Undercover Economist

Dan Brown and the mystery of the lost profit margin

According to his publisher, Dan “Da Vinci Code” Brown’s latest book, The Lost Symbol, sold more copies in its first 36 hours than any other adult hardback sold in total. (A certain boy wizard is excluded by the artful qualifier, “adult”.) The sales of Brown’s book were given a boost by an unprecedented price war. According to The Bookseller, an industry magazine, Waterstone’s offered a mere 50 per cent discount – £9.49 instead of £18.99. Tesco asked £7 and Asda £5. Asda’s book buyer celebrated “fantastic” sales, despite the fact that the store is thought to be losing £4 a copy. The old joke is made real: losing money on every sale, but making it up on volume.

Asda’s price wasn’t even the lowest available. The Book Depository, an online retailer, grabbed headlines with a price of £4.99 – whereupon Amazon quickly cut prices to match. These prices have prompted many people in the industry to feats of rhetorical self-flagellation. Industry insiders complained to The Bookseller about “ridiculously aggressive discounting” and asked “how can the book trade take itself seriously?”

To an economist, of course, this all makes perfect sense. Muddled thinking tempts us to speak of “the book trade” as a single sentient being. If it were, discounting a sure-fire bestseller from £18.99 to £4.99 would make no sense at all. But, happily for Dan Brown fans, the book trade does not have a single voice in charge and it would be illegal to appoint one.

Instead, the booksellers, like many other retailers, rely on unspoken conventions about the prices of their goods. Every retailer has to charge a mark-up to cover overheads, and faces a tension between the immediate pressures of competition and the need to stay in business. Every item sold, even at the tiniest mark-up, is better than no sale at all. Yet if the mark-ups are too thin, bankruptcy will not be far away. Such is the everyday tension of business, and companies tend to find a suitable level for prices where most of them can make a living. Occasional grabs for market share, or the threat of aggressive new entrants, usually prevent prices rising much above that level. Usually, but not always: from time to time an industry manages to agree a cosy arrangement that benefits everyone but the consumer.

Economists also have a clear theory about when such arrangements will tend to break down: they collapse when any future benefits from an accommodating attitude pale into insignificance compared with the prize on the table. Slow-burning bestsellers such as Jim Collins’s Good to Great seem to be sold at full price; indeed, Good to Great is still not available in paperback in the US as it nears the eighth anniversary of its publication. The book is likely to sell strongly for years to come, so why rock the boat with a price war?

Brown’s offering, by contrast, is selling hundreds of thousand of copies right now, so there is an overwhelming temptation to break ranks and offer a low price to grab a bigger slice of a smaller pie. The second puzzle is why anyone would cut prices so far as to make a loss. But that is not too hard to figure out. Asda and Tesco hope to tempt a few grocery shoppers through the door – and a £4 loss on a Dan Brown book is small change compared with the value of a shopping trolley. The Book Depository, a company I’d never heard of before the Dan Brown book launch, is presumably keen to promote itself as a cheap and efficient alternative to Amazon; Amazon is determined to discourage defectors. And why would Waterstone’s not join in the deep discounting game? Presumably because it only sells books – and the likelihood of selling quality books to Dan Brown readers is slim.

Also published at ft.com.