Prices of electronic books

A quick browse of Amazon shows that many books available through the Kindle are priced around the same level as the physical product.  The cost of provision of these electronic books is much lower, however: printing costs, distribution costs, and even the margins to retails are either non-existent or significantly reduced.  Why, then, is there this equivalence in pricing? 

The most obvious answer is that prices in this case aren’t being set based on cost, but on customers’ willingness to pay.  When buying a book, the physical product is generally only a marginal part of the purchase; the purchaser is instead looking to obtain the content.  Since the content is the same between physical and electronic books, the customer’s willingness to pay shouldn’t be affected.

This, of course, opens further arguments about whether there is evidently a lack of competition in the market, if prices aren’t reduced to cost – and subsequent questions over the definition of the scope of the market and substitutability between different books and different editions.  This is a topic for another day!

The willingness-to-pay argument is flawed, however, when the second-hand market is considered.  While books (with the exception of academic textbooks) don’t have an active second-hand market on the scale of videogames, books are sold second-hand through charity shops, car boot sales, and now increasingly online via eBay and Amazon.  Particularly with the last of these, if consumers are only looking for content there are very cheap ways of obtaining it; second-hand books can often be found for a penny on Amazon marketplace.  Consumers still buy new books, both physical and electronic.  This may be due to historical habits or concerns over the quality of second-hand books; in any case, it is fairly irrational behaviour.

A further consideration is that there is no second-hand market for electronic books.  This has two effects on the market.  First, consumers should theoretically have a lower willingness to pay for electronic books since they will be unable to sell them on when they are no longer required; the impact of this will vary by the type of book, since if standard sell-on prices are as low as £0.01 then this will have marginal effect on the total cost of ownership.  Second, publishers would expect to see many more sales than would otherwise be expected (as any second-hand sale is not seen by them), and so in order to make the same profit could reduce prices.

Despite this, as noted above, electronic books are sold for largely the same price as physical copies.  This may be because publishers do not wish to devalue their brands, or simply because the markets are reflecting the optimum profits for an oligopoly.

A final issue is around taxation, however: in the UK, electronic books are subject to 20% VAT while physical books are not taxed.  It’s quite possible, given this, that prices are following costs despite the above arguments – if VAT just happens to offset the savings from printing and shipping paper books.  There’s no real rational explanation for why electronic books are taxed in this way.

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