Cooking the Books in Germany

A story in the New York Times explains that, in Germany, the government fixes the prices at which books are sold, meaning that, for any given book, every bookseller in Germany must sell the book at the government-determined price.

The Times columnist can’t quite conceal his admiration. "If you want proof that a cultural divide separates Europe and America, the book business is a place to start. In the United States chain stores have largely run neighborhood bookshops out of business. Here in Germany, there are big and small bookstores seemingly on every block." Moreover, the German system delivers many more books than does the free market in the United States. "Last year 94,716 new titles were published in German. In the United States, with a population nearly four times bigger, there were 172,000 titles published in 2005." And, to top it off, the German system even leads to lower prices. "American consumers should take note," the columnist says, because "last year, on average, book prices fell 0.5 percent" in Germany. This wonderful system is in danger, however, because Switzerland recently abolished a similar law, and now discount chains in Switzerland may sell books into the German market, undercutting the German booksellers.

But the Times journalist misunderstands the economics here. In reality, the German government has set prices for books too high (that’s why the unregulated Swiss sellers may profitably undercut them)¯or, more accurately, at a price above the long-term marginal cost of production. This is exactly what happens when competing firms engage in an illegal price-fixing conspiracy and form a cartel. (Think OPEC.)

Since the cartel raises the price of the product, less of the product is produced and sold, and there is also a wealth transfer from consumers, who pay more for the product than they otherwise would, to producers. There is also an overall loss to society, because there are people who would have paid for the product if the price were low but who now don’t get to buy the product at all. These are the most marginal consumers of the product, and so, everything else being equal, they are likely to be the poorer consumers, who are being priced out of the market by the price increase implemented by the cartel. Translation: Price-fixing hurts society as a whole, consumers as a group, and poor consumers most of all; it benefits only producers.

But if price-fixing lowers the quantity of product produced and sold, how can it be that, as the Times tells us, the German book market produces more books per capita than does the U.S. market? In fact, this doesn’t contradict what I said above and is in perfect accord with economic theory and experience. In general, once the price of a product is raised above the marginal cost, producers have an especially strong incentive to try to grab sales from one another. One way to do this is by covertly cutting the price (this is why OPEC members constantly undercut the price the cartel sets). This is difficult with consumer goods like books, however, because all the prices are publicly ascertainable, and in the German case it would also expose the price-cutter to legal sanctions.

Another way to grab sales from competitors is to compete not on price but on quality. In the United States, back in the days when the Civil Aeronautics Board (the predecessor agency of the FAA) regulated airline prices (that is, set them too high), the airlines competed on quality, not price. That’s why flying used to be so much more luxurious. This, it turns out, was very inefficient. By increasing quality, the airlines raised their own costs to the point that such costs reached¯and often exceeded¯even the artificially high price the government was setting. Hence, an ironic outcome: Firms in a legally cartelized industry were often on the verge of bankruptcy.

Something similar¯at least with respect to quality competition¯seems to be happening in the German book market. Since prices are fixed, publishers and bibliopoles compete for sales on the basis of quality, which in the book market means producing and offering many new titles. These are books that, in a free market, so few people would be willing to buy that producing them wouldn’t cover the costs of production. At the artificially high price set by the German government, however, it becomes profitable to produce and sell them. Hence, German publishers churn out books that only a very few people are willing to buy. The artificially high price for the popular books subsidizes these unpopular titles that couldn’t make it in a free market.

But, the New York Times insists, the prices of books in Germany fell last year by 0.5 percent. I don’t doubt it, but that just means that the government must have adjusted prices downward that year, slightly reducing the amount of the artificial markup. The relevant comparison isn’t whether books in Germany cost more this year than last year; the relevant comparison is whether books cost more in Germany than in the United States. Not surprisingly, books in Germany cost a lot more. You can buy the English version of Harry Potter and the Deathly Hallows from Amazon in the United States for $19.24, but the German version from Amazon.de in Germany costs EUR 24.90, or about $35.81.

As with most government interventions into the market, it’s instructive to see who wins and who loses in the German system. Here, publishers and booksellers win because they’ve been given a legal cartel that allows them to extract extra value from consumers, at least to the extent that they don’t compete all that value away by producing books most people don’t want. Among consumers, the situation is more complex. The winners are richer people who have plenty of money to buy books and who like books on obscure topics. The losers are poorer people with less money to spend on books and who want primarily the popular books that would get sold more cheaply in a free-market system.

Most of this escaped the columnist and editors at the Times , of course. Confronted with a system that benefits wealthy people with outré reading habits at the expense of poor people with plebeian tastes, the Times praises the German system for being so progressive and enlightened. After all, the system benefits the kind of people who read the Times ; therefore, it must be right and good.

Robert T. Miller is an assistant professor at the Villanova University School of Law.