Amazon's "Monopsony"

I almost never agree with Paul Krugman about anything when he's talking politics. But the man has a Nobel Prize in Economics, so when he talks about the institutional forces affecting commerce, I do at least pay attention.

Krugman wrote an editorial for the New York Times on the Amazon-Hachette feud, and, wonders never cease, I agree with every word.

"So far Amazon has not tried to exploit consumers. In fact, it has systematically kept prices low, to reinforce its dominance. What it has done, instead, is use its market power to put a squeeze on publishers, in effect driving down the prices it pays for books — hence the fight with Hachette. In economics jargon, Amazon is not, at least so far, acting like a monopolist, a dominant seller with the power to raise prices. Instead, it is acting as a monopsonist, a dominant buyer with the power to push prices down.

And on that front its power is really immense — in fact, even greater than the market share numbers indicate. Book sales depend crucially on buzz and word of mouth (which is why authors are often sent on grueling book tours); you buy a book because you’ve heard about it, because other people are reading it, because it’s a topic of conversation, because it’s made the best-seller list. And what Amazon possesses is the power to kill the buzz. It’s definitely possible, with some extra effort, to buy a book you’ve heard about even if Amazon doesn’t carry it — but if Amazon doesn’t carry that book, you’re much less likely to hear about it in the first place."

Krugman does miss one crucial point, which surprises me given that it's a purely economic one. It's not just that Amazon can kill the buzz surrounding a new book. It's that driving product prices down constricts the ability to make profit, and most authors and publishers' already have very thin profit margins. In fact, most authors (myself included) don't make a living through writing. Writing is something we do on the side, either before or after our day jobs.

To be fair, Amazon has proposed a deal it claims will pay authors more; maybe so. But there's only so much profit to be squeezed out of a single copy of any book, so when Amazon tries to reduce the amount of profit-per-copy, somebody gets less. It's simple math, and you can bet Amazon doesn't want that "somebody" to be Amazon. So either authors will get even less money, or publishers will get less and then either publish fewer books by new authors or pay authors even less in advances and royalties. It's really that simple.