ROBUST discussion

Andre Jute asks
What does classical economics say about ebook pricing?

Amazon’s division of the income of ebooks defines the economics of the market whether, or not, the writers fixing their prices understand, in terms of classical market economics, the psychological mechanisms at work in their readers, the bookbuyers.

The minimum price Amazon allows is 99 US cents. The writer’s cut is 30% of prices between 99c and $2.99, and 70% from $2.99 to $9.99. Over $9.99 the writer’s cut reverts to 30%. It is clear which pricing structure Amazon is trying to guide writers to.

The marginal unit, according to my experiments, supported by the experience of people like Joe Konrath, will be sold at $2.99 and equivalents in other currencies.

It appears to be true that $2.99 clears the market, whereas $0.99 leaves it open. In such a strongly growing market those without training as economists have instinctively, and those with the necessary background deliberately, defined the marginal unit as “where the writer’s income is maximized”.

At a lower price than $2.99 the writer’s income is cut by a combination of variable royalty divisions and higher but not quite adequate sales. At a higher price the sales fall away and the price must be increased to gain the same income, a positively reinforcing spiral to self-destruction; this spiral is limited to $9.99 by Amazon’s division of income reverting to the low scale over $9.99.

Whether the instinctives would define the marginal price the same way in a static or falling market is an open question; they’re a bunch of very smart people, survivors.

The way Amazon’s “royalty” structure works, the book needs to sell six copies at 99c to earn the same as one book at $2.99. Numerous experiments, one most recently by the reliable Seb Kirby, have shown that sales at 99c are generally not six times what they are at $2.99.

Sales at 99c may have non-monetary purposes, such as gaining name recognition or claiming a market as your own, as Stephen Leather did in the UK last Christmas, a simple exercise in impressive unit numbers, regardless of instant income, trading off present income for future income; we’ll see this Christmas how well it has worked for Stephen. (One of my editors “absolutely loves that man” and is accustomed to paying full price for his books…)

All of this applies to novels and popular non-fiction (one of my experiments was with popular non-fiction). It may be that texts with something special, perhaps instructional, perhaps in addition a writer very widely known in the field, can be priced higher and still clear the market. Or it may be that a higher price than $2.99 will merely invite competition.

Classical market economics, unlike the discredited alternative of marxism, doesn’t pretend to have all the answers.

I suspect that the longterm upper price for ebooks is the same as for mass market paperbacks. Whether the market will shake out the writers who compete only on price, and then drift up towards this previously defined natural barrier, is in the hands of the gods.

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The punchline is in my second post in this thread.

Andre Jute wonders if he has discovered
An undocumented feature of classical oligopoly theory?

There appears to be a breach in the laws of classical economics in the current ebook ferment. Classical monopoly- and Robinson oligopoly-analysis of course deals with homogenous products, but about eighty per cent of indie books were found to be homogenously bad (see the Slush Pile articles on the blog Kissing the Blarney http://coolmainpress.com/ajwriting/ar... ), so we’ll stretch a point for the sake of argument.

The classical monopoly producer would depress prices, selling more and more units, until the cost of producing the last unit just equaled the income from selling it. There would be no real profits, though accounting might make it appear otherwise, but there would of course be huge capital growth in the value of the business because dominance is perceived as power. Many of the monster oligopolies today work the same way (Microsoft, Apple, Amazon, etc — their owners and operators are agreed that market share is more important than profits). But the analysis here given is not often applied because it has become tautologically identified with Very Big Business.

But in ebooks, the unit numbers generated by 99c sales, which we have seen cannot be profitable to the owners, who’re the writers, instead of acting as a barrier to entry as in either monopoly or oligopoly theory, instead seems to invite more writers. Most of them will flutter like a moth against a hot globe, and be extinguished. But in classical economics they shouldn’t even be there…

It’s The Jute Effect: Against the impossible barrier of oligopoly pricing, for some wannabe artists fame may substitute for funds.

You heard it first on ROBUST.