How the Internet Helps Pricing Efficiencies

One of the things that always surprises me about Economics is how long it takes for theory to be realized in reality. Self-interested economic participants are supposed to maximize their gains by being savvy, price sensitive shoppers.

Many people’s own habits and laziness precludes that expected behavior — at least initially. Eventually, as it becomes more and more ingrained into the culture, we do begin to behave as the Economists expect. We may not shop around for gas at $1.89 — but at $3.89, a lot more of us do.

So too with books. Regular readers of this site know I recommend buying
used books, if you cannot afford new ones. Apparently, many other
people have been doing so. Both the WSJ and the NYT have had extensive coverage of the issue last week. Which leads me to a research paper from last year:

"A research paper released a year ago, however, found that online used-book
markets like Amazon cannibalized potential sales of new books only about 15
percent of the time. The researchers – Anindya Ghose of New York University and
Michael D. Smith and Rahul Telang of Carnegie Mellon University – also
hypothesized that because the lower prices of used books leave more money in
consumers’ pockets, the gains from additional readership might result in more
purchases of new books and in the increased exposure of authors to new
audiences."

No kidding. That sort of long range thinking is noticeably absent from publishers, labels, etc., who imagine that anything thats not an actually sale is the equivalent of theft. Indeed, a second NYT article began by asking "Is Amazon.com becoming the Napster of the book business?"

Um, no. Copyright laws give purchasers of physical works the right to sell the physical copy (but not a copyright) in that work. 

The WSJ observed:

"The Internet is creating a new and fast-growing category in the book-selling market — the barely-used book. An increasing number of consumers are snapping up used volumes online at invitingly cheap prices. These aren’t yellowing copies of out-of-print titles but often unblemished copies of newly published books — sometimes available just a few days after a book’s official publication date.

Today, any consumer armed with a title or an ISBN number can search the Internet for the lowest price and get one within minutes. At the same time, the Web sites that offer such books, such as Amazon, Abebooks Inc. and Alibris Inc., have made it painless for readers to resell them. A reader who owns "The March," for example, can sell it via Amazon just by clicking on the "Sell Yours Here" button to the right of the new-book listing. The process is so simple that even the most technologically befuddled person can follow it. Once the book sells, Amazon collects a commission of $0.99 plus 15% of the sale price from the seller. It then deposits the remainder in the seller’s account and provides the address of the customer. The seller ships the book directly to the customer. Amazon’s payment to the seller includes a pre-calculated credit toward shipping costs."

The NYT‘s focus was more on the booming used text book industry, as the price of College Texts have gone thru the roof (thank goodness there’s no inflation!): 

"In barely a decade, online booksellers have grown to account for two-thirds
of the market for general-interest used books, a trend that calls into question
the future of brick-and-mortar stores devoted to used books, according to a
study financed by the publishing industry and released yesterday.

The study, by the Book Industry Study Group, a nonprofit research
organization whose membership includes nearly all commercial publishers as well
as libraries and nonprofit book-related organizations, found that online sales
of general-interest used books are growing at a rate of more than 30 percent a
year, while sales of used books at stores are almost flat.

Used books account for a relatively small portion of overall consumer
spending on books, with roughly $600 million, or 3 percent, of the $21 billion
that Americans spent last year on general-interest titles going for secondhand
books, the study found.

The market for used textbooks is far larger, at $1.6 billion, or more than 30
percent of the $5.3 billion spent by consumers on educational and professional
books.

Over all, used-book purchases accounted for $2.2 billion, or 8 percent, of
the $26.3 billion that American consumers spent in 2004 on books of all types.
That total was up 11 percent from the previous year, the study found.

"The growth reflects how easy is has become to sell used books and to create
inventory in this business," Jeff Abraham, the executive director of the study
group, said in an interview.

Most of the growth is coming in the online sale of general-interest books,
said Jeff Hayes, a group director of InfoTrends, a research company that worked
on the study, a trend suggesting that traditional used bookstores might be an
increasingly endangered species."

 

Used_booksgraphic

graphic courtesy of NYT 

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Why is online used book sales booming? Simple: It is a function of
ease of use, efficiency, and competitive pricing; Any publisher that prices books high enough loses
the marginal purchaser; Those that either cannot afford the price, or
simply do not wish to purchase a book at $X, wait until its used, and
buy it cheaper.

I find it interesting that the Long Tail applies not only to niches by subject matter or relative lack of mainstream appeal, but to the economics of specific pricing: content finds an audience as prices drop. While it may not be a true "long tail," there’s little doubt how the bell curve looks vis-a-vis costs.

As prices approach zero, more and more potential consumers can have
access to a given work. Its the underlying dynamic of the entire
explosion in internet content, including blogging.   

The publishing industry believes this to be a problem:

"Used books are to consumer books as Napster was to the music
industry," she said. "The question becomes, ‘How does the book industry
address its used-book problem?’ There aren’t any easy answers,
especially as no one is breaking any laws here." (emphasis added)

I disagree with the publisher’s who think they are losing sales;
They are capturing readers who might otherwise never read this book.
Eventually, when they are more finacially secure, you have a customer
with a love of books, a fan of specific authors, and ready source of
income (i.e., sell old books/buy newer ones) to keep purchasing new
books. 

Perhaps a dynamic pricing sturcture — similar to DVD pricing — might capture more of these sales.

Source:
Internet Grows as Factor in Used-Book Business
By EDWARD WYATT
NYT, September 29, 2005
http://www.nytimes.com/2005/09/29/books/29book.html

The Growing Market For Slightly Used Books
In Latest Threat to Publishers, Readers Flock to Web to Buy
Best-Sellers at Big Discounts

JEFFREY A. TRACHTENBERG
THE WALL STREET JOURNAL, September 29, 2005; Page D1
http://online.wsj.com/article/SB112793907533954842.html


Online Battle of Low-Cost Books

BOB TEDESCHI
NYT, July 12, 2004

E-COMMERCE REPORT
http://www.nytimes.com/2004/07/12/technology/12ecom.html

Demand for used PCs on upswing
Dinesh C. Sharma
Newss.com. Wed Sep 28 09:08:00 PDT 2005
http://beta.news.com.com/Demand+for+used+
PCs+on+upswing/2100-1003_3-5884687.html

Study: Used Books Are $2 Billion Industry
THE ASSOCIATED PRESS
NYT, September 28, 2005
http://www.nytimes.com/aponline/arts/AP-Used-Books.html

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