Amazonian Economics

Let me explain the interesting economics of Amazon.

First, there are the physical books. Amazon saves a lot of money by not having physical stores where you can get a book in your hand instantly. So there are two downsides for the customer: you have to wait, and unless you spend at least $25 at a time, you pay shipping on top of the price of the book.

Amazon needs to discount from the bookstore price to make up for this. But Amazon’s discount isn’t across the board. Instead, Amazon has carefully designed their discounts to give the maximum amount of grief to their competition. Amazon seems to be selling best sellers and most first release hardbacks at about what they pay the publisher. They cover their marginal coat but not their overhead. They make a profit on everything else.

These are exactly the categories that would be most profitable for a physical bookstore per inch of shelf space, if Amazon wasn’t using it as a loss leader.

In ebooks, Amazon is even more aggressive. As far as I can tell, at the wholesale pricing in effect at the time Amazon delisted Macmillan, Amazon chose to lose money in the bestseller/hardback new release category on every copy they sold at $9.99. (Amazon set the retail price)

But you need to understand that Amazon was bribing you to commit to Kindle. It's very similar to the one dollar books offered for signing up to the Book of the Month Club. Once you have committed to Kindle, it's easy to use it as your default option for ebooks, and harder to buy them anywhere else. Amazon expects to make back their initial investment back later.

There are other ways to offer a similar inducement. Amazon might, for example, sell the Kindle hardware for less than they charge now.

From Amazon's standpoint, the artificial discount on e-books has two advantages. First, they could eliminate or reduce it at any time. In contrast, if they sell an individual Kindle at a lower price they can never get that lost revenue back.

Second, the discounted ebooks make it harder for Amazon's competition to stay in business.