Booked Up
Following a survey of our
wall space, plus of the attic, the garage, the basement, and every closet in
the house, my wife has estimated that I own something on the order of 14,000
books--enough, she points out, that if I read one a day for the rest of my
life, there's an excellent chance I won't live long enough to finish them all.
Still, I keep buying books at an alarming rate. That's only partly because I'm
attempting to deny my own mortality. It's also because buying books is so much
fun these days.
Of
course, there have always been plenty of ways to have fun buying books--such as
prowling through cavernous used-book stores in search of hidden treasure or,
for Washington, D.C., residents, driving three hours through glorious Virginia
countryside to attend the equally glorious Green Valley Book Fair. But two
recent innovations have ushered in a true golden age of obsessive book
shopping: You can head over to a luxurious store such as Barnes & Noble,
lounge in comfortable chairs, sip coffee, and listen to music while you
contemplate your selections. Or, if you prefer, you can shop from a Web-based
service such as Amazon.com, which offers a sophisticated search engine, reviews
at your fingertips and, best of all, one-click ordering. Ordering from Amazon
is so easy that I often come away from a virtual visit with the exhilarating
sense of not having the vaguest idea how many books I've just purchased.
By and large, the amenities you get from Barnes & Noble
are quite a bit costlier to provide than the amenities you get from Amazon. One
reason B & N feels so comfortable is that it's spacious--and space costs
money. By letting you browse among physical books, B & N invites damage and
theft. The well-stocked shelves require a substantial investment in inventory.
Amazon avoids most of those costs, and it passes some of the savings on to the
consumer--popular hardbacks (except for best sellers) are typically about 20
percent cheaper at Amazon. You can enjoy luxury at B & N, or you can enjoy
convenience and low prices at Amazon.
So far, so
good. The market offers a range of options. Those options that provide
consumers with sufficient value will thrive; in the long run, those that fail
to justify their costs will face extinction. If enough consumers are willing to
pay B & N prices for B & N comfort, B & N will prosper; if not,
not. Either way, economists will applaud the triumph of consumer sovereignty.
Likewise, if enough consumers are willing to sacrifice physical browsing for
Amazon discounts and convenience, Amazon will prosper; if not, not. Once again,
economists will stand ready to endorse the judgment of the marketplace.
But there's another potential outcome, and it's
one that economists would not endorse. Some consumers browse in the
comfortable atmosphere of Barnes & Noble but then head home to buy their
books from Amazon at discount prices. In sufficient numbers, such consumers
could spell B & N's demise. (Even in much smaller numbers, those consumers
surely limit B & N's growth and its willingness to provide even greater
comforts to its patrons.)
It's one
thing to watch a business fail because of its own inefficiency; that's just the
market doing its job. But its quite another thing to watch a business fail
because it's efficiently providing a service for which consumers have managed
to avoid paying. In the scenario I've envisioned, B & N falls victim to the
economic equivalent (though not, I think, the moral equivalent) of theft. Among
the ultimate losers are book shoppers themselves.
How can this disagreeable outcome be avoided? One solution
is for the bookstores to own the Web sites; B & N won't mind losing
business to one of its own subsidiaries. And to a certain extent that's
happening: It, and other large "superstores" such as Borders, has begun
operating Amazon-like sites. But as long as Amazon itself remains independent
and holds a substantial market share, at least a part of the problem
remains.
In
principle, publishers could come to B & N's rescue by pressuring Amazon to
raise its prices. (Amazon relies on publishers for timely book shipments, so
the instruments of pressure are readily at hand.) But publishers might or might
not want to play that role. On the one hand, they have a considerable stake in
the success of large and luxurious bookstores; on the other hand, they also
have a considerable stake in the success of services like Amazon. My friends in
the publishing industry tell me that, on balance, they wish Amazon well.
At other times and in other industries, things
have gone the other way. For many years, the Schwinn Bicycle Co. famously
refused to supply bicycles to discounters. In recent decades, the manufacturers
of mattresses, patent medicines, electronics equipment, herbicides, and light
bulbs have insisted that their products be sold only at the full retail
price.
Why would
Schwinn want to maintain a high retail price for bicycles? The naive
explanation is that manufacturers always like high prices. But that's
too naive: The price Schwinn cares about is the wholesale price, and it
controls that directly. A more plausible story is that bicycle shoppers like to
visit fancy showrooms with knowledgeable sales staffs but then buy from
discounters. Eventually, retailers recognize that there is no reward to
offering quality service, and the fancy showrooms disappear. Customers are made
worse off, and so is Schwinn, as there is now less reason to prefer a Schwinn
bicycle to others.
By forbidding its dealers to compete with each other via
prices, Schwinn forces them to compete with each other via quality of service,
to the ultimate benefit of consumers. That was exactly the reasoning endorsed
by the Supreme Court in 1988, when it upheld the right of Sharp Electronics to
terminate the dealership of a chronic discounter.
In its
Sharp decision, the court showed an admirable understanding and respect
for economic theory. Not so the New
York
Times , which
editorially called for legislation to overturn the ruling. The Times
asked for compromise legislation that would give manufacturers the right to
"set high standards for service and refuse to supply retailers who don't meet
them," while denying manufacturers the right to set prices.
But in the presence of competition among
dealers, there is no difference between setting a standard of service and
setting a retail price: For a given service standard, competition will lower
the price until it's commensurate with the service standard, and for a given
price, competition will raise the service standard until it's commensurate with
the price. The Times ' prescription is comparable to allowing people to
choose how much to sleep while forbidding them from choosing how much to stay
awake; the reality is that you can't choose one without choosing the other.
So, as the Supreme Court
recognized, discounters can be clearly detrimental to both manufacturers and
consumers in the market for electronics or bicycles. But when it comes to
books, the analysis is a lot less clear-cut, and here's why: A discount bicycle
dealer offers nothing but low prices, whereas a Web-based discount book dealer
also offers special services you can't get from a bookstore--such as the
convenience of shopping from home. That's why bicycle and electronics firms
have been so keen to stop the discounters while publishers have laid out a
tentative welcome mat.
