[joshkaufman]

It's the other way around, actually: by law in the US and most countries worldwide, suppliers are free to set whatever prices and terms they like, but retailers have the final authority to set the price that's presented to the retail customer. Suppliers can not unilaterally dictate to retailers the final sales price the retail customer pays.

That's why "Manufacturer's Suggested Retail Price" (usually abbreviated MRSP) is a thing. The manufacturer / supplier suggests a price, but the retailer makes the final call. The only recourse suppliers have to this is pulling distribution from that retailer entirely, as long as they apply the same policy to all retailers - companies like Apple and Bose make credible threats to do this to suppliers that violate their guidelines, which is why their prices are so consistent across retailers.

Otherwise, retailers have the final call on retail pricing unless they waive that right via negotiation: if they want to sell at a loss, or reduce their own margin to use lower prices as a marketing tool, they can. That's why Walmart and Target often sell bottles of Tide below cost - it's called a "loss leader" strategy, and it's very common as a way to attract new business.

Amazon used loss leader pricing on bestselling titles to establish the Kindle platform, which is a major reason why it's the dominant ebook platform now.

A big part of this dispute is that Hachette is demanding final authority on setting prices, and demanding that Amazon gives up the right to discount and use its ebooks as loss leaders - instead, they'd get a flat percentage (likely ~30%) of whatever Hachette decides to charge. This is a major part of what's now called "agency pricing," and the big 5 publishers and Apple colluded to force Amazon to adopt it several years ago. That's why the DOJ filed suit for antitrust / collusion / price fixing, and the publishers each lost or chose to settle.

As a condition of the judgement / settlement, publishers now have to renegotiate their contracts with Amazon. Amazon, justifiably, isn't willing to agree to agency pricing without major concessions. Hachette won't agree to standard retail non-agency pricing. Hence the impasse.

EDIT: also to clarify, wholesale non-agency pricing isn't "unprecedented in the book business." Barnes & Noble and independent retailers have operated on wholesale pricing for print books for decades. Otherwise, B&N wouldn't be able to place a "20% off" sticker on bestselling titles, or offer large discounts to move remaindered stock. Hachette is asking Amazon to agree to something no other book retailer has or would agree to. Retailers like Apple and B&N/Nook have agreed to agency pricing on ebooks in the hopes of shutting down Amazon's ability to discount, with the understanding that publishers were attempting to force Amazon to do the same. (Via collusion.)

The larger game is that Hachette (and other large publishers) are attempting to protect their hardcover print sales by inflating the price of ebooks, which makes them less attractive to readers. Ebooks are more profitable, but it's a more difficult market to control, so publishers are fighting Amazon and doing what they can to slow ebook adoption as much as possible. It's not a smart strategy, IMO, but that's what they're doing.

[growse]

When Amazon decides to discount a product, who swallows the loss? Does the supplier still get a fixed cut per sale regardless of sale price, or do they get a fraction of whatever the sale price was?

I ask because I believe in things like grocery retail, the retailers have immense power over the suppliers. If you see pasta sauce at 2-4-1, it's the supplier picking up the cost of that. Favourable placement in store? The supplier pays. The big retailers can hit the supplier over the head with the threat of simply stopping selling the suppliers entire catalog, which would cause massive revenue loss for the supplier. With this stick, the retailer can ensure that they're getting a fixed income for every unit sold, regardless of the actual unit sale price. They pretty much have the suppliers completely over a barrel.

Seems like the balance of power between retailer and supplier is drastically different between sectors.

[ghshephard]

Amazon swallows the loss. For example, with eBooks, they were purchasing wholesale from the book publishers for $15, and then selling them to customers for $9.99.

As much as I love my Kindle, and Amazon, and as much as I realize that the publishers probably extract more value from the entire chain than is reasonable given their contribution (as compared to the author, who I believe should be rewarded a great deal more) - I realize that we will face dark times in the future if Amazon is able to corner the eBook market.

[pbhjpbhj]

>Amazon swallows the loss. For example, with eBooks, they were purchasing wholesale from the book publishers for $15, and then selling them to customers for $9.99. //

What were the books selling for in paperback? I'm guessing less than $15 - I know it's priced to the market and the utility improves the value, and thus a higher price can be attained. But, I didn't think that Amazon would let publishers rip them off in this way - paying more for something that costs less to produce.

Amazon if ebooks are even marginally above paperback costs should just buy the paperback, format shift to ebook, sell the paperbacks as pulp.

I don't think anyone wants to hand over the ebook market entirely to Amazon; all the publishing houses needed to do was not be evil and not try to squeeze the system dry ... oh well. Death and taxes and human greed can always be relied upon.

[ghshephard]

I remember when "Under the Dome" was selling wholesale (Hardcover) for $13 and I ended up buying it from Walmart for $6.99 - because (A) it was $3.00 less than the eBook, and (B), well, I then could, in theory, resell the book.

It's odd watching two book sellers compete with each other to sell a book at loss.

But, your comment, "Amazon would let publishers rip them off in this way - paying more for something that costs less to produce." brings to mind Scalzi's comment,

http://whatever.scalzi.com/2014/07/30/amazons-latest-volley/

"(This is where many people decide to opine that the cost of eBooks should reflect the cost of production in some way that allows them to say that whatever price point they prefer is the naturally correct one. This is where I say: You know what, if you’ve ever paid more than twenty cents for a soda at a fast food restaurant, or have ever bought bottled water at a store, then I feel perfectly justified in considering your cost of production position vis a vis publishing as entirely hypocritical. Please stop making the cost of production argument for books and apparently nothing else in your daily consumer life. I think less of you when you do.)"

Think about the software that I purchase online that costs $0.001 to deliver and I pay $595 - it costs 1/10,000th what the old version with paper books, and CDs, and nice glossy boxes.

I agree with Scalzi - the argument about "it costs less to produce" is bogus. Something should be worth whatever value it has to the person buying it intersecting with whatever price the person willing to sell it wants, plain and simple. The cost of creation is not particularly interesting.

[pbhjpbhj]

>Think about the software that I purchase online that costs $0.001 to deliver and I pay $595 - it costs 1/10,000th what the old version with paper books, and CDs, and nice glossy boxes. //

Er, what? The software doesn't cost $0.001 to produce.

This is more akin to being able to buy that software in a Staples store for $595 in a box with a DVD and manual. Then the producer starts selling it online for $650, because after all you no longer have to go to the store. They just refuse to cut the consumer in on the savings of not producing boxes, not producing media, not creating manuals and instead only focus on the added utility.

When you're dealing in cultural arts and informational products that can benefit society and instead of allowing the benefit of new technology to enrich you further and enrich society more you instead steal the whole benefit for yourself that's evil.

In terms of Scalzi's example: Yes a soda that's sold for $2 in a can might cost 20c to produce, fine no problem. But then recycling takes off and tech develops and that can now costs 12c less to produce so you put the price up to $3 because you're using more recycled material and that's now a selling point. That's what's wrong here. You already had more profit by selling at the same price point, the move in tech and society created the benefit and you leached it and cynically did one over on your customers because you knew that their desire to improve the world could allow you to get a better price.

[ghshephard]

The thing is - I've always been willing to pay a great deal more for software online than on CD - it has more value to me.

The fact that it costs zero dollars to produce (on the margin) is immaterial.

One good argument though, against eBooks being more expensive - you can't resell them, or ven easily give them away, or lend them. That issue, right there, should make eBooks worth less to the person buying them - but having nothing whatsoever to do with the fact that they cost less to produce.

[cwyers]

There's two costs at work here -- marginal cost and absolute cost. eBooks don't reduce the absolute costs of any of Scalzi's books -- the work he and his editor put into it and the marketing expense, principally. But they do reduce the marginal cost, and so if you sell eBooks at the same price as physical books, that's more profit, split up however the parties involved agree to.

Scalzi's comparison to fountain sodas missed the mark -- the reason those cost so much more than the cost of the good itself is that the soda needs to cover the costs of owning, maintaining and providing utilities to the building where the fountain is, and the employees who work in that building. Amazon doesn't HAVE that kind of overhead, and they want to pass the savings on to the consumer. The publishers want Amazon to hold onto those savings (or share them with the publishers), so that Amazon can't undercut the other retailers who DO have that kind of overhead.

[justincormack]

Well there is a reduction, in printing, warehousing and perhaps pulping costs. For some books that is a lot, those on the long tail end of the book market in particular.

[deegles]

> Amazon doesn't HAVE that kind of overhead ...

Apparently servers, bandwidth, electricity and developers are free now?

[ganeumann]

Scalzi is arguing that the packaging is the important thing, not the contents, which is a funny thing for an author to argue. Because if the content is the important thing, then there is now a system that delivers the exact same thing more efficiently. We, as consumers, should definitely push to benefit from that efficiency with lower prices. To do otherwise would be irrational.

Aside from being a straw-man, Scalzi's just wrong. We pay less for a soda at the fountain than we do in a bottle. That's the comparison that should be made. When you buy Coca-Cola, you are buying more than just the raw ingredients processed. Otherwise you'd be buying Store Brand Cola.

[ghshephard]

Yeah - I thought his examples were actually not very good. The other one is water - you pay a certain amount of money for bottled water (which presumably doesn't have the crappy lead / metals from the pipes, and ideally will store well, and be available in a disaster, etc...) - but you pay less when you fill up your water containers at the store, for water of roughly the same quality.

[UnfalseDesign]

I agree. If Scalzi is saying that the cost of production should not alter the price of the product, then I would ask him why paperback and mass market prints of books are less than hardback books in regards to the price. According to his argument, paperback books and hardcover books should be set at the same price regardless of what it takes to produce them.

[jobu]

Skalzi may tearing apart Amazon's arguments through most of that article, but I think the last paragraph is most important part:

"Authors: Amazon is not your friend. Neither is any other publisher or retailer. They are all business entities with their own goals, only some of which may benefit you. When any of them starts invoking your own interest, while promoting their own, look to your wallet."

Hachette isn't working in the authors' best interest here either - they're looking out for themselves.

[pbhjpbhj]

And Skalzi we must presume is looking to his best interests which are apparently vested in the established system and may deteriorate if that system is disturbed.

[graeme]

It's amazon's choice to sell for less. The publishers didn't want to price e-books low. So they refused to sell at a $9.99 price. Which is their right.

Amazon believe a low priced e-book market would generate more profits overall. So they priced low anyway. That, in turn, was their right.

I don't see how the publishers are evil in that situation. What would you do if a reseller was convinced your product was priced too high, and they wanted you to slash prices? The standard advice on Hacker News is "raise your prices".

Amazon appears to have been right, but it was hardly obvious. And low pricing may not apply to all books. For instance, I don't release my books on kindle because of the low pricing structure for self published books.

(Amazon gives 70% royalties for kindle books priced $2.99-$9.99, but only 30% for pricing above and below that, IIRC. The optimal price for my books on my own site is above $9.99, so I don't want that deal)

[pbhjpbhj]

>I don't see how the publishers are evil in that situation. //

[Some made up numbers!]

The paperback costs $10. The publisher removes virtually all the direct production costs of creating the book itself (but obv. not the author, editor, type-setting, marketing and such which remain the same or lower). The publisher puts up the price of books because, hey, why use technology to open access to arts and information when you can use it instead to increase the wealth gap.

Yes, as I indicated, there may be extra utility in ebooks and that enables them to increase the price. But, with no price increase they still make more profit.

Yes, it's just capitalism; it's evil.

[res0nat0r]

Capitalism is now evil?

[Alex_MJ]

Both of these posts have been educational and I now understand the debate in far more detail than before. Thank you!

[Marazan]

I thought that Amazon demanded a most-favoured-nation clause in relation to the price Hachette charged other retailers?

[thirdtruck]

This is one of the most comprehensive and reasonable addendum to an explanation of the situation that I've read in a while. Thanks again!

[ewzimm]

You've described this issue more clearly than any article I have read about it. It's a bit of a shame that Internet comments are significantly more informative than the New York Times, but it certainly says something about traditional publishing and media.