Discuss the difference between a wholesale and agency model of e-book distribution and pricing. Why didn't the wholesale model work for e-books, and what happened when publishers tried to implement an agency model?

Question

What will be an ideal response?

Answer 1

The wholesale model of distribution and pricing is the same model publishers used with hard cover books. In this model, the retail store pays a wholesale price for the book and then decides at what price to sell it to the consumer. The retailer sets the price with the publisher, and that the book will not be given away for free. In the past, the wholesale price was 50% of the retail price.

With e-books, publishers discovered that some online retailers like Amazon and Apple began to sell books below cost to encourage customers to purchase their e-book reader devices, or to sell them other goods. The real value in e-books for Amazon and Apple is selling digital devices. While the publishers were expecting e-books to sell for $14, Amazon began selling them for $5, reducing the publishers' revenue by at least half. Amazon not only sold millions of Kindles but also sold 90% of all e-book titles on the Web in 2011. Amazon had a de facto monopoly on e-books. In response, the top five publishers, along with Apple, introduced an agency model of distribution in which the distributor is an agent of the publisher, and can be directed to sell e-books at a price determined by the publisher, around $14.99 and higher for certain titles. In return for a 30% commission, Apple agreed to support this model, as did Google, neither of whom were comfortable watching as Amazon dominated one of the hottest areas of web content sales. Amazon's prices rose to this level, and its market share fell to 60%. However, as a result, the Justice Department sued the five publishers and Apple for price fixing in violation of antitrust laws. The case was settled and Apple paid a fine of $450 million. The settlement created a public relations storm for Amazon as writers, journalists, politicians, and publishers decried Amazon's use of its market power to sell books that would bankrupt the established publishing industry. Today, each publisher (and not an industry consortium) makes an agreement with Amazon about the price of their books (agency model). Today, e-book prices from major publishers are variable, but generally sell for around $15. For instance, John Grisham's latest crime novel published by Doubleday in 2018 sells at $14.95 for a Kindle e-book, $15.99 for a paperback, and $17.99 for a hardcover edition. Amazon is no longer selling e-books below their own cost.