Who's Footing the Bill For the Price Wars?

While the current price war among Amazon, Wal-Mart and Target may very well end as the holiday season approaches, the willingness and ability of the retailing behemoths to sell bestsellers for $8.98 has deeply angered traditional booksellers who have raised the question of just how those companies can legally do it. Booksellers note that many states, including California, have laws that prohibit retailers from selling goods at below cost if the tactic is being primarily used to drive its competition out of business. Based on the published discount schedules of the major publishers, there is no way Amazon and Wal-Mart can profitably sell the 10 titles that are being discounted.

The highest published discounts offered by publishers for new titles is 48% for books shipped to retail distribution centers; retailers can earn a 50% discount for books bought nonreturnable. The discounts offered by Wal-Mart to customers for books it prices at $8.98, however, range from 74% (Under the Dome, list $35) to 59% (Ice, list $22), which would mean Wal-Mart is losing $8.52 on Dome and $2.02 on Ice. “Someone is losing money or someone is breaking the law,” one bookseller said about the discounts.

That is just what the ABA is thinking, too, and last Thursday the trade association sent a letter to the U.S. Department of Justice asking the government to investigate what it believes is the illegal predatory pricing practices of the three retailers. The letter, sent to the antitrust division of the Justice Department, requested a meeting at “the earliest possible opportunity.” The ABA argued that Amazon, Wal-Mart and Target “are using these predatory pricing practices to attempt to win control of the market for hardcover bestsellers.” The letter continued by noting that the companies engaging in slashing prices are not primarily involved in selling books, but nevertheless their actions could result in the entire book industry becoming collateral damage of the price war. The ABA further noted that the fight over hardcover prices began with Amazon's decision to charge $9.99 for e-books. “We believe the loss-leader pricing of digital content also bears scrutiny,” the letter stated.

The ABA noted that news reports suggest that publishers are not offering special terms to the big box retailers, but some individual store owners are suspicious and believe that the large retailers are receiving extra discounts and/or special deals from publishers, a practice that in the 1990s led to lawsuits against several publishers and later against Barnes & Noble and Borders. There is no proof, however, of extra discounts, and the market is very different from the 1990s, when the booksellers' legal action resulted in publishers signing consent decrees that limited the range of discounts publishers could offer. Booksellers also collected about $27 million in settlements with the publishers. The ABA's lawsuit against B&N and Borders was less successful and was settled out of court with the ABA receiving $4.7 million. Although no publisher has directly addressed the current price war—with the exception of Hachette CEO David Young, who has said he thinks it is dangerous for retailers to sell books below cost—publishers have made it clear on other occasions that they are uncomfortable with the trend in discount pricing, especially the decision by Amazon to sell e-books at $9.99.

Independent booksellers waging another lawsuit against either retailers or publishers would find it expensive and difficult. The Robinson-Patman Act is rarely enforced and has been whittled away over the years. One attorney noted that if a lawsuit were filed, defendants could easily mount a “meeting the competition” defense. Indeed, Target said it lowered its prices on bestsellers because it needed to meet the price being charged by its competitors.

Loss Leaders