E-book pricing and vertical restraints


This paper empirically analyzes how the use of vertical price restraints has impacted retail prices in the market for e-books. In 2010, five of the six largest publishers simultaneously adopted the agency model of book sales, allowing them to directly set retail prices. This led the Department of Justice to file suit against the publishers in 2012, the settlement of which prevents the publishers from interfering with retailers’ ability to set e-book prices. Using a unique dataset of daily e-book prices for a large sample of books across major online retailers, we exploit cross-publisher variation in the timing of the return to the wholesale model to estimate its effect on retail prices. We find that e-book prices for titles that were previously sold using the agency model decreased by 18 percent at Amazon and 8 percent at Barnes & Noble. Our results are robust to different specifications, placebo tests, and synthetic control groups. Our findings illustrate a case where upstream firms prefer to set higher retail prices than retailers and help to clarify conflicting theoretical predictions on agency versus wholesale models.

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  1. 1.

    DOJ Complaint, U.S. v. Apple, Inc., et al., April 11, 2012. According to this complaint, “defendants’ conspiracy and agreement to raise and stabilize retail e-book prices by collectively adopting the agency model […] led to an increase in the retail prices of newly released and bestselling e-books.”

  2. 2.

    Apple did not settle with DOJ. After a bench trial in the U.S. District Court for the Southern District of New York, the court concluded on September 5, 2013 that Apple violated § 1 of the Sherman Antitrust Act. The U.S. Court of Appeals for the Second District affirmed the decision of the district court on June 30, 2015.

  3. 3.

    Although this new model is dubbed the modified or revised agency model by the industry, we refer to it as a modified wholesale model, since the defining element of the agency model—resale price maintenance—is no longer present. The settlements still refer to this pricing agreement as an agency model as publishers are allowed to set a list price for a title and retailers are permitted to set retail prices. The only allowed restriction was that a retailer’s aggregate discounts—retail prices below list price—for a given publisher’s titles could not exceed the aggregate commission received from the publisher.

  4. 4.

    Although our findings so far do not provide evidence for such behavior, we cannot rule out the findings of Johnson (2013) as it mostly applies to the long run. Note that a direct test of Gaudin and White’s (2014) theoretical prediction would be to compare prices that were set during the original wholesale model to those set in the second period in which the wholesale model was used after the switching from agency. Unfortunately, we do not observe prices from the original wholesale period, so we are unable to make such a direct comparison.

  5. 5.

    Several other recent theoretical papers have considered the relationship between agency and wholesale models in related settings (Gans 2012; Abhishek et al. 2015; Condorelli et al. 2015; Johnson 2017). Gans (2012) focuses on the pricing of mobile applications on platforms and finds that a hold up problem may arise if consumers have to purchase a device to access the platform. However, restrictions on pricing, such as a most favored nation (MFN) clause, may help overcome the hold up problem. Abhishek et al. (2015) find that the agency model leads to lower retail prices, although retail prices may be higher under the agency model if there are positive externalities from sales of complementary products (such as e-readers in the case of e-books). Condorelli et al. (2015) let the decision whether to use agency or wholesale models be endogenous in an environment where the retailer has privileged information about consumers’ valuations and show that retailers prefer the agency model. Liu and Shuai (2015) study pricing and welfare for different pricing strategies in vertical markets. Finally, although not about e-book pricing, Adner et al. (2016) develop a theoretical model which centers around compatibility decisions between Apple and Amazon on their e-book readers.

  6. 6.

    See Poort and van Eijk (2015) for a discussion of resale price maintenance in the book market. Examples of empirical studies on vertical price restraints in other markets include Mortimer (2008) and De los Santos et al. (2016). For instance, Mortimer (2008) examines how the introduction of revenue-sharing contracts in the video industry affected firms’ profits and consumer welfare.

  7. 7.

    See Baye et al. (2015) for a more general overview of recent events in the book industry.

  8. 8.

    Specifically, almost 40 percent of adult Americans who read e-books own a Kindle e-reader, which is the highest percentage of any single device. Figures are from the “Consumer Attitudes Toward E-Book Reading” survey (Book Industry Study Group, August 2013).

  9. 9.

    See http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=1565581.

  10. 10.

    Direct testimony by Amazon’s vice president of Kindle Content, David Naggar. Available at http://www.justice.gov/atr/cases/apple/exhibits/px-0837.pdf.

  11. 11.

    According to the direct testimony of David Naggar, Amazon’s vice president of Kindle Content (see also footnote 10), the negotiation also included a threat to pull their e-books from any retailers that did not adopt the agency model. Amazon initially stopped sales of Macmillan’s books on January 28, but subsequently acquiesced to their demands after coming to the realization that the other major publishers (with the exception of Random House) were making similar demands.

  12. 12.

    Table 5 of the direct testimony of Richard Gilbert (available at http://www.justice.gov/atr/cases/apple/exhibits/px-1105.pdf). As part of his direct testimony, Orley C. Ashenfelter found an average price increase of 16.8 percent for e-books published by the five publishers in the six-month period before and six-month period after the implementation of the agency model (http://www.justice.gov/atr/cases/apple/exhibits/px-1097.pdf).

  13. 13.

    The New York Times Best Sellers lists we have used are hardcover fiction; hardcover nonfiction; trade paperback fiction; mass market paperback fiction; paperback nonfiction; hardcover advice, how-to, and miscellaneous; and paperback advice, how-to, and miscellaneous.

  14. 14.

    See, for instance, https://gigaom.com/2012/09/10/that-was-fast-amazon-is-already-discounting-harpercollins-ebooks/ https://gigaom.com/2012/09/10/that-was-fast-amazon-is-already-discounting-harpercollins-ebooks/.

  15. 15.

    The percentage change in price is calculated as \(100\cdot [\exp (\hat \gamma )-1]\), where \(\hat \gamma \) is the estimated coefficient on (w h o l e s a l e j t × b i g s i x j ) as reported in Table 3.

  16. 16.

    The percentages are (100 ⋅ [exp(−0.233) − 1] = −20.7) and (100 ⋅ [exp(−0.108) − 1] = −10.2) using the coefficients from Table 5 for Amazon (-0.233) and Barnes & Noble (-0.108), respectively.

  17. 17.

    Note that Barnes & Noble’s second drop could be explained by Barnes & Noble strategically adjusting its prices after learning about Amazon’s response. Also note that especially after the retailers were again setting their own prices, price variation increased, and some of this price variation is not picked up by our controls. Since our synthetic control group analysis uses a two-week window only, it is particularly sensitive to idiosyncratic movements in the price data within this period—Fig. 2 shows that Harper Collins’ prices at Barnes & Nobles were indeed going down in the second week after the switch, but went up again during the next few weeks.

  18. 18.

    Note that Books-A-Million was not selling Hachette book titles in the period we use for our sample.

  19. 19.

    In fact, Amazon’s Kindle app for the PC and for iPhone was available a year before the release of the iPad and the concurrent switch to the agency model. Kindle app versions for Mac and iPad were released in 2010 and subsequently for Android and Blackberry devices.

  20. 20.

    Barnes & Noble announced on June 25, 2014 the decision to sell the rest of the Nook e-reader business to focus on its stores.

  21. 21.

    According to the original DOJ complaint (paragraph 5 of U.S v. Apple, Inc., et al., April 11, 2012): “As a result [of the adoption of the agency model] the publishers could end price competition among retailers and raise the price consumers pay for e-books through the adoption of identical pricing tiers. This change in business model would not have occurred without the conspiracy among the Defendants.”

  22. 22.

    See http://www.readersunited.com.

  23. 23.

    We use the digital list price to estimate the proportion for e-book prices. The digital list price was unavailable for the time period of the collection of the main sample. Fortunately, we collected this information in June 2014 from Books-A-Million, which prominently lists this price on the webpage of a specific e-book title as the retail price. For most titles, Amazon only lists the print list price, while Barnes & Noble only gives its own price.

  24. 24.

    The lower discounts for e-books published by Hachette is a direct result of a dispute between Amazon and Hachette that was going on at the time of data collection. As a result of the dispute, which is widely believed to be about the renewal of the existing e-book contract between the two, Amazon was selling a substantial number of Hachette e-book titles at list price.

  25. 25.

    The percentage of books below wholesale cost is obtained from Figure 12 of the direct testimony by Orley Ashenfelter, which is available at http://www.justice.gov/atr/cases/apple/exhibits/px-1097.pdf.

  26. 26.

    Direct testimony by Amazon’s Vice President of Kindle Content (http://www.justice.gov/atr/cases/apple/exhibits/px-0837.pdf). Backlisted [print] books also account for at least half of the sales of many independent bookstores (“Publisher’s Backbone: Older Books”, the New York Times, 3/26/1990).

  27. 27.

    The five publishers under the DOJ complaint received on average less per e-book sold: “the average decrease in the average per unit net revenue was 15.1%”. Publishers knew that on average they would receive less per e-book sold under the agency model, explicitly recognized by Hachette: “[the agency model] ‘would be to swap a significant amount of current margin to change the public perception of price...’.” Source: Direct testimony of Richard J. Gilbert (http://www.justice.gov/atr/cases/apple/exhibits/px-1105.pdf).

  28. 28.

    Interview with Amazon’s CEO Jeff Bezos, “The Institutional YES”, Harvard Business Review, October, 2007.

  29. 29.

    See http://www.wsj.com/articles/amazon-simon-schuster-reach-book-contract-1413833713.


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We thank Tobias Klein, Daniel O’Brien, Ricard Gill, Jeff Prince, and Arun Sundararajan for their useful comments and suggestions. This paper has also benefited from presentations at the CPB Workshop on Internet Economics and Privacy in The Hague, the 2014 NBER Summer Institute, 2015 NET Institute Conference, the Searle Center’s Sixth Annual Conference on Internet Search and Innovation, the CCP 11th Annual Conference in Norwich, the 2015 Econometric Society World Congress, the 2016 EARIE Conference in Lisbon, Clemson University, University of Massachusetts Amherst, and DePaul University. We gratefully acknowledge financial support by the NET Institute, http://www.NETinst.org.

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Correspondence to Babur De los Santos.

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De los Santos, B., Wildenbeest, M.R. E-book pricing and vertical restraints. Quant Mark Econ 15, 85–122 (2017). https://doi.org/10.1007/s11129-017-9183-z

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  • E-books
  • Agency
  • Vertical restraints
  • Most favored nation
  • Media economics
  • Resale price maintenance
  • Amazon

JEL Classification

  • D43
  • L41
  • L42