others from getting into the market. As soon as Amazon started selling ebooks at $20 a pop or more, you’d see several e-retailers undercutting them. Without the ability to do that, Amazon cannot succeed with predatory pricing. If that is their goal, they are bound to fail.
My question is where you draw “raising prices” as a prerequisite for predatory pricing. Seems to me that if you outlast your competition, you don’t need to raise your prices, because the eventual increase in customers will lead to greater profits anyway. From what I’ve read, raising prices is only a *possibility* in predatory pricing, but not a necessity. In fact, in the U.S., the burden of proof ends at demonstrating an attempt to affect rivals through aggressive pricing and/or to monopolize. There’s nothing in U.S. code that I’ve found which indicates raising prices is a prerequisite, just an option or possibility.
And even if we take “raising prices” as a prerequisite, then it follows that Amazon will be forced to increase prices on the Kindle since it has been selling them at a loss to production cost. Which means if they do become the leader in the market and knock off most of their competition, they are obligated either to increase production to reduce the price (a reverse raising) or to increase their prices to “break even” or profitable levels. So on that front, publishers have a case, since the proprietary format of the Kindle means killing off competition gives market control to Amazon, thereby destroying reasonable competition in the ebook market.
So all of this really falls apart. The sad truth is that we don’t have all the information either. There might be more to condemn the publishers. I don’t know. You don’t know. Most people don’t know. We’re babbling based on information we have, which is limited at best.
I took an antitrust class in law school recently (but not an actual lawyer here). The test for predatory pricing is twofold: 1. Prices are below an “appropriate” measure of costs (Price below marginal cost) AND 2. Dangerous probability that predator will recoup investment in below-cost prices (from Brooke Group v. Brown and WIlliamson)
Thus, it actually does matter that they can raise prices and “recoup” their investment, which is essentially never going to happen as Rick explains above. It’s just not possible from an economic standpoint in most situations to actually recoup a loss and makes absolutely no sense if you think about it because as soon as profits are raised anyone can jump in to lower prices down to cost.
I don’t deny that. That’s my point, though. One doesn’t need to raise prices to engage in predatory pricing. If you damage your competitors well enough so that you hold a large enough chunk of the market, then you never need to raise prices, since the influx of customers offsets the loss in profits by increasing damage for your product.
With predatory pricing, the argument is always getting rid of your competitors, but doing so still won’t make the loss worth it. It makes no sense. You took a loss for no reason because you could get rid of existing competitors and now you’re back to marginal cost as far as prices go. You don’t get anything back with the influx of customers because you’re still pricing at marginal cost and any chance of raising prices above that will only encourage more competitors to enter the market, thus ruining the whole plan to get people out of the market.
That’s really not how a supply and demand economy works. An influx of customers equals a greater need for increased production, thereby lowering production costs and lowering your “break even” level. A really stupid business engaging in predatory pricing would lower its prices to a level that cannot be easily regained through stealing customers from other businesses. A smart business would lower them just enough to force competitors out of the game, taking a hit long enough to gain the customers necessary to justify increased production and lowered production costs.
That’s a pretty tough line to draw there and I won’t say that would never happen, it’s just not an argument that’s going to win, especially not one a plaintiff can easily overcome having the burden of proof. Very few win on this because you have to show they can make it back and that’s not only highly speculative (extrapolating is never good), but all but impossible to do because of further entrants into the market.
I wonder if we can get these replies down to just one word per line.
I’m going to address one aspect of this, the need to raise prices.
It is true that it is not an absolute necessity that it has to happen, but that is usually the goal of doing predatory pricing: to drive your competition out of business, secure a monopoly, prevent new businesses from starting up, all so at some point later, you can raise your prices without being undercut by someone else and make a killing. So generally, one of the things that judges and juries will look at is the likelihood of a business being able to do that if they are successful in running their competitors out of business. If that is not likely, then if falls more into the line of competitive pricing, not predatory.
But I think many are using predatory pricing in a much looser context like the article from the Author’s Guild I linked above, to simply mean, “That’s not fair.” Keep in mind, the traditional publishers weren’t concerned for bookstores when Barnes and Noble, and Borders were putting independent bookstores out of business, “ruining the literary climate” as I’ve seen some suggest that Amazon is doing. Their pointing at Amazon and waving the predatory pricing flag is really hypocritical in my view.
What they are concerned about is that ebook sales will eat into their physical book sales. And the more that happens, the more expensive it will be to produce those books when runs get shorter and shorter, forcing them to charge more for each book, which will only accelerate the process.
The main reason they are accusing Amazon of predatory pricing is because the dam is cracking and leaking. And they stuck a finger in the dam with agency pricing using the “favored nation” clause to create a monopoly for any particular book with the publisher of that book, who alone sets the price for everyone with no competition for that title. So they can raise it as high as they want and get away with it, because their goal isn’t even to sell more ebooks. It’s to put restraint on the sale of ebooks over which they have control. And then retailers can’t compete with one another.
Yes, the line between competitive pricing and predatory pricing can be slim. Those are issues for a court and judge to decide. But there are very few, if any, cases won on the basis of predatory pricing because it is so darn hard to prove. It has to be more than a business selling produce at below cost. It has to be selling way below cost, taking a loss with the demonstrable intent to recoup those loses through higher prices once they competition has been eliminated.
Also, it should be noted, that obtaining a monopoly (not illegal, btw) can be done in ways other than through predatory pricing. It is the abuse of a monopoly which will bring the government down on a business, of which real predatory pricing is one form of monopoly abuse.
But if just being a low-cost retailer was illegal, and it resulting in competitive businesses shutting down was illegal, companies like Wal-Mart would have been sued by the DOJ a long time ago. The reason it hasn’t happened is because their prices remain low even when local shops go out of business. If Amazon was really guilty of predatory pricing, the traditional publishers would have sued Amazon over that instead of colluding to fix prices on their books over all retail outlets. It is very unlikely you’ll see Amazon being sued for predatory pricing because they aren’t going to raise prices to a high level, they’ll probably still be low. Because they know once they do, others will come in behind them, undercut them, and they’ll lose market share.
Okay, then you need to amend your post to say “likelihood of a business being able to raise prices,” which is a completely different concern than the one you presented. There’s a very low burden of proof for “being able.”
Traditional publishers weren’t concerned about B&N, Borders, and the dozens of other chain stores because it meant competition between bookstores was even. Now that the tide is changing, the competitive edge between chain stores is dissipating, limiting the number of markets with which to do business. The fewer competitors, the less of an edge you have as a publisher, because it reduces the size of your hand on the negotiating table. Fairly basic economics.
Publishes are concerned about ebook sales for a lot of reasons, not least of which is the question of physical book sales. Mostly, publishers don’t like the fact that the ebook market is centered overwhelmingly on a single seller and a proprietary format, because it essentially limits the potential for negotiation. Amazon has very little reason to given publishers what they want if it can still make massive profit off of ebooks without them. And right now, that’s where the market is going. Agency pricing is an attempt to standardize ebook prices, albeit a really shitty attempt (they are way overpriced), but an attempt nonetheless. Amazon is equally culpable for attempting to standardize, so if the publishers are guilty of anti-trust violations, so too is Amazon, who have attempted to set prices for themselves.
“So they can raise it as high as they want and get away with it, because their goal isn’t even to sell more ebooks. It’s to put restraint on the sale of ebooks over which they have control. And then retailers can’t compete with one another.”
This is absurd on almost every level. There’s nothing in it for a publisher if retailers cannot compete with one another. The fact that the agency model “might” lead to sale restraints is a symptom, not a desired result (and one that doesn’t make a whole lot of sense, since ebook sales continue to climb even for books under the agency model — hard to argue the “restraint on the sale” line when books are selling like hotcakes at $11.99).
“It has to be more than a business selling produce at below cost. It has to be selling way below cost, taking a loss with the demonstrable intent to recoup those loses through higher prices once they competition has been eliminated.”
Now you contradict yourself. Either you’re sticking to the “raising prices” line, or you’re admitting that it isn’t a requirement. One or the other. Not both. And since predatory pricing laws in the U.S don’t require the “raising prices” element, this is really a kind of pointless argument to keep making, because it’s inaccurate.
“Also, it should be noted, that obtaining a monopoly (not illegal, btw) can be done in ways other than through predatory pricing.”
Monopolies are illegal — the Sherman Act. The government may grant a company the right to be a monopoly, provided that it achieved market dominance through practices that do not violate anti-trust laws, which lowering prices below production costs does violate, or for other reasons determined by the government. Nobody is arguing that you can’t create a monopoly through other means.
It’s not that monopolies are illegal, it’s monopolies that stay that way through poor business practices are illegal, as you’ve mentioned. But this predatory pricing argument could go on forever. I’ve had professors that don’t even believe in it (it’s a ghost) because it’s so impractical and so difficult to prove. If lowering prices below production cost is possible and achieved the means it sets out to achieve, then it’s definitely illegal. I’m just glad I’m not the one having to make that argument.
“Amazon is equally culpable for attempting to standardize, so if the publishers are guilty of anti-trust violations, so too is Amazon, who have attempted to set prices for themselves.”
I’m really confused here. Amazon setting their own prices is monopoly?
Hi Shawn, you said: “Traditional publishers weren’t concerned about B&N, Borders, and the dozens of other chain stores because it meant competition between bookstores was even.”
I don’t get how the publishers giving the big boys price breaks on their books created an even competition between them and indie bookstores, locally owned bookstores. I actually worked for a bookstore back in the 90s that went out of business, in part, because B&N and Borders moved into town. (There were other reasons, but that was a factor.) I think that was common knowledge back then that the big stores were putting many bookstores out of business because they couldn’t compete on price or selection. And the publishers at the time had a hand in making the competition uneven.
“hard to argue the “restraint on the sale” line when books are selling like hotcakes at $11.99″
Yes, if they would keep them that low. What you often see is ebooks coming out priced equivalent or higher than the hardcover. And I’ll bet at those $20+ prices, that they are not selling like hotcakes. I know I’ve personally wanted an ebook of some big sellers at times, but they were priced around $16.00, and I passed. I’m sure many others do, and opt to buy the cheaper paperback.
I don’t know what other reason they would have to raise their ebook prices so high other than to restrain the sale of them, to give their physical books a better chance. Because they certainly don’t cost that much to produce. Not the same as a hardback or even a paperback.
“Now you contradict yourself. Either you’re sticking to the “raising prices” line, or you’re admitting that it isn’t a requirement. One or the other. Not both. And since predatory pricing laws in the U.S don’t require the “raising prices” element, this is really a kind of pointless argument to keep making, because it’s inaccurate.”
It appears you misunderstood. I said raising prices wasn’t a dead set absolute requirement to prove predatory pricing. But it is a near necessity. Without it in the USA, you’d be hard pressed to make the argument. Just selling at below cost in the USA isn’t against the law. Some countries have “competition” laws, and selling below cost to a certain degree and for a period of time can be illegal. And yet, no one has been prosecuted under it from what I could find, though I’ve heard rumors that Australia is looking into going after Amazon on predatory prices. But in the USA, just selling below cost in and of itself is not considered predatory. You would have to show intent and a high degree of likelihood that they expected to compensate for their losses by being able to raise prices at some point in the future once the competition had been eliminated. Those are both hard to prove.
And until someone wins a suit on predatory pricing, the line between competitive pricing and predatory pricing remains fuzzy at best in the USA. But without the reasonable ability to raise prices in the future, the USA government sees lower prices as a benefit to the consumer.
Or to put it this way, yes, it is theoretically possible to prove predatory pricing without showing they would likely raise prices in the future if you could prove intent. But that would be near impossible to prove without also showing how that company expected to recoup those losses of selling below cost. Proving that goes a long, long way to proving intent and motive. Without it, the prosecutors really don’t have much of a case unless they can come up with emails or other documentation that this was the plan. But proving they would, in the future, be likely to raise prices high because they had killed off competition and not allowed any other players into the market is a hard thing to prove.
But in Amazon’s case, they have nearly zero chance of ever raising prices to whatever level they want. There are too many players in the ebook business ready to come in behind them. Because they have nearly zero likelihood of raising prices, and from all indications every intent to continue to sell books cheaply, sometimes at below cost which many, many business do as loss leaders to provide competitive pricing, the legal case for them violating the law on predatory pricing is practically nill. You’d never prove it in a court of law, short of internal communications surfacing that showed a plan how they would pull that off. Not without an obvious path to recouping their losses into the future. Otherwise, they are doing nothing more than giving the consumer a great deal.
“I don’t get how the publishers giving the big boys price breaks on their books created an even competition between them and indie bookstores, locally owned bookstores. I actually worked for a bookstore back in the 90s that went out of business, in part, because B&N and Borders moved into town. (There were other reasons, but that was a factor.) I think that was common knowledge back then that the big stores were putting many bookstores out of business because they couldn’t compete on price or selection. And the publishers at the time had a hand in making the competition uneven.”
Yes, because you’re consolidating the market into a few dozen stable, cross-pollinating markets, rather than dozens upon dozens of small, often specialized stores. Chains, for good or for ill, provided a large avenue for sales, making discounts on product more often reasonable than not as a means to continue driving customers to the store. Amazon shook that, but the problem with Amazon is that it’s a *single* enterprise, unlike chain stores, which saw similar practices shared across dozens of different chains, small and large. Amazon’s hold on the book market means that competition between stores is limited, since the number of stores competing is infinitely small, and often uneven. Wal-Mart cannot hope to compete with Amazon in the book market, except on high-profile books in a limited sense. The reason being that Amazon only needs a warehouse, whereas Wal-Mart needs shelf space. But chain stores offered the competitive edge by spreading market share across a slightly smaller (in quantity), but also broadly reaching base of stores. That does not necessarily mean they were a good thing for indie stores (obviously not), but a whole lot of small stores competing against one another limits marketability by way of making discounting essentially meaningless. For a publisher, the ability to discount without taking a huge loss in an increasingly shrinking global market means being able to compete for sales in a way that means people can actually buy the product.
“Yes, if they would keep them that low. What you often see is ebooks coming out priced equivalent or higher than the hardcover. And I’ll bet at those $20+ prices, that they are not selling like hotcakes. I know I’ve personally wanted an ebook of some big sellers at times, but they were priced around $16.00, and I passed. I’m sure many others do, and opt to buy the cheaper paperback.”
Those over $11.99 books are a dime a dozen. I check my Nook market fairly regularly and most of the books released by traditional publishers are $4-5 below paperback price. That doesn’t mean I want to pay $11.99 for ebooks (I don’t and never will), but consumers obviously will.
“I don’t know what other reason they would have to raise their ebook prices so high other than to restrain the sale of them, to give their physical books a better chance. Because they certainly don’t cost that much to produce. Not the same as a hardback or even a paperback.”
Then you obviously don’t know anything about the agency model. The purpose of the agency model, as crappy as it is, is to give publishers control over ebook pricing, which allows them to deteriorate prices and control sales over time. In part to preserve hardcopy sales, but primarily to preserve producer control of product. That’s the entire point of the agency model. The fact that it has been used rather stupidly is secondary to its intent.
“It appears you misunderstood. I said raising prices wasn’t a dead set absolute requirement to prove predatory pricing. But it is a near necessity. Without it in the USA, you’d be hard pressed to make the argument.”
It’s not a requirement AT ALL in U.S. code. All that *is* a requirement for predatory pricing is demonstrating that it is *possible* that prices can be raised when competitors are beat out of the market, which requires absolutely *no* proof whatsoever. So long as a retailer or producer has control over their products, they are able to raise prices at any time. Burden of proof met.
“Just selling at below cost in the USA isn’t against the law. Some countries have “competition” laws, and selling below cost to a certain degree and for a period of time can be illegal. And yet, no one has been prosecuted under it from what I could find, though I’ve heard rumors that Australia is looking into going after Amazon on predatory prices.”
You put far too much faith in the legal system. You do realize that corporations break the law *all the time* right? They are rarely penalized for that behavior. When they are, it is rarely in any way that matters (Microsoft got hit by anti-trust laws years ago; it was more cost effective to pay the fines than change the behavior). But the fact that few companies have been hit but anti-trust laws doesn’t mean that there aren’t cases to be made, just that few people have taken on the task.
“And until someone wins a suit on predatory pricing, the line between competitive pricing and predatory pricing remains fuzzy at best in the USA.”
It’s really not that fuzzy. It’s defined in U.S. law. You’re making it fuzzy by confusing what predatory pricing requires.
“Or to put it this way, yes, it is theoretically possible to prove predatory pricing without showing they would likely raise prices in the future if you could prove intent.”
Intent is also not a prerequisite for anti-trust laws. This is actually one of the arguments being made in Congress right now: a change to corporate law which would make it mandatory for legal action against corporations to be partially based on intent to do harm. But that doesn’t actually exist in the law with regards to corporations just yet. It’s not necessary to prove that a company *meant* to snuff out competition through predatory pricing, just that it sought to cut prices below break-even levels with the financial resources to out-last competitors. Basic economics would tell you that a company who engages in such behavior automatically assumes that they will gain it back over time provided the effort is effective. If you lower prices so your competitors cannot compete, and you can out-last them at that level, then you essentially steal customers from competitors. In the case of Amazon, that means locking them into a proprietary format, which further seals the customer base into their platform. B&N does not have that luxury. All they have to sell is the Nook, but the Nook does not require you to use their store to buy books, since ePub format is non-proprietary.
Does that mean that Amazon necessarily broke the law? No. It would need to be taken to court and more information given. But the behavior is suspicious enough.
I’m going to see if I can condense this down a bit, as to respond to all of it would be getting into very long blog post.
On the big stores putting smaller bookstores out of business, I understand the dynamic you are stating. My original point was that B&N and Borders put bookstores out of business. Now Amazon is being accused of doing the same. Publishers helped with the former, and are now screaming about the latter. From their perspective, the former as you described helped them, the latter is hurting them. That is why they are screaming now. Not because they are that concerned about mom and pop bookstores closing down.
On the price of ebooks, you may be right. I know when I checked to buy ebooks of traditionally published books, they are either at or above paperback prices. And I’m told if they come out with the hardbacks, are around those prices to prevent hardbacks not selling.
“In part to preserve hardcopy sales, but primarily to preserve producer control of product. That’s the entire point of the agency model.”
I do know about the agency model, and though this post wasn’t specifically about that, you stated my point. They wanted control over price so they could prevent Amazon from discounting, from being competitive. They eliminated competition from the retail sector on any specific book. You want Stephen King’s latest book? You’ll pay X no matter where you go. No retailer can compete with another on price, mostly thanks to the “favored nation” clause, but also because the publisher has a monopoly on that book and control of the price.
“It’s not necessary to prove that a company *meant* to snuff out competition through predatory pricing, just that it sought to cut prices below break-even levels with the financial resources to out-last competitors. Basic economics would tell you that a company who engages in such behavior automatically assumes that they will gain it back over time provided the effort is effective.”
From what I’ve read on the topic, it is necessary to show they intend to profit. Without ensuring they can raise prices in the future, all they will have accomplished is to lose a lot of money. And the risk of predatory pricing is a company may have figured wrong, and end up in too weak a position once the damage is done, to recover themselves. Or they may find out their competitors had deeper pockets than they knew. And without a way to prevent new competition from coming in once the current ones have been eliminated, there’s little hope to recover the lost money effectively.
It may be there are other issues that should be of concern, but I don’t think the traditional legal definition of predatory pricing can be applied. Just selling below cost isn’t illegal. At least in the USA. Its competition.
Thanks for the points.
“On the big stores putting smaller bookstores out of business, I understand the dynamic you are stating.”
No, you don’t. You went and re-stated the same position as before and didn’t respond to the argument I was making, which, condensed, is: B&N/Borders/chains booted out competitors, but provided a stable, varied marketplace with high turnaround. Amazon is, intentionally or otherwise, booting out chain stores in exchange for a single retailer, which limits variation and negotiating potential for producers.
We like indie stores primarily for nostalgic and personal reasons, but not for economic ones. Chains provide more jobs and more economic benefits for a local economy than small shops, with rare exceptions (some indie stores break the mold). I’ll leave it there for now.
“On the price of ebooks, you may be right. I know when I checked to buy ebooks of traditionally published books, they are either at or above paperback prices. And I’m told if they come out with the hardbacks, are around those prices to prevent hardbacks not selling.”
This is really not standard. Sometimes it’s that way, but mostly it’s not. The outliers are over-priced, and usually the high-profile books that will sell like made in hardcopy anyway. It’s a stupid system, to say the least.
“They wanted control over price so they could prevent Amazon from discounting, from being competitive.”
No, they wanted control over price so they had the ability to negotiate discounts, which many publishers do with B&N’s ebook store and with Amazon. Amazon’s ebook pricing model did not allow for that. You’re confusing the desire to control the price of a product by the producer with the failure of the retailer to negotiate terms for discounts in an attempt to set its own ebook pricing standard.
“From what I’ve read on the topic, it is necessary to show they intend to profit.”
It’s a company. The only purpose of a corporation is to make profit. So this seems a completely ridiculous thing to have to prove in a court of law, and in fact is not something you have to prove, nor is the intent necessary. It’s not in the law. None of it.
“It may be there are other issues that should be of concern, but I don’t think the traditional legal definition of predatory pricing can be applied. Just selling below cost isn’t illegal. At least in the USA. Its competition.”
It is when doing so prevents competition from, well, competing. In the case of the Kindle, there’s an argument to be made about whether this is happening.
““On the big stores putting smaller bookstores out of business, I understand the dynamic you are stating.”
No, you don’t.”
Yes, I perfectly understand what you are saying. I’m not sure I fully agree with it, but even if granted as the case, it doesn’t invalidate what I was saying. I even said they saw it as beneficial to them then, and this they don’t. But this point is a side note anyway. Not the meat of the discussion.
“No, they wanted control over price so they had the ability to negotiate discounts, which many publishers do with B&N’s ebook store and with Amazon”
With agency pricing, there is no negotiating. Amazon has no control over the price and the discount is set across all retail partners. The only thing they can do is refuse to carry their product.
And if Amazon had the clout you are suggesting they did, they could have outlasted at the negotiating table with the publishers. They were ready to not carry the first publisher’s titles over the issue, but when they all combined for the same thing, Amazon had no choice but to give in or not sell their books, which would have been fatal to their business. So they gave in.
And the publishers could have done the same under the wholesale model. Refused to give Amazon the discounts they were wanting, whatever those were, and hold the line at the traditional 55% or whatever deal they were currently giving Amazon. They could have even lowered the discount if they wanted, and if the other publishers followed suit, Amazon would have had no choice but to buy their books at that price or not carry the major best sellers from traditional publishing.
While Amazon has leverage, just as B&N and Borders did in the 90s, it couldn’t have forced the publishers to give into their demands anymore than they did on the agency pricing with favored nation clause.
Those two, combined, created a group monopoly on prices by giving the publisher control over what the retail price was, instead of the retailer. And everything they’ve said on it points to the purpose of it was to control Amazon which they saw as a threat to their business model.
“It’s a company. The only purpose of a corporation is to make profit. So this seems a completely ridiculous thing to have to prove in a court of law…”
If you want to prove they were being predatory in their pricing, yes. That’s my point. Without the ability to limit new competition from joining the market, they could never have the ability to raise prices enough to offset their losses and make a profit. Since they can’t foreseeablely do that under most any scenario, what you have is competitive pricing, which isn’t illegal. Discounting below cost on loss leaders is standard and accepted practice in competitive pricing.
If the publishers really thought they could win a suit on predatory pricing, they would have filed it in a heartbeat rather than risk breaking the law themselves. But they know they can’t prove it. All they can do is state it in the media and hope the public and the DOJ buys it. But, the issue before the DOJ isn’t Amazon, but whether they are breaking the anti-trust laws. So I doubt that argument will sway the judges.
No, I wasn’t saying Amazon is a monopoly. Was indicating that both parties are responsible for price fixing, just under different circumstances.