Wednesday, October 01, 2008

Books, Videogames, and Noses

Mike Kolar sent me a link today to an article in the New York Times about used book sales and its effect on the market for new books. There are some interesting parallels (and differences) to the used videogame market, so let's take a look.

First off, the full article is here: Reading Between the Lines of Used Book Sales. Here's the first excerpt:
While Amazon is best known for selling new products, an estimated 23 percent of its sales are from used goods, many of them secondhand books. Used bookstores have been around for centuries, but the Internet has allowed such markets to become larger and more efficient. And that has upset a number of publishers and authors.

In 2002, the Authors Guild and the Association of American Publishers sent an open letter to Jeff Bezos, the chief executive of, which has a market for used books in addition to selling new copies. "If your aggressive promotion of used book sales becomes popular among Amazon's customers," the letter said, "this service will cut significantly into sales of new titles, directly harming authors and publishers."

That's very similar to the argument made by videogame publishers. It's not as simple as that, though. Here's more:
...the evidence suggests that the costs to publishers are not large, and also suggests that the overall gains from such secondhand markets outweigh any losses.

Consider a recent paper, "Internet Exchanges for Used Books," by Anindya Ghose of New York University and Michael D. Smith and Rahul Telang of Carnegie-Mellon. (The text of the paper is available at

The starting point for their analysis is the double-edged impact of a used book market on the market for new books. When used books are substituted for new ones, the seller faces competition from the secondhand market, reducing the price it can set for new books. But there's another effect: the presence of a market for used books makes consumers more willing to buy new books, because they can easily dispose of them later.

A car salesman will often highlight the resale value of a new car, yet booksellers rarely mention the resale value of a new book. Nevertheless, the value can be quite significant.

That's not something I would have thought of, because I only very rarely buy a used game. It makes sense, though--if you don't want to keep a game, and trade it in within a month of its release, your total purchase cost is significantly less.

The used book market of is used as an example (due to both size and popularity). Here's more:
The prices of the secondhand books were substantially cheaper than the new, but of course the quality of the used books (in terms of wear and tear) varied considerably.

According to the researchers' calculations, Amazon earns, on average, $5.29 for a new book and about $2.94 on a used book. If each used sale displaced one new sale, this would be a less profitable proposition for Amazon.

But Mr. Bezos is not foolish. Used books, the economists found, are not strong substitutes for new books. An increase of 10 percent in new book prices would raise used sales by less than 1 percent. In economics jargon, the cross-price elasticity of demand is small.

One plausible explanation of this finding is that there are two distinct types of buyers: some purchase only new books, while others are quite happy to buy used books. As a result, the used market does not have a big impact in terms of lost sales in the new market.

Here's where the parallels begin to break down. Amazon makes 80% more on a new book sale than a used one. For a videogame retailer like Gamestop, they easily make twice as much (or, in many cases, more) on a used game sale as they do a new game sale. So Gamestop, unlike Amazon, has an enormous financial incentive to push used game sales instead of new ones.

The term "cross-price elasticity of demand" is also very useful. I don't think anyone's done a corresponding study of game prices to determine how much an increase in new game prices affects used game sales, but it's something to keep in mind. I strongly believe that a 10% increase in game prices (from PS2 to PS3, for example) would increase sales of used PS3 games far more than 1%.

Here's the wrap-up:
...the presence of lower-priced books on the Amazon Web site, Mr. Bezos has noted, may lead customers to "visit our site more frequently, which in turn leads to higher sales of new books." The data appear to support Mr. Bezos on this point.

Applying the authors' estimate of the displaced sales effect to Amazon's sales, it appears that only about 16 percent of the used book sales directly cannibalized new book sales, suggesting that Amazon's used-book market added $63.2 million to its profits.

Furthermore, consumers greatly benefit from this market: the study's authors estimate that consumers gain about $67.6 million. Adding in Amazon's profits and subtracting out the $45.3 million of losses to authors and publishers leaves a net gain of $85.5 million.

All in all, it looks like the used book market creates a lot more value than it destroys.

Again, those numbers are pretty provocative. And I think it's totally reasonable to conclude that certain used product markets are actually beneficial for new products. I think it's far less likely in the case of used videogames because of the huge difference in profit incentive. What we need, though, is a thorough study of this question, because there are publishers going batshit insane about Gamestop, and because they're so insane, they're asking the wrong question.

The question they're asking is "Is Gamestop hurting our profits?" That question is meaningless, because there's no way under current law (in the U.S.) to stop them. The question that does matter is this: "Is a download-only distribution model more profitable than the existing model?"

That's the question that matters, and if publishers don't focus on that question, they may wind up cutting off their nose to spite their face.

Since you're now all wondering "How the hell did that phrase ever get started?", I looked it up for you, and thanks to The Phrase Finder, here's the answer:
Grose's 1796 edition of the 'Classical Dictionary of the Vulgar Tongue' explains it thus:
"He cut off his nose to be revenged of his face. Said of one who, to be revenged on his neighbour, has materially injured himself."

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