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"Doesn't Get the Free Market" Quote of the Day:
Today's "doesn't get the free market" quote-of-the-day comes from Graham Marks, children's editor at the British-based trade magazine Publishing News. Marks was asked to comment on the fact that large booksellers are competing on price to sell the new Harry Potter book, resulting in low sale prices that make it hard for many bookstores to sell the book at a profit. Marks comments:
Everywhere you go there is huge, ridiculous discounting by the chains. [Booksellers] are literally not going to make one penny out of the book. It is stupid -- just throwing money away ... The world has gone mad.
Yup, no doubt.
Anderson (mail) (www):
The thing about deep discounting is that it's risen in tandem with the sharp rise in book prices. Look at the cover price of the new Potter.

A few months later, the discount will be gone, but the cover price will remain.
6.11.2007 12:07pm
Zathras (mail):
There seem to be 3 possibilities here:

1. Marks is wrong that the companies are not making money on the books, because they are getting them more cheaply than Marks thinks;

2. The companies are not making money on the books, but the sellers have a reasonable expectation that the books will be good loss-leaders, as they bring in publicity for the stores and increased sales in other ways; or

3. Marks is correct, and this is a classic case of a "race to the bottom" market failure.

I don't have enough information to know which is correct.
6.11.2007 12:10pm
AF:
Are you suggesting that whenever someone criticizes an industry's pricing strategies he fails to understand the free market?
6.11.2007 12:10pm
Steve:
What he doesn't understand - giving him the benefit of the doubt that some booksellers are literally not making "one penny" off the book - is the concept of a loss leader.

Countless people will purchase this book who otherwise may not have visited a bookstore all year. I'd like them in my bookstore.
6.11.2007 12:12pm
PatHMV (mail) (www):
And in the meantime, people who might not have gone to the bookstore at all, but for the massive amounts of Harry Potter hype, will be exposed to all the other offerings of the bookstore while they wait in the midnight line. Odds are, they'll pick up another book or two while they're waiting. And they may even decide to come back another day to get a non-Harry-Potter book now that they've learned where the store is and what kind of good stuff it's got to sell.

I used to love the little independent bookstore we had here, before the Books-A-Million and Barnes &Noble came. But I didn't buy nearly as much stuff there as I do at the "chains." Why? Because they have a larger selection. The old bookstore didn't carry magazines, so I only went in if I was looking for a book. But I'll stop in to one of the chains to pick up a magazine to read at lunch or on the weekend, and while I'm there, I often check out to see if they have any new books that I'd like. But I wouldn't have stopped but for the magazines. The old bookstore, too, didn't have a nice little coffee shop in it, where I could sit and read a bit or work on my lap top, either before or after browsing through the books, movies, and music offered by the store. It was a lovely little store and I miss it, but there's a reason it couldn't compete with the chain stores.
6.11.2007 12:16pm
wm13:
If this was the most uninformed comment on economic matters by a reporter this year, what a wonderful world it would be. It's actually possible, in a free market, for the majority of participants in an industry to pursue a mistaken strategy for a period of time, as opposed to most of the absolute impossibilities that journalists usually claim are occurring.
6.11.2007 12:22pm
Zathras (mail):
Regarding my option #2 above, and the similar idea by Steve that this sale will bring in buyers who would not be in the bookstore otherwise, my experience seems to indicate otherwise. I have been at 2 midnight events for Harry Potter releases, along with hundreds of others (and I'm not afraid to admit it!). Between the 2 events I could count the people on one hand who were there and who bought another book besides HP. I have a feeling that this is the sellers' motivation--I just doubt that this marketing technique really works.
6.11.2007 12:33pm
ed in texas (mail):
In other news, Publishing News relies on a dictionary that evidently doesn't have the definition for 'loss leader' in it. Suggestion: talk to someone in marketing. Most anyone will do.
6.11.2007 12:39pm
Anderson (mail) (www):
I just doubt that this marketing technique really works

The publicity gets people thinking months in advance about the purchase, &thus makes a book purchase much more premeditated than it is for most people.

And there's little reason to care which Books-In-A-Box retailer you buy it from; hence, price is the only way to compete.

Therefore, people wondering where to pre-order, can be expected to choose the store that offers the book for two cents less. However high the demand is, the supply is greater.

Just imagine if they marketed the book like the Wii ... ten copies per store, every two weeks!
6.11.2007 12:44pm
Coke is it (mail):
Anderson, after searching for a wii for over a month (I do not wait out front at 6am, but I do stop by stores after work), I went ahead and bought the oft loathed PS3. And I love it more than I thought I would. Sony has got to be pretty thrilled with Nintendo's inability to satisfy the market.
6.11.2007 1:03pm
Misanthronomicon:
He's essentially calling for price-fixing.
6.11.2007 1:05pm
Duncan Frissell (mail):
Britain was overcharged for many years by the Net Book Agreement which came to an end circa 1995.

I don't know how people can argue that low prices for books or HD Screen (last Christmas) are a bad idea.
6.11.2007 1:34pm
Thales (mail) (www):
In response to one comment, the "race to the bottom" concept doesn't really apply to the effect of price competition driving profit margins to near zero or zero. Economics 101 will teach you that the long term equilibrium of any market in anything is marginal cost=marginal value=market price. It is no surprise to see deep discounting, because only by engaging in such behavior and thereby capturing volume can bookstores maximize their profits (which in this case, on this item, may be zero, but zero is better than a loss, including the losses of foregone opportunities).
6.11.2007 1:35pm
Avatar (mail):
Anderson's correct, of course, to point out the high cover price of the book to begin with. Surely we're not talking about a book that's 25% larger than the last one (I mean, we're already up to Jordan-novel size here!), so it's not like that much more paper is being consumed. It just has a high price because it's as highly-anticipated as it is.

Because the price is so high in the first place, people are going to be pretty sensitive to the discount they can obtain on that price. It's not that they're getting it for all that much cheaper than normal - $16 or $17 for a new hardback bestseller is an average discount, not an exceptional one.

A retailer could always pursue a "last resort" tactic, of course, and sell at cover price, counting on manic fans to exhaust the supply of discounted books early on and give them a shot at a nice profit on each book... but if they miscalculate, and the demand for the book is met by the supply of discounted books, then they sell -none- and have a large stock of expensive (and heavy) merchandise left over.

Not only that, but if the price gets TOO high, an awful lot of the customers of this book can just not buy it off the bat. Pretty much everyone who's interested at all in Harry Potter knows someone else who's interested in Harry Potter. If the book's a lot more expensive than normal, two people may club in on it rather than buy a copy each. Or one person might wait until a friend is done reading it and then borrow or purchase it from them. (This is a tactic for the brave person who can avoid spoilers, or lucky sods like me who can enjoy the book anyway...)
6.11.2007 1:42pm
Falafalafocus (mail):
Forgive me as I am a lawyer, but not an economics scholar. Taking the professor's comments as true that the book will not make a profit, I do not understand the concern. Let us assume that the book will not make a profit and that the bookstore will not make the loss up with alternative sales. My response is simply so what? Isn't that an inherent risk in the free market? When an inital buyer intends to act as a middleman, he always runs the risk of being priced out. That's not a failure, but rather a feature of the free market. I do agree though that if this is the worst example of the year, then we are doing ok.
6.11.2007 1:56pm
J. F. Thomas (mail):
When exactly does pricing something as a "loss leader" turn into predatory pricing? Now I'm sure that a lot of libertarians will jump on me and say there is no such thing as predatory pricing. And I doubt in this case selling the Harry Potter novel at or below cost is a case of true predatory pricing. But the consolidation of the book sellers industry has certainly led to a situation where it is almost impossible for a small bookseller to make a go of it. This is true in all areas of retailing where the volume retailers can pretty much drive the independents out of business simply by accepting a loss on a portion of their merchandise.
6.11.2007 1:59pm
KeithK (mail):

I do agree though that if this is the worst example of the year, then we are doing ok.


Quote of the day. He said quote of the day. I'm sure there will be plenty worse this year.
6.11.2007 2:05pm
JB:
Race to the bottom market failure, or approximately perfect competition? P is equalling MC in his analysis after all.
6.11.2007 2:13pm
Houston Lawyer:
Someone should send him a DVD of "You've Got Mail".
6.11.2007 2:19pm
Byrne Hobart (mail) (www):

But the consolidation of the book sellers industry has certainly led to a situation where it is almost impossible for a small bookseller to make a go of it.


So, to rephrase, the ideal size of a bookseller is larger than the current average size of a bookseller, and B&N, Borders, et al are fixing this by gradually getting rid of uncompetitive smaller companies. Sounds like they're doing us a favor.
6.11.2007 3:18pm
David M. Nieporent (www):
This is true in all areas of retailing where the volume retailers can pretty much drive the independents out of business simply by accepting a loss on a portion of their merchandise.
The more volume one sells at a loss, the more money one loses.

The reason small bookstores have trouble is lack of selection, not inability to compete on price. I don't go to B&N or Borders (or Amazon, which is a much bigger factor) because they're cheaper; I go because I know they're much more likely to have what I'm looking for. (Oh, also because I often get gift certificates to them as presents, which an independent bookstore can't offer except locally, and the people buying them for me aren't local.)
6.11.2007 3:35pm
The Original TS (mail):
"He's essentially calling for price-fixing."

Yes, exactly correct. He's complaining that the bookstores are "throwing money away." What he really means is, "those Potter nutters will by this bloody book at any price. If we all agreed to insist on the full whack and not cut prices, think of all the money we'd make!"

In effect, he wants monopoly pricing which, of course, the book retailers can't do because of competition. Interestingly, the publisher is a monopoly, and that's why the cover price is higher. If there were competition amongst publishers on this book, it would go direct to paperback and retail for $3.95.
6.11.2007 3:56pm
NickM (mail) (www):
People who show up to buy a book from you will nowadays probably agree to have their personal info, including email address, entered into your free customer club. the special offers, discounts, advance notifications, etc. they send you are designed to build brand loyalty.

Nick
6.11.2007 4:01pm
Q:
"When exactly does pricing something as a 'loss leader' turn into predatory pricing?"

it generally doesn't, no matter how low the item is priced. this is because to succeed on a predatory pricing claim the plaintiff must show a 'dangerous probability of recoupment' by raising the price of the item to supra competitive levels. stores don't intend to recoup on loss leaders by raising prices on the loss leader after rivals exit; rather, they recoup through sales of other, higher margin items.

there used to be fair trade laws allowing minimum vertical resale price maintenance practices, but those were repealed. if the scotus overrules dr miles this term, manufacturers could, in theory, prevent retailers from using loss-leaders. in most cases they probably won't though, seeing as it's general in the manufacturer's interest for the retailer to sell at the lowest possible price.
6.11.2007 4:40pm
Peter Wimsey:
This is an interesting discussion.

I don't think it's really accurate to describe the HP book as a loss leader, at least as that term is commonly used. The calculus with loss leaders is that (to use the example of grocery stores): (1) people are going to spend $50-$150 on groceries per week; and (2) everyone has to by milk; so (3) if we take a loss on the $3 gallon of milk, this will be more than offset by the profit we make on the rest of the groceries. And this is particularly true if it the loss leader encouraged people to buy groceries at a store where they would otherwise not have shopped.

Nothing like this will happen with HP - most people are going to just buy the HP book and not $300 worth of other books.

I think there are a combination of things going on that some booksellers probably dislike. First, this is a rare example of "perfect" competition, because there is complete transparency of pricing and no other confounding variables - i.e., the books themselves are identical, people all want the book at about the same time, and it's not like great service will permit you to charge a premium.

Second, because this is the biggest "book event" since...well, probably since the last HP came out...I don't think that bookstores feel like they can opt out of participating in the HP drama. Even though people won't - IMO - generally be buying other books when the buy HP, the bookstore needs to offer HP so that people consider it to be a reasonable place to buy books. If the bookstore didn't have HP books, when it came time for customers to look for another book, they may not consider that bookstore since they might be afraid that it wouldn't have whatever they wanted in stock.

So to answer the question of why a bookstore sells something on which it will make no profit, I think the answer is that it's about the advertising. Which is a reasonable approach for them to take - it makes people come into your store, they're reminded of how to get there, they'll know what it looks like on the inside...and maybe they'll go there when they need something else. And, unlike other advertising, it looks like in this case, the bookstore will at least break even on the advertising itself.
6.11.2007 5:20pm
OnlyShawn (mail) (www):
...as a consumer, I wholeheartedly welcome our new megabookstore overlords.

Inefficient smaller bookstores? Gone? mmmkay, no problem.

If one of these bookstores will send me the book BEFORE July 21, then I'll pay them double.
6.11.2007 6:21pm
AnandaG:
<blockquote>
But the consolidation of the book sellers industry has certainly led to a situation where it is almost impossible for a small bookseller to make a go of it.
</blockquote>

So the 20 gazillion small booksellers who use Abebooks.com and Amazon Stores to sell stuff that's low stock, out of print, etc., are imaginary?
6.12.2007 12:29am
Eli Rabett (www):
Well, let us look at the flip side, textbooks. The people who order them, professors, get them for free. The students get ripped off.
6.12.2007 12:39am
Mac (mail):
Amanda wrote,

"But the consolidation of the book sellers industry has certainly led to a situation where it is almost impossible for a small bookseller to make a go of it.


So the 20 gazillion small booksellers who use Abebooks.com and Amazon Stores to sell stuff that's low stock, out of print, etc., are imaginary?"

As a fan of small bookstores, and a fan of a bargain, Amanda is quite correct. The marketplace can be a wonderful thing and the partnering of small bookstores with the big boys via the internet has been one of those wonderful things and the salvation of many a small bookstore. They can be in an inexpensive location but still sell the gems via the internet that the local market would never support i.e. a copy of James Joyce for $2,500.00 and so on. Also, small bookstores give you a way to get rid of the books you don't want anymore for ones you do. If you are really sharp, you can browse the thrift stores and cheery pick books for 50 cents and trade them for decent credit at the small bookstores. Bibliophiles can feed their habil without going broke or having the floor cave in from too many books.
Long live the free market!
6.12.2007 1:57pm