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Diane Francis

Diane Francis

Posted: August 4, 2010 10:50 AM

Amazon, the Latter-Day Robber Baron

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The pricing of digital books by Amazon has finally caught the attention of two U.S. Attorneys, one in Connecticut and the other in Texas.

This may have ramifications around the world in publishing and, to a lesser extent, may affect the prices paid for other intellectual property available online from writing to film or music and even journalism.

For those unaware of the issue, Amazon in fall 2007 began offering bestsellers as e-books on its Kindle for a price of $9.99 each. This was below the cost it paid to book publishers for these works which averaged between $12.99 or $14.99 and vastly beneath that charged by traditional book stores who usually charge customers double what they pay the publishers.
As a temporary loss leader marketing exercise, undercutting rival prices is just another form of healthy competition that's good for markets.

But when a company like Amazon is in a dominant or monopoly position and sells below its own costs for goods or services the market is destroyed by driving rivals out of business or keeping new entrants at bay. So the U.. Attorneys are looking at whether Amazon's pricing behavior constitutes a form of market abuse under anti-trust laws called "predatory pricing".

Amazon has argued that it has helped publishers with its cheap pricing by expanding the e-market.

But the same could have been said by the Robber Barons of old whose predatory pricing ushered in a host of antitrust laws designed to protect markets from monopolism.
Most famous was the price war between gigantic New York Central Railway and the Erie Railroad. The giant began charging only $1 per car for cattle transportation, less than cost, to drive others away from that business so they could eventually jack up prices. Erie did not back off then sued and won its case against NYCR.

Before that, there had been incidents involving other types of rail business where giants sold services below cost, thus driving smaller players into near-bankruptcy, at which time they were snapped up for bargains, a monopoly created and excessive prices were imposed.
A more recent case involved Microsoft's inclusion of a free web-browser, Internet Explorer, which forced its browser competitor, Netscape, to give away its product and eventually go out of business. Courts ruled in Microsoft's anti-trust trial that the "bundling" of Internet Explorer with its software was a monopolistic and illegal business practice.

In the case of Amazon, these low digital prices went on for two years until last fall when a handful of big book publishers balked at Amazon's behavior and responded by delaying sales to Amazon amid evidence these deals severely damaged their book store customers.
Fortunately, they were rescued somewhat when Apple rolled out its iPad early this year and made deals with some of the biggest publishers to sell their books online but at the price Apple or a book store would pay publishers, or $12.99 to $14.99.

This levels the playing field, consumers get choices and writers can get published.
Now Amazon may be headed down the antitrust path like Microsoft or the railways even though Apple has entered the market fearlessly by refusing to play the loss leader game.
But the book business must be examined under an antitrust microscope to protect markets themselves. This will now happen south of the border but also in Canada and Europe where such laws were strengthened in the 1980s.