The Economics of eBooks

Interesting article by the The New York Times on the potential increase in pricing of ebooks. The thrust of the article is that in the near future ebooks will increase from a standard $9.99 price to $14.99, a 50% mark up. Consumers, predictably, are not happy:

“I just don’t want to be extorted,” said Joshua Levitsky, a computer technician and Kindle owner in New York. “I want to pay what it’s worth. If it costs them nothing to print the paper book, which I can’t believe, then they should be the same price. But I just don’t see how it can be the same price.”

First of all, Joshua, you are not being extorted. No one is saying you have to buy $14.99 ebooks in the future or you're going to be harmed in some way. This not a mafia-style "protection" racket or an egregious tax situation. If you don't like it, don't buy it.

Secondly, Joshua, and I assume other upset consumers, are using the Labor Theory of Value to determine what they believe the "correct" price of an ebook should be. Of course, as we now know, the value of any product is determined by its marginal utility concerning a particular consumer in conjunction with the combined factors of input cost and the profit motive. For example, if the final Twilight book costs $10 to "make" and the final Harry Potter book cost $10 to make, then they should be retailed at the same price (given the same profit margin preference). But, personally, I would have paid $100 for the final Harry Potter book, whereas you could not have paid me $100 to slog through the final Twilight book (or any of them for that matter). But many readers probably feel the opposite, saying they would have paid anything for the Twilight book but zero for Harry Potter. So saying an ebook should cost $9.99 or $14.99 or any other predetermined, ultimately arbritary price, is nonsense. Prices are amorphous, as I will shortly explain.

Author Douglas Preston makes the same fallacious arguments, but from the other side of the aisle:

“The sense of entitlement of the American consumer is absolutely astonishing,” said Douglas Preston, whose novel “Impact” reached as high as No. 4 on The New York Times’s hardcover fiction best-seller list earlier this month. “It’s the Wal-Mart mentality, which in my view is very unhealthy for our country. It’s this notion of not wanting to pay the real price of something.”

To reiterate, there is no "real price". Let's recall what a price is. It is a signal, a relay of information to parties about how much another party values an asset they hold title to. The receiving parties then decide whether the benefits they will get from the asset will exceed the costs (the price they have to pay to obtain title from the other party). For every individual for every asset, this preference is different and is subject to an innumerable amount of factors.

As I mentioned before, if Joshua doesn't like the price change, he simply does not have to purchase any more books. Yes, he will have to deal with the sunk cost of the ebook hardware, but this was a foreseeable event and an eBook still has value besides purchasing books (free public domain works, web browser, etc...). Or he could fill his spare time with other activities. Or he could go to a library, like Wilma Sanders:

“As far as I’m concerned, Amazon has committed to the $9.99 price,” said Wilma Sanders, a 70-year-old retiree who has homes in Plymouth, Mass., and Marco Island, Fla. She said that if e-book prices rose, she would stop buying. “I’m still a library-goer. There are enough good books out there that I don’t need to pay more than I want to. I already can’t keep up with what I have.”

I'm with Wilma on this. I do think Amazon will eventually fall back on the $9.99 model. What it seems like their doing is trying to translate the old hardcover/paperback price differential to the new medium (eg: when books first come out they will cost $15, then will drop down to $10 after a few months). But why does the model have to be so standard and rigid? Why can't prices float dependant on how popular a book is? My point is this is a very new market that does not need to be cemented as one particular model.

Obviously the role of publishers' and the deals they have with Amazon, Sony, B&N and Apple all play a huge role in this and the article doesn't mention a whole lot about them.

But my basic point is Amazon doesn't owe consumers anything. That's the beauty of a market. It's voluntary exchange. So if you don't like what they have to offer, go somewhere else or do something else. But don't go on Amazon.com and give a new book repeated one star ratings because you think it's overpriced. It's immature and adversely affects others.


(HT: Marginal Revolution)