In which competition fails to be perfect


This is the vaguely economic argument that people make when they talk about e-book pricing: “The price of all books will go to zero. Everyone knows that in a perfectly competitive marketplace, the price will tend towards the marginal cost of distribution, which for digital goods is zero. Authors must band together and make sure that books are priced at something high, or we will all surely perish.”

I bristle at the indiscriminate application of economics, where nobody checks that the assumptions underlying the economic theory holds true first. Here’s the challenge: if someone wanted to read for free for the rest of their life, they could do it, easily, today. They’d start with Project Gutenberg. There is a ton of Pride and Prejudice fanfiction–more than any one person could read in her lifetime. People have been posting stories–entire novels worth–on livejournals for lo these many years. There is more free reading material available than any reasonable person could tackle. And yet–shockingly–people pay for electronic books.

How can you explain this? Is it a breakdown in the market? Is it that the market has not yet reached equilibrium? Is it that ereaders haven’t yet become commonplace? None of that. It’s because a book is not a perfectly competitive marketplace.

It would be if there were no intellectual property laws–anyone could compete perfectly with books by Courtney Milan simply by making a copy of my book, which would cost them basically nothing to do. Nobody could charge anything for books by Courtney, because somebody would always undercut them. I would make no money. You can see this principle at work on Amazon if you search for public domain works.

Luckily for me I have an exclusive right to distribute my books and to license others to do so, and so there is not a perfectly competitive marketplace for books by Courtney Milan. In fact, the market is quite the opposite of competitive: I have been granted a legal monopoly over books by Courtney Milan, and that means I can charge whatever I want, and nobody else can sell my books for less, unless I give them the right to do so. Therefore, we don’t have perfect competition.

“But Courtney,” you say, “books are economic substitutes for each other. If you charged $5,000 for a book, people would just go and read Sherry Thomas and Tessa Dare and Julie Anne Long and Meredith Duran instead.”

Too true. I may have a legal monopoly over books by Courtney, but there are decent economic substitutes for books by Courtney. The problem is that (a) there are a small number of really good economic substitutes and (b) all substitutes are imperfect, with some substitutes being more imperfect than others.

For instance, I have a vast amount of empirical data demonstrating that at least some people would rather pay $7.99 to read my book than spend $0.00 to read Moby Dick for free. This is because Moby Dick is a really, really bad economic substitute for a historical romance. I like to think that even in historical romance, there is no perfect substitute for a book by Courtney. Heck, my books aren’t perfect substitutes for each other. Most people don’t read Unveiled a second time and say, “Well, now I feel just as good as if I’d read Unclaimed, so why bother?”

We all know that books are imperfect substitutes for each other because if there were, by golly, I still wouldn’t be waiting (semi-patiently) for George R.R. Martin’s Dance with Dragons. I’d have read Coraline by Neil Gaiman and I wouldn’t bother. If books were interchangeable, I wouldn’t have stood in line to get Patrick Rothfuss’s signature. Scheherazade would never have lasted a thousand Arabian nights, because the King wouldn’t have cared how the story ended.

Now, I don’t deny that books are imperfect substitutes for each other. And I don’t deny that this results in  price competition. But as a general rule, the better the author, the harder it is to find a good old-fashioned economic substitute for her Conversely, the worse the author, the easier it is to substitute. It’s really easy to bore people. It’s hard to entertain them. And the authors who can make you laugh consistently–or keep you on the edge of your seat–or have you reaching for your hankie–you know they are not interchangeable.

So, when someone says that price must tend towards the marginal cost of distribution, you are implicitly saying that authors write indistinguishable crap. And frankly, if I believed I wrote indistinguishable crap, I wouldn’t bother writing.

One of the reasons that competition is so imperfect in the book world is that this is a field that is very hard to enter. Oh, you might think it’s easy–all you have to do is slap words down and put a book up on a Kindle. But it is hard to write a book, and it is a thousand times harder to write a good book. It takes a lot of skill and a lot of talent. Self-publishing doesn’t make it any easier to write a good book–it just makes it easier to take a bad book to market.

Writing a book is so hard that there are not enough truly awesome authors in this world to keep the voracious readers in excellent books for all their reading hours. Voracious readers have to settle for “really good” authors and “enjoyable” books. If they read fast and often enough, they’ll delve into the “okay” territory just so they have something to read.

So yeah, I’m not worried about author compensation. It is already the case that authors like Stephen King can charge $34.99 for a book, while authors like Courtney Milan charge $7.99. There’s a reason for that, folks, and it’s because Courtney Milan is a really, really poor economic substitute for Stephen King.

I do think there are some ramifications to the e-revolution. I do think that there’s unmet demand for more reasonably-priced works. And I do think that price-competition will force the price of many books down. But I don’t think that having 500,000 books on Amazon priced at $0.99 will so transform the book industry that everyone will have to drop their prices to $0.99 and will still only sell 100 copies. The book industry has managed to survive against a backdrop where every single excellent book from a century ago is available for free.

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19 Responses to “In which competition fails to be perfect”

  1. Deb says:

    Ah! Now I can copy and paste a URL instead of trying to have this argument over and over again. Thanks for that. :p

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  2. Twolfmom says:

    Thank you for posting this. You have the best posts about e-books & issues that deal with them. It is always very enlightening to read. :)
    Blessings to you always!

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  3. H.E. Roulo says:

    I think the points you make about specific authors and books having value is valid and often overlooked. Too many people are prepared to panic over changes in the book market.

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  4. BookSnob says:

    Oh, that was really good.Can YOU write an economics book? I would be euphoric. Me+Economics=Love.

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  5. Lynnd says:

    Really, really good analysis in this post and your previous post. Thank you.

    And, I think you are an excellent economic substitute for Stephen King :-) .

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  6. Terry says:

    “books are imperfect substitutes for each other”. I think the words you are looking for are: Books are not fungible.

    “when someone says that price must tend towards the marginal cost of distribution, you are implicitly saying that authors write indistinguishable crap.” Maybe they are but mostly they don’t get the economics of it 1)Because books are not fungible (as you correctly point out), they can’t be indistiguishable crap. 2) The price does indeed tend towards the marginal cost but not only of distribution but also of production (cost of author’s time, quality of work -an intangible to be sure but it makes a difference to the costs of the publisher- cost of the workers involved on top of the author -agent, editor etc..- and so on -these costs aren’t fixed either). The latter part is what makes books non fungible.

    You correctly attack those making that stupid economic argument. They don’t have the proper economics down.

    Your last paragraph is dead on. Odds are that the model is unsustainable, pretty much like the “all you can eat” prices put out by cellular carriers and Netflix.

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  7. Terry,

    My formal training in economics is almost nil, and so I could be completely off base on this, but I do think I mean that different books are not economic substitutes, and not that books are not fungible. I’m not 100% certain, but my thinking is that books are mostly fungible–at least insofar as we are talking about the same book.

    For instance, I have 30-some copies of Unveiled in a plastic container in my living room, and I kind of feel like they are completely interchangeable. If I’m going to give one away, I don’t care which one. The copy of Sara Creasy’s Song of Scarabeus sitting on my bedroom floor is interchangeable with any other copy of the same book.

    Exceptions: first editions, signed additions–anything with after-acquired meaning, really.

    So, a book in that sense is not like a parcel of land. They’re all alike. Just like I don’t care which scoop of cornflakes I get.

    But I do care whether I get cornflakes or rice krispies. (Actually, I don’t like either, but hey.) Cornflakes and rice krispies are both cereals. Cereals are generally fungible within type–but whether various cereals compete with each other, and how well, is a question of how well they substitute for each other.

    But books are mostly fungible, within type.

    But like I said, my formal economics training consists of a handful of classes that are many years distant, and while I’ve had informal repeated exposure since then, I’m sure I can easily be wrong.

    Do you have a good reference that would clarify the difference?

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  8. Terry says:

    My own economics training is also many moons ago (and mostly derivative of legal training) but if memory serves, a unit has to be exactly exchangeable for another (e.g. a dollar bill for a dollar bill) for it be fungible. Whether a unit can be fungible or not (a pebble for a pebble or a box of cornflakes for another box of cornflakes is essentially market driven, i.e agreement between multiple parties that value (which is not the same as price) is the same.

    As you point out:”Exceptions: first editions, signed additions–anything with after-acquired meaning, really.” There won’t necessarily be an agreement in the market as to value.

    Books are truly fungible if we are talking of the same author, same work, same format (e.g. paperback vs hard back), same edition etc.. In other words, when you go to the bookstore and see a stack of one author’s book in paperback for sale, those books are fungible for one another but not for another author’s paperback, or the same author’s book but in hardback and so on, even if the price at the checkout counter is the same (that’s liquidity).

    I understand what you mean by ‘mostly fungible’ and we agree there but I believe there is enough difference between books that fungibility is actually more the exception than the rule.

    What Amazon and others are trying to do is “corral” whole sets of publications at minimum costs to them as if they all were fungible. In one form or another, it means that someone’s margin and product value (publisher, author, electronic hardware producer, distributor etc..) is meant to be eaten; Amazon doesn’t want it to be them. In the end, though, it never works out.

    What people arguing for the “race to the bottom” are doing is forcing value on similar but not fungible products. In essence confusing price with value as well as liquidity with fungibility.

    Books not being fungible means different costs and thus different value which affects prices and that’s why most talk about e-books prices going all the way to the bottom are wrong. Actually, they might even get more expensive than paper books as part of the cost of distribution is broadband availability which is actually not getting cheaper, quite the opposite; but that’s another story.

    In any case, we are in total agreement ultimately. I guess we are having a sort of semantics “argument” and I don’t want to sidetrack this from your essential points.

    The definition in Wikipedia is a good start (they barely touch on the market aspects).

    Ok, I’ll shut up now :-)

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  9. Ha, so our economics refreshing is coming from the same source? Fantastic.

    But yes, I’m very easy to sidetrack on a point of proper vocabulary, even if all else is in agreement. It’s a form of nerd-sniping with me.

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  10. Karenmc says:

    I was trying to slide through my Monday without using my brain very much, but then I read your post. Thanks for the enlightenment. I’ve never thought about books in this economic sense before.

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  11. Love this post. It inspires me to put my head down and keep working on my craft. Which is, afterall, the most important thing I can do- simply write a good book.

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  12. Interesting argument, but I don’t agree with your logic.

    First, I agree that the “e-books will drop to zero” argument is wrong. Supply and demand does allow infinite supply (at very high price point) or infinite demand (at 0), but how many people will buy your $5,000 book? How many authors will/can work for $0? None.

    Let’s say e-books have an infinite supply (downloads) and the price drops to zero. At zero, you have a theoretically infinite demand, but the supply will change over time because you have a finite supply of authors willing/able to work for $0 so the price will increase. However, it won’t increase to the prices set under the agency pricing models the big 6 are currently using because there will be more authors in the market. Hence, more books which will drive down the price down unless price fixing occurs. (By the way, price fixing is illegal and assumes the big 6 can gain control over the indy book market.)

    As the supply increases and the price decreases, the demand for e-books will increase. Traditional books have a different supply curve and thus, a different demand curve and price point. So far, traditional publishers have misunderstood e-books. They see them as traditional books, which is a different type of good from e-books.. (Well, they might not in reality, but their behavior indicates they do.)

    All that aside, I disagree with your view of other books being imperfect substitutes for yours. Whether a good is a substitute depends on the definition of the good. Your definition is significantly narrower than mine. (My sister used to accuse me of reading the words off the cereal box. I’m an avid reader, so my definition might be too broad.) When I look at a book as a good, I don’t see author, genre, plot, characters, etc. I see packaged words because when you strip away covers, plots, and authors, that’s what a book is. A book is still an imperfect substitute because I might enjoy some books more than others, but the author’s name recognition doesn’t influence my enjoyment. It influences my expectations. Hence, by my definition, all books are closer to being perfect substitutes than they are with yours. Two enjoyable books (in my subjective reader’s view) are perfect substitutes for each other.

    There are factors that influence my purchasing decisions, but these are changing daily. For example, book reviews, recommendations from friends, and price all carry more weight than they did a year ago. There are very few authors that I read because I recognize their name. Maybe I’m in the minority, but it’s worth noting the way I get information about books has changed.

    As for the gatekeeper argument, I don’t buy it. Gate keeping is classic oligopolistic behavior. It restricts the market and artificially raises book prices. It does not, by definition, increase book quality.

    Good editors increase book quality, not marketing departments deciding which book they think will be the next big thing.

    The market already selects good blogs. It can also choose good books without sending a publisher a check for their “input”.

    I’m not suggesting editors, agents (legal side of things), and cover artists aren’t necessary. I’m suggesting the big 6 publishing house/middleman model is no longer necessary for a healthy publishing industry.

    I haven’t read any of your books. Since I’ve read your blog, I will probably try one.

    Sorry for the extremely long comment.

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  13. Kristle,

    I submit that if you read THE FELLOWSHIP OF THE RING and enjoy it very much, and then read THE TWO TOWERS and enjoy it very much, and then you do not much care at all whether you read THE RETURN OF THE KING, so long as you read other books that you enjoy equally…if you do that, your reading habits differ from many other readers, and your eclectic personal preferences probably won’t have much macroeconomic weight.

    More generally, just because you enjoy two things equally doesn’t make them substitutes. For instance, I like hiking. I also like string cheese. But these things are not substitutes. If anything, they are complements.

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  14. Courtney,

    Thanks for the response. All this stuff is fascinating. Sorry for being so well… intrigued, wordy, and probably annoying.

    Hiking and string cheese are only compliments if a decrease the cost of string cheese (or hiking) causes an increase in the demand for the other. So I’m not convinced they are necessarily complements for everyone. As for books, if Steven King drops the price on his book, does that raise the demand for another book? Probably not. (It could raise demand for his other books, which would mean all books by Steven King are complements. Hm…Tangent, sorry.) However, if books are substitutes and Steven King drops the price on his book, the demand for books by a similar author will decrease. (I doubt we’ll find anyone willing to volunteer for this experiment.)

    I think the entire argument really depends on how you define a book as a good. What is it? Can we really argue that a book is anything more than a collection of words? Is it ego that leads us to believe our works are unique or is there an intrinsic quality that separates each book in the market place, letting each book be its own good that can only be substituted with a different edition of the same book?

    Maybe I’m being too philosophical (or all those microeconomics courses warped my brain–a distinct possibility), but I see the book market as numbers first, books second.

    When I look at AAP’s statistics, I can’t tell who wrote the books, what the covers look like, etc. All I see is $49.5 million e-book sales in Dec 2010; 2.4% total growth, etc. Admittedly, these numbers reflect macroeconomics because they look at the entire industry as a whole, not a genres popularity or personal/individual business decisions.

    Supply and demand, as well as substitution and personal preference, are microeconomic theories. Maybe my definition of a book is too broad because it applies the macroeconomics view of the industry to the demand for an individual book. Still, how narrow or broad should the definition be?

    As for Tolkien, I confess I’m a geek. I read all three of the books you mentioned. Then I made a mistake and read THE HOBBIT. I couldn’t finish it. It just didn’t work for me.

    Oh, one last thing, I bought UNVEILED because of the excerpt and am looking forward to reading it next weekend.

    Best of luck!

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  15. You state the obvious truth that is often overlooked: value matters. READERS decide what value means. I found your blog for the first time today, but bookmarked it and will be back.

    Lindsay

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  16. jo bourne says:

    I’m out of my depth in any argument where the word fungible is tossed about . . .

    but ISTM the market consideration is not merely whether two objects are in fact interchangeable but whether they can be distinguished from one another.

    While Rice Crispies is not corn flakes, if all cereals are sold in plain brown wrappers and there are 30,000 boxes to choose from, cereals become effectively of equal value.

    Unless there is a way to grade/judge/distinguish/accurately describe a product, the buyer can make no intelligent choice. Value of each product drops to the average value of all product available. The price point is what a buyer will pay for the ‘luck of the draw’.

    In ebook, this creates a two-tiered system:

    Those on the upper tier — books vetted by a publisher or attached to a known writer — would have individual values. They are, if you will, labelled cereals.

    Those on the lower tier would all have the same value. Not a high one.

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  17. Interesting point, Jo, but e-books aren’t sold in brown paper wrappers. There’s a lot of information available about them: cover and blurb provide a huge clue as to whether the book is professional, and you can read a sample of the same book–a taste test if you will–before buying. There are also reviews, available onsite.

    I think the actual data holds this out: people sell books, and intelligent choices appear to be made, for books that do not meet the “labeled cereal” criteria you described above of “known writer” or “vetted by publisher.”

    And I don’t just mean Amanda Hocking. There are a LOT more people out there.

    At some point, I’m going to post on diffusion, random walks, and semi-stable equilibria in book buying. But ultimately, the thing that sets e-books apart from cereals is that cereal transactions are basically memory-less–one person’s choice doesn’t have any impact on another’s.

    But e-book transactions are not memoryless, and that serves to differentiate.

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  18. Mark Coker says:

    Great post. I often hear authors complain about having to compete against free and low cost books, and this is one of the best articulated answers. If a book is worth buying, readers will buy it.

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  19. Mark Murphy says:

    The concept of authors being paid a per-copy royalty or some other per-copy fee per book is a relatively recent phenomenon. The concept of readers tending to get their reading material through individual purchases (vs. the library, borrowing from friends, or other free sources) is an even more recent phenomenon. The assumption that underlies your piece, and most of the responses, is that these represent the One True Model and that it will be the only model forevermore. Color me skeptical.

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Courtney Milan writes historical romance novels like the ones you see to the right. She still remembers bits and pieces from her old lives, where she was (variously) a scientist and a lawyer.

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