Thursday, October 23, 2014

I knew I'd use my economics studies at some point: My Perspective on Paul Krugman's Article and Amazon's Announcement

Today I read this article by Paul Krugman. He's one of the giants in Economics. One of the rock-stars, so to speak. He won the Nobel Prize in Economics in 2008.

And, believe it or not, economics still interests me, so when his name popped up on my Facebook Timeline and I saw that he'd written about the whole Amazon/Hachette dispute, I immediately clicked over to read. 

My response can be summed up as follows: 

"We are not amused."

Now before I launch into why, I must warn you that this is going to dig into economics a bit, but I'll be trying my best to keep things jargon-free or at least to explain things so we're all on the same page. This will be a long post (because I could take all week to write about this but don't want to), but I do hope at least some of you will bear with me. 

First, let me define a few things (although I will be simplifying things so as to hopefully not bore everyone): 

Market Efficiency: 

A market condition under which all prices reflect all market information. Since I'm not writing an academic article, I'm just going to come out and say that this is the fair market condition. Every supplier knows what their clients want, and how much they're willing to pay for it. Each client knows what each supplier in the market for a specific product sells, what prices the suppliers are selling at and which product's price will match his/her specific value for the product. 

Today's product up for discussion: Books. 

In an efficient market, prices are determined by supply and demand. Supply and demand are both determined by price and quantity. So for every dollar price increase, suppliers are willing to produce more units of a product. Clients, on the other hand, buy more for every dollar price decrease. 

Equilibrium Price: 

At a specific price, all books will be sold to everyone who wants that book. There will be no surplus or deficits in books. This price, known as the equilibrium price, is where the most books are sold to the most people.

If you increase the market price, more books are produced, but fewer people are willing to buy them. (Which results in say... paperbacks being pulped. But I'm getting ahead of myself.) 

If you decrease the price, more people will want the books (come on, don't tell me you wouldn't buy five books if a shop declared a half-price sale on everything), but fewer people will be willing to publish, because the profit might not be high enough. 

Which brings me to Amazon's Announcement on what its dispute with Hachette is about:

Price Elasticity: 

The increase/decrease in quantities isn't related to price on a one-to-one basis. Let's assume that a book costs $2. If a book price could increase with one dollar, a publisher would most probably produce more than one book extra. If a book price decreases by a dollar, readers will probably buy more than one book extra. 

Ever walk into a shop to buy one book, only to find that everything is marked down to half price? Will you only walk out with two books? I wouldn't. I'd probably walk out with as many as I can carry/afford. 

This is what Amazon is blaming the dispute on. They (quite correctly, in my opinion) surmise that more people will buy books at a slightly cheaper price, which will result in everyone on the supply side making more money. This basically comes down to the argument that it's better to sell a thousand items at $1 each, than one item at $100. 

"But," one might say, "if the equilibrium price has been reached, messing with it will result in either the supplier or the client losing." 

Here's the thing, though: We've never reached the equilibrium price in the first place, because the publishing market isn't efficient. But I'm still getting to that point. 


Because I think you need a bit of a rest from reading, and because this guy explains middlemen and what they do in a market better than I do, I'm going to ask you to watch this.

To link this back to my argument: Middlemen are proof that the real world is, well, real and my nice ideal of an efficient market isn't all that realistic.

See in the real world, book suppliers don't have access to their clients. (I.E. Readers) And the clients have no way to actually know all the awesome and amazing books that are out there to read. Middlemen's jobs are to bring books to the readers and readers to the books. They then charge a price for this service, paid for by either the client, the supplier, or some combination of both.

But this is where I'm going to rock your world. It's also where my main problem with Krugman's article comes in.

Krugman sees Amazon as a monopsony (a buyer that buys so many products from a supplier that it can in fact determine the price at which it buys from the supplier, most often to the supplier's detriment.) This, I think we can all agree to be true, to an extent.

Amazon is a middleman. It connects the publisher to the readers, by creating a place where a huge amount of readers go to buy books. Because so many readers buy through Amazon, Amazon is now in a position to charge more for its service, and Amazon wants to make books cheaper while Hachette doesn't. Which, from Hachette's point of view, is to Hachette's detriment. (An yes, I can admit that they're not wrong.)

However, Krugman has basically made a big mistake by saying the following: "By putting the squeeze on publishers, Amazon is ultimately hurting authors and readers. "

My problem with this comes down to a fact that everyone seems to forget:

The publisher isn't the supplier. The author is. The publisher is yet another middleman. 

A middleman who's out to increase market efficiency to everyone's advantage.


You hear that sound? Like distant thunder? Yep, that's the sound of disillusioned authors everywhere laughing.

Why? Let's look at some market realities, shall we?


A buyer that has so much market power that it can influence the market price. This is because it can threaten to stop buying from a given suppler if he/she/it doesn't lower prices.

Pretty much since the first printing press was invented, people who've wanted to be widely read wanted to be published. After all, the more copies of something exists, the more people have a chance to read them. As time went on, publishers started gathering readers as well. People liked reading high-quality books and if a publisher was known for producing those, people kept buying from them.

Which is a dream come true for any writer. Not only does the writer now have a chance to see his works printed in volume, but there are actually people who want to read them.

However, there are many writers, and only a select few publishing houses with access to nice, big readerships. Readerships who would not read something unless it was, let's say... printed by the writer him/herself.

This resulted in publishing houses being able to cherry pick what they thought would satisfy their readers' wants/needs. Then, these few publishing houses became fewer. Some picked the wrong cherries. Others melted together into fewer, bigger publishing houses with more market power.

Who lost here? 

The author. Industry standard at the moment is 25% royalties. Which means that they are paying 75% of profits from books they wrote for covers, editing, printing and distribution. They actually make less, because there's a third middleman, the agents, which our big publishers force on writers. ("If you don't have an agent, we ain't even looking at your book.")

The publishing houses offering bigger loyalties don't have enough market power to actually be of much use to a writer. Yes, it's getting the book published. But read? Not so much. And besides, these guys aren't the ones Amazon has a problem with. Because most of them already seem to understand the value of selling books for cheaper. Especially e-books.

Ah. Yes. E-books. See Amazon wants publishers to decrease prices on e-books. Not all books. e-books. Where there is no technical cost to carrying copies. Because there are no copies to carry. No printing costs. No warehousing. No transport. And yet big publishing houses usually charge more for them than physical books, and give writers the industry standard of: 25% royalties.

Yep. The same amount as for print books. But the expenses are less.

Which means that basically, big publishers created market ineffiency in order to benefit themselves.

But wait. There's more.


A market condition where the market or industry is dominated by a small number of sellers. These sellers have market power to influence buyer activity and price, since it's easy for a few companies to band together and collude to fix prices.

So big publishing charges 75% of a book's net price for covers, editing, printing and distribution. Marketing? Weeeeeeeelll.... No. See they put all their money together, and then decide who to spend their marketing budgets on. They choose which books gets displays in stores. They choose which books gets placement at airports and other premium selling spots. They choose which book gets the big mural at underground train stations in London and which ones get advertised in big readership magazines.

In other words: These companies influence which books get seen by their readership. Which means that the readership thinks they're seeing everything out there to buy, but really, they don't.

On top of this, the publishing house artificially inflates the price as described above. (Google Agency Model.) Or even worse, the big publishing houses collude.

So what this means is that publishing houses actively withhold information from their readers through manipulating which books the reader is aware of, and further adds to this by not charging the equilibrium price. In fact, they're not even trying.

This results in readers losing, and either buying fewer books or not buying any books, because they don't see anything that appeals to them. And because they're less likely to find something where the price matches the reader's perceived value for the book.

Who loses here? Actually... everyone. Readers lose for the reasons stated above. Writers lose because the potential amount of books sold isn't realized, which means they're not making the money they could have. (Even Lee Child and James Patterson.) Amazon loses for the same reason, because they can charge selling costs on fewer sales. And so do the publishing houses.

Why then, would publishing houses continue to act to their own detriment?

A move toward market efficiency and why this is unattractive to Hachette and publishers like it. 

First, I want to say that I don't for a moment think that Amazon is the guardian angel to all writers everywhere. I know that they're motivated by their need for greater profit, not for some particular goodwill toward writers.

However, Amazon has been leveling the playing field between publishers and writers. They've collected a huge amount of readers to themselves. And then basically gave writers free direct access to those readers. This in itself has brought about a huge and long over-due innovation in the publishing industry.

Yes, the traditional industry is still cherry picking, but those who didn't get picked simply went to Amazon and got published anyway. And Amazon, through their use of algorithms, keywords and search engines made it possible for readers to be more likely to find the book they want to read, even if they never knew it existed.  They're creating ways for authors to at least try to get books before their readers. Something that cannot be underestimated, but that publishers aren't at all that keen on. You see that bit where Krugman talks about Amazon being able to kill the buzz for a book?

Publishing houses have done this through spending one book's income on another's marketing, and then blaming the author of the former for not writing a good enough book and then all but destroying that author's career. And for good measure, holding onto the book rights forever, just in case the author wanted to sell it elsewhere and actually make money with it.

Before, authors had to sigh and say "oh well." Now, they don't. Now, they can buy their own covers. They can find their own editors (who often free-lance with big publishers as well). They can hire their own PR firms. And they can publish both e-copies and paperbacks on their own terms.

Amazon brought in print-on-demand, which means that only the amount of paper books that are wanted at a specific price need be printed.

Which means that publishing houses, once in a position of supreme bargaining power, aren't actually as necessary to writers to be published and seen.

Which means that more and more people aren't even interested in being traditionally published any more.

Which in turn means that publishing houses are clinging more to their industry standard royalty rates. They thereby "maximize" (and I use this term loosely) their profits by taking their own profit and most of the value taken from readers and writers, while delivering less and less of the benefit they might have had before. Marketing money? Gone to cover over-heads. Huge advances to help author cash-flows as they write the next one? All but gone, or otherwise part of a punitive system where authors who don't even get marketed, get dumped and made out to be bad writers if they don't earn out their advances. Editors? Still there, but I can find quite a lot of them by googling. What's more, writers can hire more and more of them as publishing houses lay them off to lower overheads.

My point and the elephants in the room. 

I've been watching what's going on for a while, and what I've seen and experienced have turned me off traditional publishing. However, from what I've written above, I want to point out the following:

Elephant #1

No matter how many times Paul Krugman and other traditionally published writers might call Amazon wrong, it doesn't make Big Publishing Right.

Elephant #2

Amazon isn't the cancer destroying the publishing industry. The publishing industry's unwillingness to innovate is.

Elephant #3

The sooner publishing houses realize that writers now have more bargaining power and act accordingly, the sooner everyone wins.

Elephant #4

There will be a point where no one will be willing to pay 75% of a net book price for what will basically amount to the old publishing world's diminishing prestige and validation that no longer means anything to the readers.

Elephant #5

No one wants Amazon to be the only connection between writers and readers, but it's obviously happening.

Elephant #6

Amazon is starting their own publishing imprints. These imprints offer services AND higher royalty rates. If publishing houses want to survive, they should stop blaming Amazon and start competing with them.

 Elephant #7 

Competition between Amazon and Publishing houses benefit everyone. Amazon will get those lower e-book prices. Writers get more sales. Readers buy books they want for prices they want and those publishing houses who are able to efficiently do their jobs while turning a profit will survive. Unlike the current ones who refuse to budge off their own business models. Those are doomed to fail thanks to the vicious cycle they refuse to get out of.

Elephant #8

The sooner writers realize that they should start pushing more to call the shots, the better for all of us. Assuming that big publishing dies. Amazon will be alone to shove us around. Alone, we'll be easily shoved. Together, on the other hand... Honestly, I'd prefer a perfect market, but given that we could end up with Amazon as a full-blown monopoly, we need to figure out how to balance market power.


Elephant #9

Amazon isn't writers' big savior. But then, neither are publishing houses. Clearly.

To those of you who actually read to the end. Thanks so much for reading! Let me know in the comments if you have any thoughts/questions. 


  1. I know this is selfish...but I hope the self-publishing market will remain stable enough until after I publish. Hopefully there won't be any unexpected surprises to those of us who wish to still self-publish in the near future.

    I also agree with you. Amazon is not the enemy and that bigger publishing companies should be more innovative. They have to adapt to the times and if they have to pay their authors more or drop their book be it.

    1. Honestly, so do I. But call me an idealist, but I do believe I'll cope somehow even if it isn't. :-)

  2. Bravo, Misha. I get tired of reading Hachette's side of the story. I think those who realize they might be sinking try to grab whatever inflatable they can, by pointing the finger and acting like the little child saying 'it's all their fault'. Your explanation and points are excellent. I've studied marketing too, and economics and it's just slightly disgusting what marketing has done to the writing world. Marketing is only concerned with money, for themselves not the writers, and certainly not creativity. . .

    1. Hey D.G. :-)

      I'm glad to see someone else who studied economics and marketing can see where I come from. I sometimes look at things a bit differently from people, so it's nice to see someone with knowledge agree with me. :-)

      I agree with you too, with marketing not being done for the writer. People might think it strange that one would even think it wrong that marketing is approached like this, but given that we see the publisher as a middle-man, marketing of a book should be to the publisher's AND any given writer's mutual benefit.

  3. Fantastically thorough and informative. I found myself nodding along, though economics aren't my strong suit. Well said.

    1. Yay! I tried really hard to both make sense and keep things interesting for non-economics-student-readers. :-)

  4. Very interesting and well-written explanation, Misha. Thanks for it. It cleared up some of my questions about this issue. I'm printing it out and making sure I've got all that you've tucked into this brilliant post. Here's to economics.

    1. Wow. Thanks, Lee! I'm glad that you're finding my post so useful. :-)

  5. I love your elephants.

    Now if writers truly had leverage...wouldn't that be marvelous. But there are too many writers and too few readers. Deep sigh.

    1. Honestly, I can see scenarios where enough pressure will force writers into banding together enough to effect change.

      Just this self publishing revolution is an example. It wasn't organized, but enough writers got tired of the system that they're now screwing things up for big publishing.

      We have more power than we realize. The publishers wouldn't be against the ropes now if so many of us hadn't stopped jumping through the trade publishing hoops.

      In my mind, at least, it's a matter of creating a situation where writers could have a place/person/mouth piece to go to if things got desperate enough. To stop or effect change faster.

  6. I was nodding so vigorously with what you wrote I gave myself a headache. I cannot help but despair though, As long as there are a few unique snowflakes who succeed in the traditional publishing space and make obscene profits (at least as seen from the outside) the situation has the hallmark of descending into a modified version of a prisoners dilemma where the big publishing houses are artificially propped up on the backs of writers who are quite willing too fork over 75% of profits for the chance at prestige and fame at the expense of everyone else industry as a whole.

    1. Hahaha yeah. You won't BELIEVE how tempted I was to go into game theory in this essay, but I realized that I'd really take weeks to explain everything using that.

      But yeah. I think big publishing is approaching this whole shake-up as a zero-sum game where either they win and Amazon fails, or they fail and Amazon wins. What they fail to understand is that they can act to everyone's benefit and EVERYONE can win. Not only Amazon or the Publisher, but readers and writer's too.

  7. Very well thought out, Misha. I read to the end. :) Amazon's monopoly scares the bejeezus out of me, and I know it's coming. One reason I refuse to do Select.

    1. Honestly, from an economics point of view, I'm not as worried as you'd think. Amazon basically triggered a mass-shift by writers towards an efficient market. And if there's one thing about efficient markets that I like a lot (and yes, I adore the concept), it's the fact that given that writers are informed by what happened the last time (I.E. with trade publishing), they won't be as willing to shift back to inefficiency.

      Does this mean that it's impossible for Amazon to turn into an evil monopolistic exploiter of writers? No. But I think it knows that it was actually laughably easy to draw writers away from evil oligopolistic exploiters of writers, simply by offering to be fair to them.

      So yes, Amazon could become as bad or worse than trade publishing. But it could also be that we writers gang together as a semi-disciplined "union" and threaten to move away from Amazon if it doesn't keep things fair.

      It's what we did little by little to the publishing houses over the past ten years.

  8. This is one of the best explanations of book marketing I've read. I've always wanted traditional publishing contract, but I'm leaning more towards small print publishers, who also use amazon for selling books. I don't want all the hassle of formatting, developing covers, etc. I can see book marketers getting lots of business. And as you say, Amazon is not the only book seller out there, its just the most widely known, and convenient.

    1. Small publishers can be invaluable if that's the way you want to go. :-)

  9. Great thoughtful piece about a confusing issue, Misha. I think a lot of what we're feeling right now are the extreme growing pains as a long broken system tries to heal least that's my optimistic hope!

    1. That's exactly my optimistic hope too! I hope that came across. :-)

  10. If I've understood your points correctly - traditional publishers are trying to make a lot of money (per author) from a few authors and Amazon are trying to make a little money from each of a huge number of authors. And we're better off having both of them in competition than just having one or the other unchallenged.

    1. Yep, that's a pretty good summary of what I've said. :-)

  11. It's always good to find some use for our educations, isn't it?

    This is a great post, Misha! Very thorough and well-written. Your elephants make great points too. :)

    1. Yeah it's nice to know all the years and money didn't go completely wasted. :-)

  12. Thanks, Misha, for explaining it in a way that makes sense to me. I've tried to keep up on this topic elsewhere but was always left scratching my head. :)

  13. Many authors would suggest that the writing on the wall with Amazon has been glimpsed through the severe cut in royalties paid for audiobooks, published through Audible--which is in essence the only game in town unless you're with a major publisher, and some would point to Kindle Unlimited, and how small presses and self-published authors have been treated and will be treated (this is yet to be seen, so I am not sure).

    The big publishers are run to turn a big profit these's what shareholders want, which is driving them to merge and driving their contracts and their choices, and even their battle scuff ups with Amazon and others. I think they also see that as demand for print editions diminishes, their advantages will too, especially with major bookstore chains diminishing--although there seems in some regions to be a resurgence in a few smaller independent stores.

    I think both the big publishers and Amazon have the readers' interest at heart--not because they love them, but because they're where the profit is. The author is a necessary component to their success, which can be an annoying cog, who--if they can pay less for the same service, will provide the opportunity for more profits--the big publishers, by selling the books at the same price but earning more per book, and Amazon by lowering the price, to out compete other sellers and earn more sales but at a lesser profit for each individual sale.

    That leaves the author to weave and dodge and decide to do what's best for his or her goals--to find readership, to earn from the labor, and hopefully to have a little enjoyment along the way.

    Monopolies are bad for customers and the providers of the materials. The major publishers--there used to be more, with a wider range of imprints within them. Not so many now, offering fewer opportunities for authors, even fewer than there were years ago. And Amazon, while offering opportunities now, could conceivably curtail them in the future, if they have the individual power to do so.

    Readers, while authors are important to them--to a certain extent, the readers don't really care about the process and profits and losses and competition. They care about access the books they want to read at a cost they can afford (or better--cheaper than they expect and easier to obtain).

    Okay, no major point and maybe rambling a bit. I agree with most of what you said, Misha. And an author has to be nimble and persistent and knowledgeable, not only in the writing end, but on the business end as well--whether self published, traditional published or a blended/hybrid fashion, because what the situation is today isn't what it's going to be two years from today.

    1. I agree with you too on most of what you said. Monopolies are bad, but there's no real way to stop them except to introduce competition. The thing is, an Oligopoly isn't any better.

      And it's true what you say that readers don't know what goes into creating a book. As such, writers can't depend on them to make the "right" choices, whatever they may be. The only thing we can count on is our own ability to make decisions. But with the market being what it is, it's hard to know which ones are right.

  14. Very intriguing take on this whole affair.

  15. Change is the name of the game. I'm wondering how many of these big publishers are going to survive the next ten years, because you're right. The market has been changing for a long time and they don't want to see it. Now days a number of large name authors and just going on their own (and why shouldn't they?) but you've definitely also got a huge rise in the Indie world. I'm just curious to see what's going to happen with all these small publishers who have a heck of a time making a profit. It seems every time I turn around I hear another author crying because the book they worked so hard to have picked up no longer has a functioning publisher.

    Unleashing the Dreamworld

  16. Good post, and very complex! I still have an affection for Amazon. Sure, they have too much power but they also champion indie authors...

    1. Yeah. I have a special fondness for anything that levels the playing field and/or delivers the service I want.

      However that fondness will wane the moment they start disadvantaging writers in any way.

  17. Ok, interesting take on this Amazon thing. Thanks for sharing your views Misha!

  18. I think Amazon has made publication possible for the little guy, so for that- I thank them.

  19. WOW! I admit, I like Amazon! Insightful, great post!!

  20. Your elephants are right on. I don't think Amazon will be going away any time soon.

    1. Nope. And if they toe the line, they definitely won't go away.

  21. I love your point that the publisher is a middleman, too. I think in all entertainment-based industries--music, movies, and books--it's easy for the studios/publishers/record companies to feel as though they are providing the art and the artist is just an employee working for them. The publisher definitely has a lot of oversight into the process and is ultimately in control of what does/doesn't get published, but it still acts as a funnel of sorts. The author is the start point. I think that's evidenced by the fact that some authors are cutting out the publisher and publishing on their own...and doing so successfully!

    1. Agreed. See the thing is, people seem to think we're clients, which we sort of are, but we're the suppliers too.

      If we chose not to supply a publishing house, they'd be in trouble.

      But no one ever thinks like that, which means that we've been putting up with exploitation for much longer than we've had to.

  22. Crystal, you're right. I've basically started blogging just as self publishing took off. Which meant that I've basically had a front seat to watch self-publishing evolve. And to watch publishing houses do absolutely nothing about it.

    I've been through a publishing house all but shutting down (keeping only romance and erotica because that's what sells). From my perspective, the problem remains the same, although the outcome is different. They're mostly only doing edits and covers. No distribution because most are e-copy-first, which turns into e-copy-only. Next to no marketing or no marketing at all. Which means that they're doing zip to differentiate themselves from the million plus self publishers on Amazon, which results in under-selling, mostly.

    1. Too true. Not all publisher are equal and it's a question of "author-beware" when signing a contract.

    2. Oh yeah. That much I can attest to.


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