Friday, February 19, 2010

Breaking Amazon's Monopsony

Do you know what monopsony is? Economists define monopsony as a market where you have only one buyer. It's the mirror image of monopoly - a market where there is only one seller.

Why do we care about the definition of monopsony? Well, the recent developments in the e-book market sparked some curiosity on the part of many folks. How is that book prices rose after Apple announced the introduction of the iPad? After all, doesn't competition reduce prices? My colleague, Keith Murray, has a terrific blog post on this subject.

Here's my take: Prior to Apple's entry into this market, Amazon had something closely resembling a monopsony in the e-book market. They dominated the market. They were the principal buyer of e-books. Thus, they had a great deal of market power relative to book publishers. The entry of Apple into this market, with the iPad, has essentially broken the monopsony. Now, there are multiple significant buyers of e-books. As a result, the book publishers have gained some leverage, and they can command a higher price for their products. Now, in the long run, prices may again fall as the market evolves. For now, though, we have an interesting scenario whereby prices have risen as a monopsony situation comes to an end.

1 comment:

Successful Investment Articles said...

I think the advantage this time goes to the business, Apple is a big help for them. For some reason the start of their business transformation is all thanks to Apple. Business is ought to grow not to fail why settle in a business if your purpose is not to gain big. Yes its a big lost for the Amazon's but that's the way things are