How the Internet Helps Pricing Efficiencies

One of the things that always surprises me about Economics is how long it takes for theory to be realized in reality. Self-interested economic participants are supposed to maximize their gains by being savvy, price sensitive shoppers.

Many people’s own habits and laziness precludes that expected behavior — at least initially. Eventually, as it becomes more and more ingrained into the culture, we do begin to behave as the Economists expect. We may not shop around for gas at $1.89 — but at $3.89, a lot more of us do.

So too with books. Regular readers of this site know I recommend buying
used books, if you cannot afford new ones. Apparently, many other
people have been doing so. Both the WSJ and the NYT have had extensive coverage of the issue last week. Which leads me to a research paper from last year:

"A research paper released a year ago, however, found that online used-book
markets like Amazon cannibalized potential sales of new books only about 15
percent of the time. The researchers – Anindya Ghose of New York University and
Michael D. Smith and Rahul Telang of Carnegie Mellon University – also
hypothesized that because the lower prices of used books leave more money in
consumers’ pockets, the gains from additional readership might result in more
purchases of new books and in the increased exposure of authors to new

No kidding. That sort of long range thinking is noticeably absent from publishers, labels, etc., who imagine that anything thats not an actually sale is the equivalent of theft. Indeed, a second NYT article began by asking "Is becoming the Napster of the book business?"

Um, no. Copyright laws give purchasers of physical works the right to sell the physical copy (but not a copyright) in that work. 

The WSJ observed:

"The Internet is creating a new and fast-growing category in the book-selling market — the barely-used book. An increasing number of consumers are snapping up used volumes online at invitingly cheap prices. These aren’t yellowing copies of out-of-print titles but often unblemished copies of newly published books — sometimes available just a few days after a book’s official publication date.

Today, any consumer armed with a title or an ISBN number can search the Internet for the lowest price and get one within minutes. At the same time, the Web sites that offer such books, such as Amazon, Abebooks Inc. and Alibris Inc., have made it painless for readers to resell them. A reader who owns "The March," for example, can sell it via Amazon just by clicking on the "Sell Yours Here" button to the right of the new-book listing. The process is so simple that even the most technologically befuddled person can follow it. Once the book sells, Amazon collects a commission of $0.99 plus 15% of the sale price from the seller. It then deposits the remainder in the seller’s account and provides the address of the customer. The seller ships the book directly to the customer. Amazon’s payment to the seller includes a pre-calculated credit toward shipping costs."

The NYT‘s focus was more on the booming used text book industry, as the price of College Texts have gone thru the roof (thank goodness there’s no inflation!): 

"In barely a decade, online booksellers have grown to account for two-thirds
of the market for general-interest used books, a trend that calls into question
the future of brick-and-mortar stores devoted to used books, according to a
study financed by the publishing industry and released yesterday.

The study, by the Book Industry Study Group, a nonprofit research
organization whose membership includes nearly all commercial publishers as well
as libraries and nonprofit book-related organizations, found that online sales
of general-interest used books are growing at a rate of more than 30 percent a
year, while sales of used books at stores are almost flat.

Used books account for a relatively small portion of overall consumer
spending on books, with roughly $600 million, or 3 percent, of the $21 billion
that Americans spent last year on general-interest titles going for secondhand
books, the study found.

The market for used textbooks is far larger, at $1.6 billion, or more than 30
percent of the $5.3 billion spent by consumers on educational and professional

Over all, used-book purchases accounted for $2.2 billion, or 8 percent, of
the $26.3 billion that American consumers spent in 2004 on books of all types.
That total was up 11 percent from the previous year, the study found.

"The growth reflects how easy is has become to sell used books and to create
inventory in this business," Jeff Abraham, the executive director of the study
group, said in an interview.

Most of the growth is coming in the online sale of general-interest books,
said Jeff Hayes, a group director of InfoTrends, a research company that worked
on the study, a trend suggesting that traditional used bookstores might be an
increasingly endangered species."



graphic courtesy of NYT 


Why is online used book sales booming? Simple: It is a function of
ease of use, efficiency, and competitive pricing; Any publisher that prices books high enough loses
the marginal purchaser; Those that either cannot afford the price, or
simply do not wish to purchase a book at $X, wait until its used, and
buy it cheaper.

I find it interesting that the Long Tail applies not only to niches by subject matter or relative lack of mainstream appeal, but to the economics of specific pricing: content finds an audience as prices drop. While it may not be a true "long tail," there’s little doubt how the bell curve looks vis-a-vis costs.

As prices approach zero, more and more potential consumers can have
access to a given work. Its the underlying dynamic of the entire
explosion in internet content, including blogging.   

The publishing industry believes this to be a problem:

"Used books are to consumer books as Napster was to the music
industry," she said. "The question becomes, ‘How does the book industry
address its used-book problem?’ There aren’t any easy answers,
especially as no one is breaking any laws here." (emphasis added)

I disagree with the publisher’s who think they are losing sales;
They are capturing readers who might otherwise never read this book.
Eventually, when they are more finacially secure, you have a customer
with a love of books, a fan of specific authors, and ready source of
income (i.e., sell old books/buy newer ones) to keep purchasing new

Perhaps a dynamic pricing sturcture — similar to DVD pricing — might capture more of these sales.

Internet Grows as Factor in Used-Book Business
NYT, September 29, 2005

The Growing Market For Slightly Used Books
In Latest Threat to Publishers, Readers Flock to Web to Buy
Best-Sellers at Big Discounts

THE WALL STREET JOURNAL, September 29, 2005; Page D1

Online Battle of Low-Cost Books

NYT, July 12, 2004


Demand for used PCs on upswing
Dinesh C. Sharma Wed Sep 28 09:08:00 PDT 2005

Study: Used Books Are $2 Billion Industry
NYT, September 28, 2005

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What's been said:

Discussions found on the web:
  1. None of Your Business commented on Oct 4

    How the Internet Helps Pricing Efficiencies

    The Big Picture has a great post today about how the Internet Helps Pricing Efficiencies.
    This is one of the first economics articles Ive seen relating directly to the Internet economy.

  2. apav commented on Oct 4

    There’s a further point I believe you’ve already made. The value of a new book increases when there is a viable resale market/ residual value for it. This increases the likelyhood that someone will purchase a book. They have the knowledge that they can recoup some of the cost if they decide not to keep it. (Some publishers are just dense.)

  3. Barry Ritholtz commented on Oct 4

    excellent point! The resale value of any good purchased is inherently built into the price of that new item —

    Indeed, if the Publishers could magically eliminate the used book/resale market, their initial prices would be actually become lower significantly lower . . .

  4. Lord commented on Oct 4

    This is the same problem publishers have with Google’s plan to make all books searchable. They believe people may end up buying an old, used book rather than a new one, while the truth of the matter is it will stimulate the sales of both. It does have the effect of separating the best books from the average though, as the best ones are more likely to be kept while the average or worse ones are more likely to be sold.

  5. blunt commented on Oct 4

    I am a modest book collector and one thing (use it, it helps keep local booksellers alive!) and to a lesser extent Amazon have done is make it eaasy to find relatively (not really) rare books and also providd something resembling market based pricing. One rarely finds a book massively undervalued because now sellers can observe the market and while some are still priciing at huge markups savvy customers are able to see the competition.

    I expect ebay has had a similar effect on “collectables.”

    It certainly applies to many other consumer products. I will scout the web for prices and if a local retailer is in the balpark buy there, but othereise buy online. We are actually creating markets that more closely resemble those of text books.

  6. Emmanuel commented on Oct 5

    As someone who’s worked in higher education, I’ll flatly state that textbooks are overpriced. There are no better cash cows than textbooks. Amazon and other online booksellers routinely give discounts of 20 to 30% on bestsellers, but almost never, repeat, never give discounts of the same magnitude for textbooks. Given that the average textbook costs over $100, this is a large burden, especially for less affluent students.

    Now, even booksellers like Barnes and Noble sell used textbooks, albeit at not that much savings. What they’re upset about is that there might be a large market emerging which permanently alters their near-monopoly or -oligopoly power over textbook pricing. Thus, you can understand their drive to “criminalize” second-hand textbook buying. It’s a real shame, and I am surprised that the Eliot Spitzers of the world haven’t looked into this matter more closely.

    Here is an informative study done in Oregon on price gouging by textbook publishers. If more people clamor for change, then more attention will be paid to this problem.

  7. spencer commented on Oct 5

    Just another example of how the internet is moving the real economy closer and closer to the economists perfect competition model.

    But just remember, in the perfectly competitive model there are no monopoly profits.

    And as an investor, that is what you are always seeking.

  8. BusinessPundit commented on Oct 5

    Pricing Inefficiencies

    Barry Ritholtz has a great post about how the internet helps pricing inefficiencies.One of the things that always surprises me about Economics is how long it takes for theory to be realized in reality. Self-interested economic participants are supposed…

  9. blunt commented on Oct 5

    By “closely resembling textbooks” I meant the market models in econ 101.

    As for the price of text books this is a “crony” market with various players including teachers supporting the status quo and in many cases with government laws and regulations supporting it.

    I suspect a solution is emerging on the net with “open source” documents and books offetring an alternative in many cases.

    As for pressures it might be wise for “student activists” to go back to the early sixties and questin the “factory university” and the nature of education. Note the allegedly “leftist” teachers and others have done all they could to deflect energies elsewhere. Parents and tax payers might lobby school districts and politicians in regards to text books, computer services and a large range of other products where education (among many other public services) gets exceedingly poor deals and quality.

    The alleged government waste cutters could find billions saveable in federal funds if they started focusing on these rackets in education, health care and other places and local and state governments would also save. However both parties benefit from these game players and public outrage is limited and directed into “bigger causes.”

  10. Richard commented on Oct 5

    As someone who’s published several really obscure books — collections of literary short stories — I’m thrilled when someone buys an old book of mine for a cheap price. Sometimes it leads to something, as this week, when the someone buying a used book of mine read it, liked it, and asked me if she could reprint a story in a magazine she edits and offered what is to me, a semi-starving writer, a really nice-sized check.

  11. Glenn Fleishman commented on Oct 7

    This paraphrase in the NYT’s article cracked me up because of how inaccurate it is:

    “Most of the growth is coming in the online sale of general-interest books, said Jeff Hayes, a group director of InfoTrends, a research company that worked on the study, a trend suggesting that traditional used bookstores might be an increasingly endangered species.”

    The majority of used book sales online are coming from traditional booksellers. If you look at the sales from Amazon Marketplace, Alibris,, and ABEBooks, the vast majority of books offered aren’t from individuals but from the automated uploaded current inventories of booksellers.

    In fact, some used bookstores are shutting down their retail presence to focus online, so perhaps that is what the NYT’s reporter meant. But it’s not a general trend. Powell’s Books, for instance, has only expanded during the increase of used book sales, and sells an enormous amount online and an enormous amount among a dozen-plus stores in the Portland, Ore., region.

    I run an online book price comparison service ( and have been tracking book prices informally for about six years.

  12. Lively Debate commented on Oct 10

    Capitalist Digest

    This weeks Carnival of the Capitalists is out. The five things I want you to read from this edition are:

    Let’s Tax These Bubble-Driven Windfall Profits talks about an oil bubble.

    Regulation Begets Regulation tackles gas price regulation as well….

  13. Lively Debate commented on Oct 10

    Capitalist Digest

    This weeks Carnival of the Capitalists is out. The five things I want you to read from this edition are:

    Let’s Tax These Bubble-Driven Windfall Profits talks about an oil bubble.

    Regulation Begets Regulation tackles gas price regulation as well….

Read this next.

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