By Steven Pearlstein,
As a general rule, we don’t prefer monopolies. We know that, over the long run, monopolists tend to raise prices, reduce choice and stifle innovation.But are monopolies so bad that we might want to tolerate a little price-fixing by customers or suppliers in order to break them?
Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.
That is what five leading book publishers are arguing in explaining why they simultaneously accepted an offer from Apple, just before the release of the iPad, to change the way e-books are priced and distributed. Their actions moved the industry from a “wholesale” model, in which they sold e-books to retailers and let them set the retail price, to an “agency model,” in which the publishers set the retail price and pay the retailers a fixed commission on every sale. In the process, they managed to break up Amazon’s e-book monopoly and raise the price of online books by 30 to 40 percent.
Now you might ask at this point why breaking up a monopoly would raise prices rather than lower them.
The answer has to do with how Amazon went about building its e-book monopoly in the first place — namely, by setting a price that was lower than what Amazon was paying publishers for the book. What looked to consumers like a great bargain at $9.99 a book looked to others in the industry suspiciously like predatory pricing, or selling below cost today in order to gain a monopoly and raise prices in the future.
So which is better: a market in which Amazon uses low prices to maintain its e-book monopoly and drive brick-and-mortar bookstores out of business, or one in which the major book publishers, in tacit collusion with Apple, break Amazon’s monopoly and raise prices?
Full piece at The Washington Post.
1 comment:
One of the best responses to Pearlstein's piece is this one, in my opinion:
It might be helpful to the discussion to introduce a related term, monopsony. Monopoly is a sole supplier, whereas monopsony is a sole buyer. The US government is a monopsony for military equipment in the US. Wal-Mart manages to make itself a monopsony to many of its US suppliers. When a company is involved in the wholesale stage of commerce, it can be both a monopsony and monopoly at the same time, as Amazon was doing - a monopsony to the publishers and a monopoly to the ebook retail market. Note that both terms do not imply absolutely 100% control over the market, but rather in a large economy, they mean a big enough percentage to dictate prices successfully.
The idea that monopolies are bad because they unfairly raise prices and thus distort the market is just one side. Monopsonies are bad because they unfairly lower prices for manufacturers/suppliers and thus distort the market as well.
Disclosure: I work for a book publisher.
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