How the Internet Helps Pricing Efficiencies

Tuesday, October 04, 2005 | 07:46 AM

One of the things that always surprises me about Economics is how long it takes for theory to be realized in reality. Self-interested economic participants are supposed to maximize their gains by being savvy, price sensitive shoppers.

Many people's own habits and laziness precludes that expected behavior -- at least initially. Eventually, as it becomes more and more ingrained into the culture, we do begin to behave as the Economists expect. We may not shop around for gas at $1.89 -- but at $3.89, a lot more of us do.

So too with books. Regular readers of this site know I recommend buying used books, if you cannot afford new ones. Apparently, many other people have been doing so. Both the WSJ and the NYT have had extensive coverage of the issue last week. Which leads me to a research paper from last year:

"A research paper released a year ago, however, found that online used-book markets like Amazon cannibalized potential sales of new books only about 15 percent of the time. The researchers - Anindya Ghose of New York University and Michael D. Smith and Rahul Telang of Carnegie Mellon University - also hypothesized that because the lower prices of used books leave more money in consumers' pockets, the gains from additional readership might result in more purchases of new books and in the increased exposure of authors to new audiences."

No kidding. That sort of long range thinking is noticeably absent from publishers, labels, etc., who imagine that anything thats not an actually sale is the equivalent of theft. Indeed, a second NYT article began by asking "Is becoming the Napster of the book business?"

Um, no. Copyright laws give purchasers of physical works the right to sell the physical copy (but not a copyright) in that work. 

The WSJ observed:

"The Internet is creating a new and fast-growing category in the book-selling market -- the barely-used book. An increasing number of consumers are snapping up used volumes online at invitingly cheap prices. These aren't yellowing copies of out-of-print titles but often unblemished copies of newly published books -- sometimes available just a few days after a book's official publication date.

Today, any consumer armed with a title or an ISBN number can search the Internet for the lowest price and get one within minutes. At the same time, the Web sites that offer such books, such as Amazon, Abebooks Inc. and Alibris Inc., have made it painless for readers to resell them. A reader who owns "The March," for example, can sell it via Amazon just by clicking on the "Sell Yours Here" button to the right of the new-book listing. The process is so simple that even the most technologically befuddled person can follow it. Once the book sells, Amazon collects a commission of $0.99 plus 15% of the sale price from the seller. It then deposits the remainder in the seller's account and provides the address of the customer. The seller ships the book directly to the customer. Amazon's payment to the seller includes a pre-calculated credit toward shipping costs."

The NYT's focus was more on the booming used text book industry, as the price of College Texts have gone thru the roof (thank goodness there's no inflation!): 

"In barely a decade, online booksellers have grown to account for two-thirds of the market for general-interest used books, a trend that calls into question the future of brick-and-mortar stores devoted to used books, according to a study financed by the publishing industry and released yesterday.

The study, by the Book Industry Study Group, a nonprofit research organization whose membership includes nearly all commercial publishers as well as libraries and nonprofit book-related organizations, found that online sales of general-interest used books are growing at a rate of more than 30 percent a year, while sales of used books at stores are almost flat.

Used books account for a relatively small portion of overall consumer spending on books, with roughly $600 million, or 3 percent, of the $21 billion that Americans spent last year on general-interest titles going for secondhand books, the study found.

The market for used textbooks is far larger, at $1.6 billion, or more than 30 percent of the $5.3 billion spent by consumers on educational and professional books.

Over all, used-book purchases accounted for $2.2 billion, or 8 percent, of the $26.3 billion that American consumers spent in 2004 on books of all types. That total was up 11 percent from the previous year, the study found.

"The growth reflects how easy is has become to sell used books and to create inventory in this business," Jeff Abraham, the executive director of the study group, said in an interview.

Most of the growth is coming in the online sale of general-interest books, said Jeff Hayes, a group director of InfoTrends, a research company that worked on the study, a trend suggesting that traditional used bookstores might be an increasingly endangered species."



graphic courtesy of NYT 


Why is online used book sales booming? Simple: It is a function of ease of use, efficiency, and competitive pricing; Any publisher that prices books high enough loses the marginal purchaser; Those that either cannot afford the price, or simply do not wish to purchase a book at $X, wait until its used, and buy it cheaper.

I find it interesting that the Long Tail applies not only to niches by subject matter or relative lack of mainstream appeal, but to the economics of specific pricing: content finds an audience as prices drop. While it may not be a true "long tail," there's little doubt how the bell curve looks vis-a-vis costs.

As prices approach zero, more and more potential consumers can have access to a given work. Its the underlying dynamic of the entire explosion in internet content, including blogging.   

The publishing industry believes this to be a problem:

"Used books are to consumer books as Napster was to the music industry," she said. "The question becomes, 'How does the book industry address its used-book problem?' There aren't any easy answers, especially as no one is breaking any laws here." (emphasis added)

I disagree with the publisher's who think they are losing sales; They are capturing readers who might otherwise never read this book. Eventually, when they are more finacially secure, you have a customer with a love of books, a fan of specific authors, and ready source of income (i.e., sell old books/buy newer ones) to keep purchasing new books. 

Perhaps a dynamic pricing sturcture -- similar to DVD pricing -- might capture more of these sales.

Internet Grows as Factor in Used-Book Business
NYT, September 29, 2005

The Growing Market For Slightly Used Books
In Latest Threat to Publishers, Readers Flock to Web to Buy
Best-Sellers at Big Discounts

THE WALL STREET JOURNAL, September 29, 2005; Page D1

Online Battle of Low-Cost Books
NYT, July 12, 2004

Demand for used PCs on upswing
Dinesh C. Sharma Wed Sep 28 09:08:00 PDT 2005

Study: Used Books Are $2 Billion Industry
NYT, September 28, 2005

Tuesday, October 04, 2005 | 07:46 AM | Permalink | Comments (9) | TrackBack (4) add to | digg digg this! | technorati add to technorati | email email this post



TrackBack URL for this entry:

Listed below are links to weblogs that reference How the Internet Helps Pricing Efficiencies:

» How the Internet Helps Pricing Efficiencies from None of Your Business
The Big Picture has a great post today about how the Internet Helps Pricing Efficiencies. This is one of the first economics articles Ive seen relating directly to the Internet economy. ... [Read More]

Tracked on Oct 4, 2005 11:52:10 AM

» Pricing Inefficiencies from BusinessPundit
Barry Ritholtz has a great post about how the internet helps pricing inefficiencies.One of the things that always surprises me about Economics is how long it takes for theory to be realized in reality. Self-interested economic participants are supposed... [Read More]

Tracked on Oct 5, 2005 9:21:14 AM

» Capitalist Digest from Lively Debate
This weeks Carnival of the Capitalists is out. The five things I want you to read from this edition are: Let's Tax These Bubble-Driven Windfall Profits talks about an oil bubble. Regulation Begets Regulation tackles gas price regulation as well.... [Read More]

Tracked on Oct 10, 2005 9:09:26 PM

» Capitalist Digest from Lively Debate
This weeks Carnival of the Capitalists is out. The five things I want you to read from this edition are: Let's Tax These Bubble-Driven Windfall Profits talks about an oil bubble. Regulation Begets Regulation tackles gas price regulation as well.... [Read More]

Tracked on Oct 10, 2005 9:11:17 PM


There's a further point I believe you've already made. The value of a new book increases when there is a viable resale market/ residual value for it. This increases the likelyhood that someone will purchase a book. They have the knowledge that they can recoup some of the cost if they decide not to keep it. (Some publishers are just dense.)

Posted by: apav | Oct 4, 2005 11:53:36 AM

The comments to this entry are closed.

Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      


Complete Archives List



Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:

Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo



Odds & Ends

Site by Moxie Design Studios™