The classic construction has it that monopolies enforce higher prices. And in the current suit by the U.S. Department of Justice, accusing book publishers of price collusion on eBooks, the bad guys are the ones raising prices. By that definition, Amazon could not be a monopolist. They want lower prices. Way lower prices.
The reality is a little more complex. But, for the sake of argument, let’s assume that Amazon is not a monopoly. Where does that lead us?
The business literature is filled with examples of how firms use lower prices to gain market share or competitive advantage. In the Amazon case, we have the example of “penetration pricing,” or price discrimination. That’s exactly what they’re doing:
Setting lower, rather than higher prices in order to achieve a large, if not dominant market share.
The question, of course, is whether any of this can lead to an eBook monopoly for Amazon. This much we know:
- When any firm gains competitive advantage, it can begin to dictate terms to its suppliers. Take Wal-Mart, for example. Or Apple’s iPhone/iPad supply chain.
- Before Apple and agency pricing, Amazon had 90% market share. They had the eBook market to themselves and were pricing aggressively to gain competitive advantage. The adoption of agency pricing, to my mind, proves they were on their way.
- With the advent of agency pricing, Amazon’s eBook market share fell to 60%. Barnes & Noble gained 25%, Apple gained 15%.
- Almost as soon as the U.S. DoJ announced a settlement with three of the six parties on the collusion allegations, Amazon announced it would again lower eBook prices.
- As it must. Under the settlement, the publishers are required to “to grant retailers – such as Amazon and Barnes & Noble – the freedom to reduce the prices of their ebook titles.”
REPLAY: Amazon gains 90% share of the eBook market?
The sad thing here is how many apologists (sorry, I lack a more elegant term) contend that there is “spin” involved when making the argument that Amazon is lowering prices to gain competitive advantage. In the most egregious example, Peter Scheer makes the specious claim that Amazon cannot be simultaneously selling eBooks AND Kindles at a loss.
Now, both of these statements can’t be true. It’s not possible for Amazon to both (1) sell e-books at a loss in order to reap big profits on Kindle devices, and (2) sell Kindles at a loss to reap big profits on e-books. It may be doing 1 or it may be doing 2, but it can’t be doing both at the same time.
Of course, Peter Scheer is correct. Unfortunately, he’s casting the question in such a way that the only logical answer is the one he wants. Getting to first causes, let’s pose the question differently:
To gain a dominant market share in eBooks, Amazon is willing to sell eBooks AND Kindle Readers at a loss. Because, really, you can’t have one without the other.
Still sound “impossible?”
Again, think Wal-Mart. They sell lots of things, make money on many of them and can afford a few losses elsewhere. Same for Amazon. The idea of using those few losses to gain a dominant position in one corner of a business has to be… Ummm… Appealing. And, up to a certain point, it is perfectly acceptable business behavior. There are other examples… Take Dell. Or Nokia, just for starters.
We grant that this strategy doesn’t always work, or doesn’t work forever. But it’s always nice to have powerful friends helping you out along the way.