Question About the Economics of E-Books

|Peter Boettke|

First, an admission ... I am a late experimenter with e-books and not all that satisfied with the experience as a reader in that format, though I appreciate the ability to carry an entire library without a trunk.

Second, I have both an I-pad and a Kindle reader, prefer the Kindle for reading books, but the I-pad for reading pdf files.  Personally, I would always choose an e-book to read on my Kindle rather than as an iBook.

Third, since my book, Living Economics was released the most persistent question I received was "Will it be available in an e-book format?"

The book is now available in both Kindle and iBook formats from the Independent Institute.

However, I have a question why is there such a price discrepancy between Kindle ($9.99) and iBooks ($21.99)? 

The best answer by July 1st will win a signed copy of Living Economics.

Comments

[Eli]

Because your publisher sets the price on the iBook store, but sets only the *list* price on Amazon. Amazon knows demand is more elastic.

[brad]

People who own I pads believe there is no close substitute for a Pete Boettke book.

[Mark]

It's the Alchian-Allen Theorem in practice. The price of the iBook relative to the price of the iPad is less than the price of the Kindle version relative to the price of the Kindle reader.

Similarly, people wedded to Apple products reveal their preference for paying more for stuff, mostly due to signaling. Charge more for the iBook knowing that these buyers would never be seen using a Kindle.

[Pierre Desrochers]

As someone with a book that also just came out (The Locavore's Dilemma if I may be so crass...), I am told by my publisher that Amazon is very aggressively pushing the hardware rather than the software. Nothing personal, just business...

[McKinney]

I would guess it's price discrimination. The Apple people tend to be wealthier as shown by their willingness to buy the iphone over its cheaper competitors.

[McKinney]

PS, since iphone users are wealthier they are less price sensitive.

[Roger Koppl]

There is a free Kindle app for iPad. You'd have to be pretty rich before the opportunity cost of downloading it outweighed the difference in book prices. Perhaps the functionality is low on the Kindle app?

[Jerry O'Driscoll]

I think the first answer is on the mark.

It's Amazon's pricing policy, which has upset the publishing industry. The industry tried to resist, and landed themselves in an antitrust lawsuit.

[Will Luther]

What do you like about reading on the Kindle relative to the IPad? Is it a weight issue? Does IBooks strain your eyes relative to the Kindle? (If the latter, try night mode.)

[Jonathan M.F. Catalán]

I think Pierre has got it right, and others have said much of the same. Amazon.com wants to compete both in the e-book and in the reader market, the two being compliments of each other. Knowing that the demand for readers is probably relatively inelastic (I know I'm not buying an e-reader even its price falls by $10), Amazon.com competes by lowering prices on complimentary goods (i.e. e-books for Kindle).

Since I don't own a reader, I don't really know any of the complimentary technology very well. Do conversion programs exist? Illegal programs? Can I, technically, change my e-book from Kindle to iBook format? If so, then Amazon.com also takes demand for e-books away from other companies, since clients can just convert them to other formats. I wonder how this could affect the market.

I figure that publishers selling in other formats resist price reductions, because without wide proliferation of conversion software then those who own readers from other manufacturers are forced to buy software in the complimentary formats.

[Niko]

@Catalan:

There is calibre which is able to convert from a number of formats to a number of formats. The dominant formats are epub (DRMed or DRM free) and mobi (the kindle format, AZW is a DRMed mobi file as far as I know).

There are a number of great free tools out there. For example I am using jpdftweak to take some book from NBER, which have one pdf file for each chapter, and I assemble them in one big file (I used to this with some of the books from IBM back when their technical journals were free).

Back to the price discrepancy. The price fixing story is rather nice, but there are people who accuse Amazon of price fixing in order to drive Kindle sales.

Printing books is not that expensive any more. A while back I wanted to print some books for myself and it would've cost me 2 euros each without VAT, less if I would've printed 50, even less for over a hundred, and this was in a small on demand print shop and it included a profit for them too. I imagine the costs of production are even less for a large publisher. The problem is probably with other costs. For Coca-Cola for example, 60% of the price of a bottle represents marketing costs, or so I've heard. But these costs would be the same for a paper book or an e-book (marketing I mean). Electronic books (kindle or other) have the added benefit of being at your finger tips in a matter of seconds, unlike the paper ones, and at zero costs to the consumer.

In the end the price is determined by the willingness of the consumers to pay the price. For Amazon it is 10$, for Apple is 21.99$ (???)

[Jonathan M.F. Catalán]

Niko,

On a technical point, prices are not only determined by the willingness to pay. More often than not, industrial prices are well below the willingness to pay. We can say that prices tend to be fixed below the willingness to pay (what post Keynesians call price plus mark-up). The way Böhm-Bawerk explains it is that capital goods tend to have alternative uses. The value of the marginal group of the means of production is equal to the least valued alternative output (because the loss of that group is manifested by a reduction of the additional least valued output). Thus, you see a wider spread between the marginal pairs, where the value of the product to the seller falls and therefore prices can fall with it. Böhm-Bawerk actually calls this the cost theory of production, or something similar to that.

Check out this post of mine comparing post Keynesian price theory with the Austrian alternative.

[Jonathan M.F. Catalán]

Sorry, cost plus mark-up.

[Kevin L]

No one mentioned perceived value? This Techdirt article reminded me of your question: http://www.techdirt.com/articles/20120606/07165819219/role-perceived-value-music-is-small-fading-fast.shtml

[Mario Rizzo]

It is interesting that no one will take this as an example of the "irrationality" of the pricing system. People will exercise every ounce of their creativity, spurred on by Pete's offer of a prize, to find a rational explanation. I am not criticizing this, but just noting it. What does that mean about the drive to rationalize what we see people do? Is rationality in the world? Or is it only in our heads? Or both?

Sorry to raise this issue. I couldn't help myself. It was a motor-response.

[Jonathan M.F. Catalán]

Mario,

Well, these are two different things. What Pete wants is an explanation of what has led to the prices manifested on the market. This is not a rationalization, but an explanation of relevant 'forces.' Rationalizing these forces would entail asking why these forces exist, or why certain individuals took certain actions. We've seen a little of both (e.g. Amazon reduces the price of e-books to increase demand for their Kindle reader), but I think it has more to do with the former task.

[Greg Ransom]

The issues here are well known:

http://online.wsj.com/article/SB10001424052702304444604577337573054615152.html

Amazon sets the price at the Kindle store, not publishers.

Publishers set the price at the iBook store, not Apple, and Apple takes a 30% cut.

Apple set up this scheme to get into a market already dominated by Amazon.

The publishers were losing control of the pricing of their goods.

Amazon was discounting below their costs, undercutting publisher sales in physical books. This made high priced ebooks & physical books an uncompetitive alternative.

Amazon was aiming to create massive network effects -- driving consumers into a propitiatory standard which at some point promises to eliminate the publisher middleman.

Apple offered publishers an alternative pricing & commission model already proven in the apps market -- with higher prices targetted at higher end consumers in the higher end iPad community.

Your publisher, Pete, sets the iPad price of your book, & Apple takes a 30% cut.. Amazon sets the Kindle price of your book & likely takes a loss on the book.

Your publisher & Apple are doing two things -- they are price discrinating & they are sustaining an alternative channel & standard & form factor for publishing & selling ebooks, ie they are offerin a rival production/consumption model & standard & product.

It's clear that Apple is looking to make the book a multimedia platform on the iPad, esp. in the education market.

Ie offering a performance / capability differentiated product in a propriety format in partnership with publishers & professors.

So the competition here is wide ranging -- competing for partners and ecological communities, competing for lock in to different sales platforms, competing for different consumer niches, etc.

Your book is a tiny pawn in this much larger Grand Game.

[Roger Koppl]

Greg gives the most clear and detailed version of an answer several others have offered. But I go back to my question: Why isn't the law of one price working? At least that's what I had in mind, although it seems I was cryptic. Anyway, as I said, you can get a free Kindle app for your iPad. So why don't iPad users just use that Kindle app and pay those low, low Kindle prices? Why is there still enough demand to have such a price disparity? The Kindle app for my iPhone works well IMHO, better than Kindle if the book has color images. Presumably the same is true of the iPad version. It seems like a pretty big puzzle to me, frankly.

[Troy Camplin]

The law of one price has never worked. Prices are on a trajectory around a strange attractor. We see two extremes of this in the Kindle vs. iBook pricing.

I suppose "demand" isn't a good-enough answer. There are likely to be differences in demand for each device.

[McKinney]

I think the law of one price isn't working because consumers have different elasticities of demand. That's why some people use coupons and other don't.

Some people will buy a shirt at Dillard's when they could have the same shirt at Wal-Mart for half price. But they don't want to have to tell anyone that they shop at Wal-Mart.

Some people will not wear a shirt without a logo on it. Others don't care about the logo, just value.

The iphone is a status symbol. People with iphones are not price conscious people. They don't shop around for a lower price. Amazon people are very price conscious people.

[Roger Koppl]

I still think Pete is right to see a puzzle here, a seeming violation of the law of one price. Troy's answer doesn't explain the 2:1 ratio of prices. I think this kind of price difference has persisted since iPads first came out, hasn't it? I don't really see how that's a matter of strange attractors or something. And even if it is, that's just restating the puzzle, not solving it. Nor do I think McKinney is really resolving the puzzle. His explanation requires a lot price insensitivity from a lot of iPad owners. The elementary theory of price discrimination tells you that there must be a barrier to arbitrage between the markets. (I realize that we have two different vendors here, but the point about barriers remains.) In this case, what barriers? Again, you can get that Kindle app cheap and easy, right on your iPad. And it's pretty private what app your using to read this or that book on you iPad. So it takes a crazy amount of price insensitivity to justify the continuing price difference.

Curiouser and curiouser, said Alice.

[Jerry O'Driscoll]

Purveyors of e-books are price searching in the Alchian sense. With new technology, this is hardly surprising. You can pay for an e-book from one source, and get the same book for free from another.

Why are Austrians perturbed by this? The law of one price is an equilibrium construct. There is no equilibrium in hi-tech, just endless change. Mises is more relevant than ever. And Alchian.

[Jim Rose]

cave-dwellers such as me do not know what an iBook is. my wife has a kindle that I use occasionally.

I have never owned an apple product. steve who?

the price gap may have something to do with iBooks being for more sophisticated users familiar with technologically flasher devices.

kindle is e-books for dummies.

[Jim Rose]

cave-dwellers such as me do not know what an iBook is. my wife has a kindle that I use occasionally.

I have never owned an apple product. steve who?

the price gap may have something to do with iBooks being for more sophisticated users familiar with technologically flasher devices.

kindle is e-books for dummies.

[McKinney]

I think the barrier to price searching for ibook owners is pride. Restaurant and grocery stores charge two prices for many things by issuing coupons. People with money are embarrassed to use coupons.

The same goes for clothing. An embroidered icon does not make a shirt better, but people will pay a lot more for it.

My guess is that people with ibooks don't know about the e-books or the app for kindle and aren't interested in searching.

If the higher price for ibooks wasn't selling, I'm pretty sure Apple would reduce the price.

[McKinney]

PS, brand loyalty offers a barrier, too.

[McKinney]

Jerry, thanks! I didn't know the law of one price is an equilibrium concept.

The economist magazine had an article recently on exchange rates, the Big Mac index and the law of one price. I suspected that elasticity of demand had something to do with the differences in prices for Big Macs and not just over or undervalued currencies. But they had me with the law of one price.

[Per Bylund]

I think e-books are subject to the same principles as digital music, which makes pricing ridiculous and unintuitive. I discussed this issue in this article, however focusing on music rather than books: http://mises.org/daily/5834/Postmarket-Effects-of-Intellectual-Monopoly

[Troy Camplin]

Sometimes one has to restate the problem to solve it. Indeed, the theory of one price is an equilibrium concept. Prices are determined in a far-from-equilibrium process, and thus converge around a strange attractor rather than onto a point attractor. This is going to be particularly exacerbated in a situation where there are different technologies with different loyalties. You can indeed buy the same product at Target and at Wal-Mart, but pay more at Target because you like the shopping experience at Target rather than at Wal-Mart. It may be that pricing for different devices are similar. It may also be that different services have different agreements with the publishers, providing discounts for one (in exchange for similar discounts in their direction), but not the other, which can get translated up in pricing.

[EconAndre]

Pricing for the iPad includes access to your other machines like iPhone, iPod, etc. So Apple believes demand will be greater because of more distribution channels within Apple's network. Demand for Kindle is less because there is only one channel in which to read the book.

[Jen]

Kindle e-books are a value, iBooks are a luxury.

[Joshua Scott]

Because that is what people are willing to pay?

Now if only EBSCOHost would pick it up so that I can read it for sunk costs.

[August Jenkins]

The prices for these two goods are different precisely because they are different goods. They are different goods offered by different companies. Both companies face different opportunities and make decisions based on the unique opportunities and knowledge that are available to them at a specific point in time, known by Hayek as the "knowledge of the particular circumstances of time and place." Given this unique knowledge, these companies employ various factors of production to achieve their desired end. But because we do not have the ability to tap into this unique knowledge, we do not have the ability to determine why there is a price discrepancy between the two products.

Furthermore, costs are subjective and only exist in the mind of the decision maker. Any attempt to trace costs back to some stage in production with the goal to determine why there could possibly be a price discrepancy between the two products would be an elusive goal.

These products are different goods. Just because they have similar qualities does not mean that prices should be approximately equal.

[Jimmie]

The prices for these two goods are different precisely because they are different goods. They are different goods offered by different companies.

This hits closest to the mark, I think.

E-books sold by Apple are different products than ones sold by Amazon. The most significant difference between them is that iBooks have Apple's "FairPlay DRM" and can only be used on Apple devices (unless you take it upon yourself to remove the DRM). Amazon's e-books do not and are easily converted to pretty much any format you please with a free and easy-to-use third party program.

Apple's pricing reflects two things: 1) that is has no interest in competing with anyone outside its own playground, and 2) that it believes its brand identity is strong enough to get people to may its price regardless of what the rest of the market is doing.

In essence, Apple has created its own gated community. Any competition occurs inside those gates; that is, Mr. Boettke's e-book will compete with other e-books like it, but not with Mr. Boettke's other e-books in other markets.

You can see this with other media as well. Albums on iTunes tend to me more expensive than those on Amazon and other similar services.

[Scott Wood]

FWIW, and I think many people have brought this up in the comments, when the Kindle was first released Amazon originally priced essentially all ebooks at $9.99 (I'm sure that there were some exceptions, but I don't recall the details), even if they paid more than that to the publishers.

I understood that as an effort to subsidize the concept of ebooks for the long term in general, and to subsidize consumers' entrance into the Amazon ebook eco-system.

There are some network-effect "competition for the market" characteristics in the ebook world. When I buy an Amazon ebook I am buying Amazon's maintenance of my ebook library, which is most valuable when they maintain my entire ebook library, not just part of it. Also, FWIW, Amazon seems to be trying to build in some social aspects into their ebook eco-system (e.g., the ability to see how many people have highlighted different passages in your book), although it isn't particularly effective at it.

Publishers don't like Amazon's approach, I assume because they would rather be able to fit ebooks into their current price-discrimination oriented marketing strategy of producing the high-priced hardcover first, and picking up the folks on the bottom end of the demand curve with the lower priced paperback later.

Apple broke Amazon's business model for the time being by agreeing to allow publishers to set their own prices in iBooks, which emboldened publishers to refuse to deal with Amazon unless Amazon also relented. That agreement between Apple and the publishers was recently ruled to violate anti-trust laws, which has allowed Amazon to return to its $9.99 policy, at least for some publishers (others are appealing...I might have some of these details wrong).

Since I didn't see the "The price for this book has been set by the publisher" notification on your book, I assume that your publisher is one of the publishers that is not pressing Amazon on this at the moment. I am a bit surprised at how expensive it is on iBooks, though.

I'm not entirely happy with this explanation. The "build the ebook market" model seems appropriate for 2008, but not 2012, as ebooks seem to have been accepted at a far faster rate that I would ever have expected. But the build the Amazon eco-system explanation might still hold, for now.

While I'm content with the adding ebooks into the price-discrimination mix for the publishers explanation, I'm not sure why the publishers couldn't just publish the ebook 9 months after the hardcover, like they do with the paperback. Perhaps that is a concession that Apple and Amazon wrenched out of them as a cost of being included in their eco-systems at all, but I don't have a good way of squaring how early ebook publication would be more valuable to Amazon and Apple than late publication would be to the publishers, while preventing Amazon from selling below cost would be more valuable to the publishers than allowing it is to Amazon.

FWIW, I wouldn't be surprised if at sometime in the future different ebook publishers would charge different prices because of the quality of their reading software. I'm a bit disappointed in Amazon for not improving the quality of the reading experience in the Kindle app (which I use on an iPad...I rarely read on the Kindle device anymore), and I would expect Apple to be more persnickety about that.

[Mike Rulle]

I am going for Occam's Razor on this one. Being a buyer of books from both on my Ipad, the prices of best selling or strong selling books are the same on both sites. When there is a difference it tends to be small and is Amazon with the lower price.

Economic books designed for a broad audience are also almost always the same price on both sites (even as Amazon has many more choices). Examples include Thomas Sowell and Steven Landsburg. When prices are different for same books, Amazon again is always cheaper but at small differences.

The only thing which explains such a large difference in prices of your book is some contractual issue that is currently particular to Chicago Review Press and Apple. My guess is that issue will disappear or expire soon at which point the prices will be identical.

I can only speculate what the issue is which created the price difference (for all I know you are running an experiment on the elasticity of book pricing---but a 100% difference seems a bit high!). I do not know why Apple would not voluntarily lower the price---so I assume Chicago Review ia artificially keeping it up by keeping the contract in place until it expires. Publishers are easier to perceive as being more stubborn

[Greg Ransom]

What Scott Wood & Mike Rulle said.

Contracts are part of the market process. Roger Kopple should understand the role of "Big Players", and negotiations between them for market power and market share and strategic partnering, etc., etc.

We aren't talking the market for wheat here.

[FreedomHasValue]

iPad consumers pay for convenience. An iPad is a much more versatile device, to say nothing of the hype it's currently getting. Consumers who pay more for an iBook can do a million other things with their iPads in addition to reading their iBooks and leave their Kindle at home (or on the shelf at Amazon).

[Craig]

I have no idea about the discrepancy in price, but was curious why you don't use the kindle app on the iPad? Surely with a bigger screen in colour it must be better than the Kindle on the Kindle so to speak.

[Roger Koppl]

I'm catching up with this only now, and I kind of doubt anyone is still reading. Anyway, Scott Wood says Kindle on iPad is not so good and Mike Rulle says that price differentials are generally small, and often zero. As Greg Ransom seems to suggest those two facts make the puzzle disappear for the most part. Why Pete's book is double on the Apple system remains a puzzle, but it starts to look like the law of one price is in less trouble. That's somehow satisfying.

[Greg Ransom]

I use Kindle on the iPad. And like it.

I still see this as a Big Player & network effects & price discrimination issue.

Apple needed the publishers on board -- and sucked them in with a pricing model they wished to move to, i.e. publishers wanted to set the price of books and didn't want pricing and distribution controlled by a single retailer, Amazon.

So Apple offered them the pricing power they wanted and a competitor to Amazon.

The price of a downlist book doesn't matter a fig in this wider competition.

Now who's behavior are we trying to explain?

The publisher?

The buyer?

The retailers/network standard owners?

There may be very few copies of Pete's book sold in the iBooks format.

The publisher may be happy to have that tiny bit of price discrimination, earned via differentials of knowledge, differentials of preference, etc. perhaps tied to differentials of wealth, which changes the trade-off cost of searching and 'status' etc for people of different wealth.

I've already explained how Apple needed something to get publishers to support their alternative standard.

Buyers may have alternative preferences, wealth, knowledge, and all sorts of other things.

But again, we don't know how many copies Apple is actually selling as compared to Amazon.

[Greg Ransom]

Note well.

If Amazon is selling for a loss, and Apple is taking a 30% cut, it may be Amazon which is making more money, no matter what the sales differential.

Just as the high priced mom & pop store may earn more than the tiny margin Albertson's despite huge volume differentials.

[Greg Ransom]

The 'law of one price' stipulates that goods are identical.

But most goods differ in all sorts ways this abstraction does not allow -- place, time, "atmospherics", status markers, all sorts of things.

And some differences don't matter to some, but do to others.

Most don't discriminate between Pepsi & Coke & whatever.

I like the taste of Coke and don't like Pepsi nearly as well.

Usually we don't worry about such outliers when we create the "law of one price" abstraction.

[Greg Ransom]

Sorry, that should read:

it may be Apple which is making more money, no matter what the sales differential.

[McKinney]

Did anyone notice the news about travel sites sorting hotels differently for Mac and PC users? Mac users get the expensive sites at the top while PC users get the cheap one because studies of the data show that Mac users prefer more expensive hotels.

The same is probably true of iphone owners.