Alberto Mingardi  

Krugman on Amazon

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What does it mean that Amazon has "too much power"? Paul Krugman has published a vehement column on the online retailer, arguing basically that Amazon enjoys a significant "market power" vis-à-vis publishers. He refers to the feud between Amazon and Hachette, that originated from a contract dispute in April. It seems to me that the story can be summarized this way: Amazon wants to sell e-books at the price which it considers most attractive, presumably having the goal of further establishing its Kindle as a standard for readers of electronic books. Hachette wants to keep prices higher, presumably because it doesn't want sales of paper-books to be eroded by ebooks' sales.

Amazon did not take Hachette's "no, thank you" in the kindest of manners, and retaliated somehow. Well, a business strategy may be unpleasant - but that doesn't make it illegitimate.

Amazon is a shop: a gigantic, beautiful, incredibly developed shop - but a shop. Shopkeepers retain the right of deciding what should be on the shop's shelves. They make deals with different suppliers, and can thus be convinced in promoting with more energy this rather than that particular brand of a given good.

Should the government interfere? Perhaps if we're talking about the only shop in town - which is something Amazon, no matter how big, definitely is not. Amazon's "market power" is the result of consumers choosing to buy from Amazon, and not from other online or physical bookstores. Amazon has been rather successful, in growing its customer base, but not so much in scoring profits, and of his business model we may say what Chou En-lai said when he was asked of the impact of the French Revolution: "it is too early to tell".

Paul Krugman has a different opinion. He acknowledges that "Amazon has not tried to exploit consumers" but, if "it has systematically kept prices low,", it was just "to reinforce its dominance". Stupid you, world customers, who fall into the trap.

So, it is not important "that Amazon is giving consumers what they want". What really matters is that it has "too much power".

How does Krugman prove this assertion? Well, he vaguely suggests that there is a political vein, in Amazon's retaliatory practices against Hachette. He writes:

Last month the Times's Bits blog documented the case of two Hachette books receiving very different treatment. One is Daniel Schulman's "Sons of Wichita," a profile of the Koch brothers; the other is "The Way Forward," by Paul Ryan, who was Mitt Romney's running mate and is chairman of the House Budget Committee. Both are listed as eligible for Amazon Prime, and for Mr. Ryan's book Amazon offers the usual free two-day delivery. What about "Sons of Wichita"? As of Sunday, it "usually ships in 2 to 3 weeks." Uh-huh.
Now, in the same post from the Bits Blog, it is mentioned that other Hachette books are shipped immediately and heavily discounted, on Amazon: the examples given are "13 Hours: The Inside Account of What Really Happened in Benghazi" and "How Google Works". I didn't read either, but I've checked and they are both heavily discounted and quickly shipped as of today.

Indeed, "Sons of Wichita" is not. I don't know if Professor Krugman read the book. I did, and I can say that it is a far less biased, and more nuanced, "collective biography" of the Koch brothers than many readers expect (if you don't trust me, check out this Reason interview with the author, Daniel Schulman). Actually, Amazon tells consumers that it is "frequently bought together" with "The Science of Success", the book on "market-based management" authored by Charles Koch - which may suggest that word of mouth is marketing it better among Mr Koch's admirers than among those who despise him.

I don't know why Amazon is favoring some of Hachette's books over others, but I would suspect demand has more to do with it than politics.

Perhaps before resorting to chastise Amazon for its "market power", and calling for political intervention, we should remember that we are in terra incognita. E-commerce is a relatively new trade and e-books are new products. We need some learning by doing. What needs to be "discovered" includes prices readers are happy to pay, which depend on a lot of factors. Amazon has just announced it made a deal with Simon & Schuster. The company said that "the agreement specifically creates a financial incentive for Simon & Schuster to deliver lower prices for readers."

Are "lower prices" to be sacrificed on the altar of fighting "market power"? I think you'd need some better arguments to say they should.


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CATEGORIES: Business Economics




COMMENTS (10 to date)
Andrew_FL writes:

Funny, Krugman's complaint about the Koch Brothers book would lead me to wonder if he complained when Costco attempted to drop Dinesh D'Souza's book. If I didn't already know the answer, that is.

Yancey Ward writes:

This was the first shot across the bow for Bezos buying The Post. You can expect the Times to have one essayist after another writing attacks on Amazon and Bezo himself. If Bezos had never bought the paper, Krugman never writes that essay.

Dan Jennings writes:

Uummmm.... And, what If Amazon were the only shop in town and would not carry a particular product? So what? You don't have a right to have your product in their shop. Moreover, it is your issue to find a way to sell your product.
When a business finds ways to shortchange consumers, opportunity avails for competition and loss of business for the big player, in town. Maybe, this is just my naivetè. The Internet is wide open for anyone to compete. They have no power over Fedex, UPS, or USPS to forbid them from shipping the products of the competition. Amazon cannot control the Internet, forbidding competition from selling online. While Amazon may use its market strength to threaten a business into exclusivity, the error in its ways will have long term consequences. Again, they would have opened the door of opportunity for someone to compete. Aside from innovation, this is One of the reasons why the largest mega corps cannot remain so for very long without govt interfering and setting policies to favor the mega corps, protecting them from competiton.

AMW writes:

When I read Krugman's take on the delayed shipment of "Sons of Wichita," I had to laugh. I used to work for a Koch non-profit in Wichita. I haven't read the book (although I would like to someday) but I heard the author interviewed on NPR's Fresh Air, and I have to say I found him very fair to the Kochs. Most of what he said matched up with what I had gleaned in my years in Kansas.

I hope Krugman's mention of the book causes sales to spike. I think his readership would be unpleasantly surprised by what they find in it!

Sam Haysom writes:

Chou En-lai was the one who made that quip.

OH Anarcho-Capitalist writes:

Krugman's lament hails back to the days prior to passage of the Sherman Act. The Standard Oil's of the day were accused of acting as monopolies by expanding consumer access to commodities and dramatically lowering their prices. Hardly the actions of monopolists.

The Sherman Act was driven by competitors' claims of being shut out of business by too powerful companies - companies that served their customers far better than they could.

Alberto Mingardi writes:

Thank you for your comments. They are all very interesting and thought-provoking.

@OH Anarcho-Capitalist : Don Boudreaux has written an excellent piece along those lines (see http://cafehayek.com/2014/10/krugman-and-amazon-and-antitrust.html). This old paper of Boudreaux and Di Lorenzo is also a good starting point for digging into those questions: http://mises.org/journals/rae/pdf/R62_3.pdf

@Sam Haysom : Thank you. Corrected.

Kevin A writes:

I find it interesting that krugman is complaining that amazon is a monopsony bookseller, while advocating for a single payer system, a monopsony in healthcare.

Rick Caird writes:

Vox Day has a post up pointing out that the publishers are brutal to most authors. Amazon is much more friendly and profitable for the authors. The real problem the publishers have is Amazon is cutting out the middle man. It is not clear why Krugman misses all that.

Flat Eric writes:

Actually, the notion that Zhou En-Lai's 'it's too soon to tell' comment shows the long Chinese perspective of history is almost certainly wrong. It's generally agreed that he thought the question was about the 'evenements' of 1968, a year or two before.

http://www.historytoday.com/blog/news-blog/dean-nicholas/zhou-enlais-famous-saying-debunked

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