Below you find my essay for my application to PPE (Philosophy, Politics and Economics) to Oxford in 2006.
Fixed Book Prices Revisited
Steffen von Bünau
November 1 st 2006
Introduction
The labour market in the industrialized world is shifting towards highly qualified jobs which require profile of the so-called “knowledge worker”. This is not a new development; neither is the term of the knowledge worker, in fact the term was already coined back in 1959 by Peter Drucker. The importance of knowledge has also been known as Winston Churchill predicted: “the empires of the future will be empires of mind”.
However, in the last decade the availability of information has also undergone a substantial shift, influencing the labour market. The internet has made more information available than ever, most of it being free of charge once the internet access is granted. One can estimate the role of the internet in information storage and supply by looking at the development of the gates to the information: companies like Google and Yahoo which core service is to supply mechanisms for finding information are growing rapidly. It is probably fair to say, that the
widespread of information leads to an acceleration in the importance of the knowledge worker. Most recently the survey “War over talent” in “The Economist” highlighted the role of skilled labour, particularly in developed countries.
Not surprisingly with a shift in the nature of labour, there is a shift in the requirements for that
labour. In relation to the knowledge worker, the most important skill is to work with
information. This skill is also vital for using the free resources available in the internet. The
key to the ability to deal with information is, to first of all understand it. Since most
information is available in written form this requires the ability to read. However important
the internet and new media are, most people still learn and improve their reading competency
through books. It is true that the internet helps gaining equal access to information, but only to
those with matching information skills. Therefore, the medium book plays a crucial part by
conveying those skills.
Government intervention in the book market is common in a lot of countries, but it varies in
methods. In Germany, for example, the agreement for fixed book resale prices is rooted in a
decision from 1888 by the so called “Boersenverein des deutschen Buchhandels”.
Another tool widely used in the EU is a lower VAT rate on books. Extreme cases are Ireland
and the UK where VAT on books is completely abolished. The discussion on resale price
maintenance resumed after the effects of a liberalisation of the book market were observed in
the UK. Resale price maintenance was abolished there in 1995. This change resulted in a
decrease in bookshops and an increase in book prices. The reason for the price increase could
also be a shift towards hardbacks, as the authors of “The economics of Books” Marcel F. M.
Canoy, Jan C. van Ours and Fredrick van der Ploeg argue.
In Germany, the interest in book market regulations rose, after the decision of the European
Union in June 2000 that the German resale price maintenance does not infringe the European
competition law. In October 2006, the weekly newspaper “Die Zeit” published an article
expressing doubts about the effectiveness of the resale price maintenance. Furthermore, the
discussion is fuelled by other changes in the book market such as the rapid growth of online
selling and publishing.
In this essay I will analyze the economic consequences of the German resale price
maintenance and I will try to answer whether the use of resale price maintenance is advisable,
especially under new market conditions due to new technology. Before assessing the impact
and effectiveness of the „Sammelrevers “(the name of the German rpm) I will give an
overview of its aims.
First of all it is generally agreed that a variety of genres and books has a cultural value, which
might not be reflected by a corresponding demand in the market. To enable and protect
diversity in the book market, therefore is a vital goal of resale price maintenance. To provide
a good access to literature, a dense network of quality bookshops is also desirable. The dense
network of bookshops is not only important under cultural aspects but to support reading.
The stimulation of reading is also the motive to keep book prices low: another aim of the
resale price maintenance.
The Consequences of Fixed Resale Prices
The advocates of the resale price maintenance argue that cultural diversity would flourish due
to cross-subsidising, allowed by resale price maintenance. Cross-subsidising is the use of high
profits in one sector to allow cheaper prices in another.
A common application of cross-subsidising can be seen in air travel, where seat prices in
higher class earn an extra profits which allows airlines to charge less on the standards seats,
then they would have to, if they were offering only standard seats.However there is a key
difference between the air travel market and the book market. In the air travel market, the
airline provides the service and can charge its price directly to the consumer.
This is somewhat different to book markets. Regardless how promising the prospects of a
book are, the publisher still needs to get it into the stores. In a market without resale price
maintenance, the point is that publishers would come under fierce price pressure in particular
from the big chains. They would earn less profit and concentrate on those books with very
little risk, since they want to minimize the risk of unsuccessful books, which they share with
the shops. Now the advantage of resale price maintenance is, that cross-subsidising becomes
possible to a greater extent, leading to a greater variety of books published. With the power of
setting the resale price the publishers can raise the price they charge the book stores, by also
raising the price the book stores charges the costumer. Without the ability to set the resale
price, the publisher would possibly have to charge less in order to get the books into the stores
at all. The hope is, that the publishers use this extra profit to subsidies riskier books.
Opponents however argue, that publishers do not necessarily use the extra profits to subsidies
books of higher risks and cultural value. They might just take the extra profits and continue
concentrating on bestsellers. It is also argued that the concept of cross-subsidising riskier
books is itself undesirable: the point is, that riskier books are more likely to be of an esoteric
character which generally is favoured by people with higher education. But people with
higher education also tend to earn more than and less educated people might generally favour
bestellers(low risk books). Now those riskier books are subsidised by higher profits from
books with lower risk. In conclusion, the danger is, that less educated, possibly poorer people,
pay higher prices than they would, subsidising books which are read by people of higher
education and higher income.
Furthermore, the loss of price competition due to fixed resale prices is seen as an advantage
by the proponents. They hope that bookshops might engage in non-price competition such as
providing better service, general advertising or other activities fostering a culture of reading.
Naturally, opponents of the resale price maintenance interpret a lack of freedom as a
disadvantage. The argument here is not that the general level of prices could be lower but that
price discrimination is not possible. The idea behind price discrimination is that different
prices are charged for the same good, not based on different production costs. If possible it
might result in lower prices for pupils or people of old age, like it is common in cinemas or
theatres.
In order to guarantee a high level of geographical availability a dense network of high quality
bookshops is desirable. Resale price maintenance is said to protect individual bookshops
against chains, because they cannot be forced out of the market by price competition. This is
supported with data from the UK and Germany. In Germany the largest chain Thalia holds
only three percent of the market whereas 18% of the UK’s market in 1998 is hold by WH
Smith. However, this can be seen as a shallow argument since chains get bulk discounts from
the publishers and therefore can achieve higher profits from each book. More importantly,
chains have capacity to also compete in the non-price arena. For example, chains can invest
more in stores in better locations with more comfortable interiors or goodies such as free
coffee, newspapers and internet.
The issue of resale price maintenance is a very controversial one, a variety of opinions exists.
For example the essay “Resale Price maintenance for Books in Germany and the European
Union: A Legal and Economic Analysis” by Prof. Dr. Jürgen G. Backhaus and Dr. Reginald
Hansen published in the “International Review of Law and Economics” concludes that the
cultural affects are “by all means more important than anti-trust aspects” and therefore rpm in
the book market is to support. This is a contrast to “The Economics of Books” by Marcel F.
M. Canoy, Jan C. van Ours and Fredrick van der Ploeg whose concluding remarks are more
reluctant.
Most scientific articles base their conclusion on the resale price maintenance on their
judgement of the effects of cross-subsidising. Indeed it is probably the strongest argument on
cultural grounds but its impact is doubted.
When not taking the cross-subsidy argument into account a majority of arguments stands
against resale price maintenance of books. In the next section, I will not try to verify or falsify
the argument of cross-subsidising but instead show that its importance is diminishing under
changing conditions.
The World has Changed
Books have a fixed set of standard properties and are easy to send which makes them a very
well sellable over the internet. Online book stores like amazon.com or the online shop of
Barnes & Noble are growing and now move into other goods as well ( “Lifting the Bonnet” 5th Oct. 2006 in “The Economist” ). Since online-selling of books is growing, it is questionable if
bookshops really are the key to adequate book supply.
This trend is likely to continue with younger generations more and more used to purchase
goods over the internet. Of course, actual bookshops still possess certain advantages, probably
most importantly the personal recommendations by qualified staff. But then, this is known to
online shops and they successfully provide sophisticated substitutes. Recommendations in the
form of “If you liked this book you’ll like this one” and personal favourite lists compensate the lack of personality to a degree depending on the shopper. Future generations more used to
online shopping might not judge the absence of real personality heavily.
I think it is necessary to once again reflect on the cultural aims. Is the aim really just to
provide geographical availability (on which online selling would have a huge impact) or are
bookshops as an institutions given a cultural value? Book clubs and literature societies might
grow around a local shop and definitely be of cultural value. So it needs to be clarified if it is
sufficient supply chain or actual book shops which shall be supported by the resale price
maintenance. For simple availability, the need for having a dense network of bookshops is no
longer obvious.
The second influential point also involves the internet, but not on the consumer side. The
business of publishing books is also changes, maybe publicly not as well noticed as the
growth of online selling. On-demand publishing gives the possibility to publish at low risks
and costs. Consequently, authors who might have not passed the former standard examination
procedure, aimed at reducing risks, might now get their works published.
I am aware of the fact that a book published by an on-demand publisher is unlikely to attract
the same level of publicity as books from conventional publishers with powerful marketing
machinery. But I suspect that this might change as well. The internet has introduced a variety
of new opinion sources like weblogs and forums, and the impact they have is not clear yet. I
reckon that they might become extremely influential. In “The Economics of Books” the
importance of mouth-to- mouth culture in book advertisement is highlighted. I argue that it
might not be wrong to consider weblogs as possible successors or at least as very influential
to the mouth-to- mouth culture in future. This is due to the concept of weblogs involving a
high level of interaction in comments or votes which creates a strong personal attachment to a
blog.
Conclusion
Reconsidering resale price maintenance under these new circumstances makes it easier to
come to conclusion. The main reason on which the resale price maintenance is based -
promoting cultural diversity by cross-subsidising - becomes less important. On-demand
publishing and worldwide book purchase should provide a lot of variety.
Under these aspects, I value the arguments against resale price maintenance higher. For
example, I consider price discrimination as generally beneficial for overall supply of books to
groups with different financial resources. However, I believe that government action is
needed, but not so much for promoting diversity but to promote reading directly via strong
investment in primary education.