Amazon and Monopsony

On Sunday of this week, Paul Krugman posted a now-much debated op-ed entitled: Amazon’s Monopsony is Not Okay. For those unfamiliar with the article or the debate that surrounds it: it is about Amazon’s enormous market power, and the impact that power is having on the publishing market as a whole. Specifically, publisher Hachette is currently in a dispute with Amazon, who are pressuring Hachette to change their rates for e-book prices by cutting off the supply of Hachette’s authors’ books to the public: making them either delayed or completely unavailable. Most of the experts, regardless of their political leanings agree: Amazon has a lot of market power, and that power is hurting publishers. Where they differ is on the question as to whether or not that market power is hurting book consumers or not, and the answer to this question is answered in the strange term featured in Paul Krugman’s title: Monopsony.

Krugman himself explains well what a monopsony is: a market with only 1 buyer. To go into a little more detail, this term is different from the more recognizable term ‘monopoly.’ The difference between the two, in practice, is that in a monopoly, the seller gets to choose what price it wants to charge, whereas in a monopSony, the buyer gets to choose what price it wants to pay. In our example, Amazon is the buyer, and traditional publishers and authors are the seller. The price that Amazon sets, is the price which Amazon pays the authors and publishers in order to then resell those books online to people all over the world. This is one type of traditional market failure, and it generally results in two specific shortcomings. The first one is that the monopsonistic buyer will pay a lower price for what it’s buying than if the market for buying; in our case book rights, was competitive. This means that authors will get less money per book that Amazon sells in the online marketplace than if authors could sell their books to some other retailer, who might be willing to offer them more money per book to sell the author’s e-books online. This first failure explains how Amazon is hurting existing authors, who can no longer get paid by their publishers as much as they used to.

The second market failure is that the buyer typically buys fewer books, at the lower price, than the market would as a whole, were it competitive. This comes from the supply side, or, in our case, the publishers. If publishers won’t get paid as much to publish a book, some of them may not want to spend the years they dedicate towards finding and cultivating new and exciting authors, and decrease the number of books they produce per year if they aren’t able to charge the prices that they’re used to. This decreases the total supply of new books, forcing publishers to show only a few new authors every year.

In short, I agree with Paul Krugman, although I believe his short statement that said “Amazon is ultimately hurting authors and readers” has been misinterpreted by the community as a whole. Amazon has been able to keep prices extremely low for customers, which is a large source of its dominance, but Amazon’s monopsony power over authors will necessarily restrict the number of new books being put into the market. This will reduce the room for new authors to publish, since existing publishers will want to keep their most successful prospects and the new, riskier prospects will be the first to hit the chopping block, so to speak. This will reduce the diversity of books being published,  which for many readers is a very bad thing. More importantly, and the inspiration for this blog post: I can’t keep reading Harry Potter. I already know how it ends.

For another view on the topic, Paul Krugman’s article has been annotated here:

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