Friday, June 29, 2012

Is agency or wholesale pricing better? It depends on who's asking the question

As part of the ongoing discussion about the U.S. Justice Department's eBook price-fixing case, there's been a lot of back-and-forth about which pricing model, agency (where publishers set retail prices) or wholesale (where retailers set their own prices), is better. I'll cut to the chase: Agency is better for publishers and some retailers (who either can't or won't compete on price,) while wholesale is better for other retailers (those who are willing and able to compete on price) and consumers. Agency allows publishers to eliminate discounting--they authorize every reseller to sell their eBooks at the same price. If a publisher wants to make more money, it simply raises its prices, and those price increases are passed directly onto consumers.

Under wholesale pricing, publishers sell their eBooks to resellers, who have the right to resell them at any price they choose. They can change prices and respond to consumer demand without getting permission from publishers. Without wholesale pricing, there would be no discount resellers in the U.S. Barnes & Noble would have to compete with independent booksellers solely on selection, not price. 

Publishers, or for that matter, any vendors of products or services, don't seek to control retail prices in order to make them lower for consumers--they do it to maintain or increase prices. Decades ago, the term "fair trade" referred not to helping improve income and conditions for producers in developing countries, but to a policy of requiring all resellers to sell the same product at the same price (also called "price maintenance".) The first statute allowing manufacturers to force everyone to sell at the same minimum price went into effect in 1931 in California. Here's a quote from Wikipedia: " (Fair trade laws) were ostensibly intended to protect small businesses to some degree from the competition of the very large chain stores during a time when small businesses were suffering. Many people objected to this on the grounds that if the manufacturers could set the price, consumers would have to pay more even at large discount stores." The last of the fair trade laws was repealed in 1975.

My parents ran a small store that discounted its merchandise. They couldn't sell Sony electronics or Seiko watches, because both companies refused to sell to discounters. So, they instead sold Panasonic electronics and Citizen watches, helping both companies to establish a foothold in the U.S. The fair trade laws kept consumer prices high and created a price umbrella under which competitors could enter the market at lower prices.

That demonstrates a fundamental flaw in the publishers' thinking about agency pricing: In the short run, it bolsters the price of their eBooks, but in the long run, it attracts substitute titles into the market that are sold at lower prices. Experience shows that book buyers are very price-sensitive--that's how Barnes & Noble and Borders killed most independent booksellers, and how Amazon built such a big eBook market share. We're already seeing the effect with the growth of self-publishers who are selling their eBooks at dramatically lower prices than the Big 6.

Price maintenance is a strategy that rarely works in the long run. Resellers figure out ways to get around it, consumers pressure their legislators to outlaw the practice, or the courts intervene.
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