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.
H ow 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 NewYorkTimes, 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.