I’d like to start buying e-books for their convenience, but I cannot break myself from the habit or concept of owning physical books. I can not flip through a Nook as fast or effectively as an actual book; I can go 200 pages forward, 50 backwards, and 15 forward, as fast as I can turn a single page in a Nook. On the other hand, I can’t “search” a physical book like one can search Google. I’d rather read a digital version if I’m traveling, but the physical version at home. There are reasons for wanting both a physical copy and a digital copy, and really, I want both. But I can’t shake or tolerate the feeling that if I bought both digital and physical copies I’d be paying for something twice. The knowledge that others elsewhere (almost everyone, in fact) are fine with one or the other makes me feel like I’m  buying some extravagantly unnecessary luxury; like a man buying two dinners at a restaurant in case he changes his mind halfway through the meal. I can’t be alone in this.

And this brings me to the puzzle: why doesn’t Amazon practice some price discrimination, and offer me a discount on a digital version when I buy a physical copy of a book?

This is a puzzle because it is a fairly general result that when it is possible to price discriminate it is profitable to do so. And in this case, all the ingredients for effective price discrimination are there.

First off, you’ve got an obvious separating mechanism, that is, a way to divide buyers into groups to whom you can charge different prices.  After someone purchases a physical cop of a book, offer them a lower price on a digital copy. This way you can continue to charge the higher price to everyone else.The DRM for the digital copy also provide barriers to resale in the that would prevent arbitrage.

You’ve also got market power. Books are highly heterogeneous books; there really very few good substitutes for Sarah Palin’s autobiography. We know that publishers have the market power to price discriminate since they already do so with hardcover and paperback books. (You didn’t really think the price difference between the two was about the higher cost of making a hardcover book did you? It’s really about willingness to pay and the illusion of cost.)

On top of all of those price discrimination ingredients you’ve got an obvious difference in willingness to pay for the two separable groups of customers. If someone has already bought a physical copy of the book, then on the margin, at a price of zero, they’ve got a pretty darn good substitute for an e-book. Thus they’re going to have a much lower willingness to pay for any given e-book than someone who doesn’t already own the only good substitute for one.

A lower price on a digital edition would allow consumers (e.g. me) to think of it as an add-on or an accessory to a physical book, instead of as buying the same thing twice. Removing this conceptual barrier will increase the value of e-readers to many consumers, and quite likely sell more of them. Not only that, but for Amazon this is a bundling of goods that digital-content-only Apple can’t offer, which gives Amazon a competitive advantage.

So please, Amazon, won’t you price discriminate against us?

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