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The opportunity cost Amazon forfeits in its war with Hatchette

By Bailey McIntosh
web posted September 29, 2014

"[Amazon] sells 41% of all new books that are sold," but what happens when a distributor that big refuses to look at opportunity costs when negotiating with book suppliers? (Kellogg). For the past six months a war has been raging between the Hatchette Book Group and Amazon. The war started when Amazon started groping for changes in the distribution in revenue of e-books between the publishing company and the distributor. However, Amazon should not have the control they are searching for over the publishing industry, revenue in e-books and revenue in books because of the threat of navigating in a scarce goods market, its own reputation, and the opportunity cost at stake.

The feud started over negotiations and disputes in the pricing of e-books. As Emma Cueto points out, compared to hard cover books, "publishers still have a large amount of input into the price of e-books, which often conflicts with Amazon's love of slashing prices." The disputes have expanded to hard cover books from Hatchette, one of America's top five publishing companies, as Amazon raises prices and pushes back shipping dates, aggravating consumers and causing their quantity demanded to fall. Since e-books have the comparative advantage in production prices, it is understandable why Amazon would want to have more of the 75% margin for e-books, but this is hurting their reputation among authors. From looking into publishing and self-publishing for works of my own, I understand the authors' dilemma. A substantial amount of all revenue made on a book is through e-books; it is considered a "crime" in the publishing world to publish a book and not create an eBook version, unless it is extremely long or highly interactive. The harm towards authors and the setbacks to consumers can majorly damage Amazon's quantity demanded, which hurts them as a firm and distributor.

Amazon should not force its wants on publishing companies and authors, because of the threat a monopolistic control over the book market where they are ignoring the publisher's right to supply the book that only they publish. As pointed out earlier by Carolyn Kellogg, Amazon controls a substantial amount of all new books sold (41%). If Hatchette loses their battle against Amazon, it is reasonable to suspect that Amazon will force the same power over other publishing companies, leading towards a monopolistic control over the book market. Following, Amazon should not be able to reach this control, because of the publisher's rights of supplying a scarce good. The books that Hatchette publishes can only be procured from them, thus there is a scarcity to this good since it cannot be obtained through other publishers.

In addition due to the tactics they are taking, Amazon's reputation can be highly damaged. Personally, I have purchased many books through Amazon before, and as a consumer I am now highly discouraged to purchase books from them again because of the harm they are creating towards authors and publishers. The same motives can discourage consumers from purchasing books from Amazon, which will lower their quantity demanded. The consumer's opinion of Amazon is extremely important; it can prove the significance of Hatchette's hold on scarcity or Amazon's power as a distributing firm. Tim Worstall discusses this with an example: "If we all go off and buy the new JK Rowling and other Hachette books without using Amazon then we'll have proved that scarcity one way, if we don't and read Maigret [a substitute good] instead then we'll have indicated that Amazon is the worthy winner."

Overall, Amazon is not considering the opportunity cost of not toying with such a scarce goods market. They are not considering the power Hatchette has by supplying a scarce good; instead, they are only looking to how they can get more profit. This could create a backfire for Amazon if Hatchette decides to supply them with fewer books and if consumers switch to an alternate distributor. Theoretically, this would affect the demand and supply which would hurt Amazon and their hold on the book market as shown in the graph.

In conclusion, the opportunity cost of not messing with such a scarce goods market is higher than the profit they may earn from more control in the sale of e-books. The opportunity cost of not messing with publishers and the book market is greater than their current tactic because of the threat of a fall in quantity demanded due to author's and consumer's setbacks, the risk in demanding control over a scarce goods market, and the consumer's view of Amazon, which if negative can lead them to buy from other distributors. Therefore, Amazon should not continue with its current efforts to control publishers and their authors. ESR

This is Bailey McIntosh's first contribution to Enter Stage Right. © 2014

 

 

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