Are ebooks too expensive or too cheap?

Amazon and Macmillan got into a tiff over the weekend about the pricing of ebooks, with Amazon wanting to keep prices around $10 and Macmillan wanting them around $15. (Amazon conceded.) Tyler Cowen links to a good review of the problems that the two media giants are fighting over. It looks like Amazon wanted to lose money on ebook sales through low prices so that they could presumably enjoy the mythical "first mover advantage." There is plainly no such thing -- either google it, or just reflect on your own experience with technology. Beta came before VHS by a longshot and commanded almost all of the market during that initial period. Apple came long before Windows. And Roman numerals had a hold on learned Europeans more than a millennium before Fibonacci introduced Arabic numerals to the West.

That aside, the main question that everyone is asking is, "Should ebooks cost more or less than hard books?" Much commentary focuses on production costs, both in the comments at Marginal Revolution and in two links at the review above that try to decompose the list price of a hard book into various production costs -- author's time and effort, ink and paper, advertising, transportation and storage, etc. After all, if one thing costs more to produce than another thing, shouldn't it command a higher price?

Well, not if no one wants it. Ultimately consumers value the thing enough to pay a certain price or they don't. I can try to put together a car on my own, but what will happen when I ask a price of $1 million for the hunk of junk to reflect how incredibly costly it was to produce? That's right -- no sale, probably not even at $1. Value is subjective and determined by consumers; it is not intrinsic and determined by costs of production. That's why, to use a great example Virginia Postrel noticed, Apple could charge a decent premium for the black-color MacBook. It is otherwise objectively the same as, and therefore costs virtually the same to produce as, the white version. Evidently, Apple dorks "love the idea of" a darker laptop.

So the real question then is, "Do readers value ebooks more than hard books?" A commenter at Marginal Revolution thinks the answer is obvious: "The article missed some of the most important reasons that ebooks should be priced lower -- they cannot be resold, loaned, or given away." Of the entire reading public, though, for what portion is this a big deal? Most people don't read all the books they buy; they sit around unread, and certainly their owners aren't going to loan them out, resell them, or give them away before they've taken a crack at them first. Even the ones they have read continue to lay around filling up space. We conclude that, aside from people who like clearing out their collection regularly, most book-buyers find little value in reselling, loaning out, or giving away their books.

If an ebook seller could charge a higher price to those who want to resell, loan, or give away their books, and a lower price to those who don't really care, that would work out OK. However, price discrimination doesn't work if there are easy arbitrage opportunities -- where the person to whom it's sold at a low price can sell it to the higher-charged person for less than what the high price is, thus earning easy money. Also, the seller cannot do this unless they more or less control the market -- otherwise competitors will advertize to the higher-charged group: "Hey, those guys are trying to rip you off, but we'll sell it for half their price."

And if we're really trying to understand how the world works, let's ask if there might not be a group of book-buyers who would not just be indifferent about the option of reselling, loaning, and giving away, but who actually saw that as a cost to them? Other things equal, they would prefer a book that could not be resold, loaned, or given away. If your answer is "that's crazy," then you're stupid and unimaginative. What if you're giving someone a book as a gift, and you don't want them to cheapen this token of your relationship by going out and reselling it or giving it away, or loaning it out indefinitely? When ownership is highly costly to transfer, re-gifting is unlikely. And it's not as though books given as gifts are only a drop in the bucket of overall book sales.

What if you're the type of person who is possessive about his possessions, like most people become after a certain point of generosity? You'd love nothing more than a plausible and socially acceptable excuse for why you can't loan or give away your stuff to someone who keeps dropping hints about wanting to borrow something for the hundredth time. "Gee, I'd love to, but the technology won't let the book be read on anyone else's device. Yeah, they're horrible like that, but what are we gonna do?" Maybe once or twice you wouldn't mind, but I still remember feeling bothered and disgusted by one of my friends in high school who kept asking me to make cassette copies of entire CDs that I'd bought original versions of.

Or what if you view your books as though they were your children or pets or friends? I think a lot of packrats attach so much sentimental value to their myriad space-taker-uppers that they couldn't think of reselling, loaning, or giving them away. Maybe not to the extent that they value them as much as their own children, but still enough so that they couldn't recover the psychic cost of parting with them. They would probably feel guilty for even thinking about it -- as though books (digital or paper) were a cheap skank of a girlfriend who you blow your wad in and then loan around in exchange for dollar bills once you've experienced her once or twice. What would a normal parent think of themselves if they even momentarily thought, "Hey, I've had enough fun with my kid during childhood -- I'm sure I could get a decent buck by selling them to someone who hasn't had kids of their own to enjoy"?

I could think of a million other reasons why some people might value the option to resell, loan, or give away books, with a negative sign, but you get the idea. What matters is the full distribution of book-buyers along the continuum of "value placed on this option" from negative infinity to positive infinity. Just zooming in on the part where you are doesn't help. If things are that simple and you believe lots of insiders don't get it, then you should be getting rich.

But let's think of a few more reasons why ebooks should cost more than hard books, just to emphasize how little the costs of production matter and how much the subjective value of consumers does. Ebooks could be searched with something like google, rather than the primitive index found in hard books. If you can't remember what page a certain idea or phrase was on, or if it isn't in the index -- or even if it is but you don't want to keep flipping back and forth -- a search engine is a real boon. We touched on it before, but clearly the ability to free up tons of space is a plus for a medium that allows thousands of books to be squeezed into something that fits in your hand. That space has opportunity costs, so all else equal you'd like to free it up. And ebooks are much more portable than hard books for the same space-economizing reasons. You thought lugging around a CD player and 20 CDs was burdensome -- what about 20 hard books? Consumers will pay more for convenience.

There are many more reasons why the typical book-buyer will more highly value ebooks than hard books -- and certainly many reasons why they would be reluctant to switch to ebooks. The point is that the full list of pros and cons, one potentially unique list for every book-buyer out there, is what matters most in setting the price of ebooks relative to hard books. Predicting what that looks like is incredibly difficult and can only be figured out by entrepreneurial trial and error. We can thus safely ignore people who offer simple-minded answers about whether ebooks are too cheap or too expensive; if even the soldiers in the trenches are confused about what the best way forward is, faraway spectators are even less knowledgeable. We'll just have to wait until the dust settles to see.