Categories:
Microeconomics
I’ve heard the question before, but this time, it’s personal: Amazon just sharply slashed the price of my book to $19.77.
The standard answer is that the (absolute value of) elasticity of demand is higher for more popular books. The more people willing to buy a book at list price, the higher the percentage increase in sales if you cut the price.
Is that the real reason? Anyone got a better theory? And if you believe the standard theory, has anyone got any intuition on why popularity and elasticity would be so correlated?
READER COMMENTS
jsalvati
Jun 24 2007 at 6:35pm
Perhaps because popular books are written for lay audiences who have many differenst substitutes for any specific book but less popular (but still good or useful) books have fewer substitutes.
Tim of Angle
Jun 24 2007 at 6:49pm
It’s a loss leader. Advertising (or being known to offer) substantial discounts on best-sellers gets people who are likely to buy the book anyway to buy it from This Store, and when they’re in they’ll be more likely to pick up other stuff at full price. Same reason grocery stores offer sales on staples like milk and bread.
jsalvati
Jun 24 2007 at 7:01pm
That theory isn’t terribly convincing for online book retailers (like Amazon), because it is pretty easy to leave the website without even looking at other books. Plus, you can’t browse books online very easily.
Pretinieks
Jun 24 2007 at 7:16pm
it might rather depend on relative, not absolute popularity.
if your book generates more media buzz than your previous one, a lot of prospective buyers are “first-time users” and haven’t heard of you before. where there’s no “brand loyalty”, price elasticity is higher.
to test this, you’ll need to write another book of roughly the same popularity. 🙂
Barkley Rosser
Jun 24 2007 at 8:00pm
Obviously congratulations are in order.
None of my books have ever had their
prices slashed by Amazon.
Cyrus
Jun 24 2007 at 8:35pm
Popular books are more likely to be bought by people who may not intend to read them. This segment of the market has a lower price point.
Manjira Dasgupta
Jun 25 2007 at 1:35am
Discounts of course help the reader who would have bought the book anyway.
Would it be too fantastic to suggest that attempting to broadbase similar books (and thus, help them attain staple reading status), may be one tiny signal to some basic desired changes in public perception?
Tim Worstall
Jun 25 2007 at 4:49am
But why worry? Your royalty is based upon the wholesale price which won’t have changed.
John Thacker
Jun 25 2007 at 8:01am
The standard theory is perfectly plausible to me.
1. Popular books are books that you’re likely to hear a recommendation from people who normally don’t recommend books to you, and who don’t necessarily share your favorite book-reading niche. Therefore you may be interested, but not fully trust their recommendation enough to buy at full price.
2. In general, popular books sell and are capable of selling to people outside their standard niche. For people that regularly buy economics books or popular economics books, Amazon will recommend, say, Tyler’s book and they’re likely to buy it anyway since they know about such books that come out. There are fewer substitutes in the category of popular economics book than in the larger category of all popular books. Once you get to a certain point, a popular economics book must sell to people who would just as well read a good biography of a Founding Father or a good history of salt.
I see it with DVDs and games, not just books. Niche entertainment products tend to have higher prices because they don’t bring in a lot of casual fans at lower prices; that’s what makes them niche. The vast majority of popular entertainment has casual fans, practically by definition.
Rue Des Quatre Vents
Jun 25 2007 at 8:38am
I’m pissed. I just bought your book late last week for the cover price after I got suckered into a buy 2 offering at Amazon: If you like Discovering Your Inner Economist you might like, Myth of the Rational Voter
Fie on Amazon’s house!
spencer
Jun 25 2007 at 9:11am
Isn’t this really a case of price discrimination?
They sold the book at full price for a certain time and found most of the buyers willing to pay full price.
So now they lower the price and find a new set of buyers willing to pay the discounted price but not the full price.
After a while they will have satisfied the demand at price two and lower the price again to find another set of buyers willing to pay the third price.
spencer
Jun 25 2007 at 9:20am
The way to check if this is price discrimination is to check the sales over time. I suspect you will find that sales at the full price had slipped sharply. Now see if the sales at the reduced price jump sharply so that total revenues at the new prices are greater then the recent total revenues at the old price. Since Amazon can return unsold books to the publisher the cost of the book does not enter into Amazon’s cost calculations. Rather, it is looking at essentially fixed cost and will maximize profits by maximizing revenues. So price discrimination this way makes a lot of sense for Amazon even though it may not help the publisher.
rmark
Jun 25 2007 at 1:01pm
Maybe the earlier price exceeded the books value?
John Thacker
Jun 25 2007 at 3:24pm
They sold the book at full price for a certain time and found most of the buyers willing to pay full price.
In some cases it is. However, other books are discounted precisely when they first come out and are “hot” in the news, only to become more expensive later. Certain DVDs and video games are cheaper precisely because they’re expected to sell more to casual fans as well. (Something that’s particularly noticeable in niche markets.)
Mark
Jun 25 2007 at 3:54pm
The market for book retailers is highly competitive, so it seems natural that the price they charge should approach their marginal cost. The marginal cost to the retailer would naturally be lower for popular books. High turnover means less money per unit tied up in inventory, and large orders make for economies of scale. Ergo, competitive pressure yields lower prices.
Mark
Jun 25 2007 at 4:06pm
Also, I think Bryan’s “standard answer” applies to the list price as set by the publisher, who does have monopoly power on the product and would be able to engage in price discrimination + price/demand manipulation to maximize profit. However, it’s my understanding that the discounting he’s speaking about is done on the retail level, where I think the explanation in my comment above applies.
Thomas
Jun 25 2007 at 7:37pm
Standard microeconomic theory states that if demand for a product rises while supply stays the same, the price will rise.
Falling prices signal a decrease in demand, ceteris paribus.
People who wanted to buy your book at the higher price already have, and thus the price must fall in order to sell more books, since you only really need 1 book, the marginal utility of an additional copy of the same book I would put at virtually 0. (Hence the price discrimination argument to sell more books)
As far as the elasticity of demand is concerned, if the book is highly inelastic, a sudden drop in price is necessary to get a significant amount of people interested in buying the book.
If your book was highly elastic, than a series of small price drops would have been better for the profit maximizing book-seller, as they would have been able to sell more books at higher prices, since there would be enough people at each price drop to make it worthwhile. This supports the argument that popular books are highly elastic.
An increase in demand should make the book more elastic, and more likely to have soft price decreases.
A decrease in demand should make the book less elastic and more prone to a sharp price decrease.
Thus if the price of your book has been sharply slashed, it can be deduced that it was not highly popular.
At least, that is how I see it.
spencer
Jun 26 2007 at 3:35pm
Have you checked the sales over the last few weeks to see if they fell sharply? Without this information it is really hard to address your question very intelligently. But on the other hand GMU economists seldom let a lack of facts keep them from reaching all kinds of weird conclusions.
Bob Hawkins
Jun 26 2007 at 4:26pm
Datum: Amazon says that they are discounting the next Harry Potter so much that they will make zero profit on it. It hasn’t even been released yet.
This would seem to eliminate explanations based on price discrimination, as every buyer gets the discount. And any explanation involving maximizing profit on the book in question.
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