This is about how prices change when a distribution bottleneck breaks. Do they rise or fall? While generally new ways of getting products to market may cause prices to fall in many cases the exact opposite occurs.

I watched a bit of video of Walter Mosberg sparing with Steve Jobs on the floor following the iPad announcement. One question Walt asked was why anybody would buy a book at $15 bucks from Apple ebook store when they could get it for $10 from Amazon’s. Steve manages to reply that that won’t happen, the prices will be the same. I sensed that Walt didn’t know what Steve was saying.

So, do eBook prices rise or fall as Amazon loses their monopoly on the eBook distribution channel? I think the answer is obvious; i.e. they rise.

It is in the nature of these things that a market maker, like Amazon, with each of their counter parties. If you buy or sell a tremendous amount of services from Amazon it’s worth your while to go chat about prices. The quality of the deal you can strike in that conversation depends on what your options are. The moment that another channel opens up for getting your eBooks to customers Amazon has to renegotiate the deals with major publishers.

Does that raise or lower costs to the book buyer? To first order you might think so. If you think of the distribution channel as a kind bridge between buyers and sellers then what’s going on here that the moment a second bridge opens up the tolls fall on the first bridge in the face of competition. Presumably that lowers the overall cost of goods to deliver a book to the customer.

Lower cost of goods gives up an option to lower the end user price, but in no way does it assure that. But, that metaphor is broken. That’s the physical world with physical goods. These are information goods. The cost of goods was already zero. The only forces that count in this situation are market power between the three actors; the publisher, the distributor, and the buyer. I think we can accept that the buyer has nearly zero power; he’s locked to his device, his store, and to tell you truth he’s so atomized that he can’t actually show up to negotiate. So all that happens here is that the publisher’s negotiation power increases and since he wants higher revenue prices rise.

It’s a bit more subtle then that since the distributor is compensated mostly by the volume of transactions; while the publisher is compensated on the gross dollar value of sales. A shift in the price upward lowers the number of transactions, but as long as it increase the gross that’s fine with the publisher. Of course the author, like the reader, is irrelevant in this discussion.

None of that is new to me. But there is one thing here I hadn’t noticed before. In the story above we are moving from one distribution channel to two; so the power shift is as strong as possible. If we are moving from say five distribution channels to six the power shift can’t be as strong. So, in that case do prices fall? Yes and no. When your check out from your typical online store your offered a pop up to select which shipping company you’d like to use. That pop up isn’t doing what you think it’s doing. That pop up is part of the negotiation. Your selection reveals something about your willingness to pay (the intensity of your desire). You pay for that. So in the usual perverse way of these things the addition of multiple distribution channels becomes a way to raise prices – a tool in the discriminatory pricing games – more than a cost driver.

I want to draw out something Steve Waldman says in  this interview (I’m really eluding a lot of interesting material here):

You can come up with very clever, fair schemes if you imagine people communicate only within your system. …    I was entranced by the … story of how markets aggregate and communicate widely dispersed information….real  markets differed … Real market institutions seem designed to hide information and shift consequences rather than reveal outcomes and allocate costs and rewards.

Markets do not work the way you think they do.

When those who suffer the delusion double down on the bet, as loyal followers of a philosophy are wont to do they sooner or later echo Margarert Thatcher:  “… you know, there is no such thing as society…”.

Further I hadn’t quite internalized how this widespread delusion is synonymous with the open/closed world question in computer science, on many levels.

Mike Konczal  posts on the unwind of the mortgages are awesome!  This posting on  Fake Ownership is particular thought provoking.  It suggests we are headed into a period when a new kind of thing, not owner, not renter will emerge; i might call it a caretaker.  This economic actor doesn’t pay much, maybe nothing, to live in the investor owned real estate, but at the same time he has none of the rights of a renter or an owner.  He’s kind of a squatter.  Some of these pop up because an investor bought a foreclosed property and he just needs somebody to sit in it until the market recovers.  Some pop up because they used be the owner, they stopped paying, so the bank owns the property now – but yeah the bank doesn’t want to let the loss play out and show up on their books.  The banks is caught in a kind of catch 22.  If they foreclose the value of the property sinks even further.  I’m reminded of an comment made early in the crisis about the banks have become incompetent landlords.