Thursday, July 28, 2005

The rental price of textbooks and music 

I needed a book for some work I did earlier last week. I was going to do this out of town; I discovered Tuesday last week that my copy of the book had been, um, borrowed. So I fire up Amazon to get another copy, and it's not in their warehouse. But, aha! there's a copy in a private seller's store in North Carolina. I expedite shipping and it arrives Friday. Crisis averted.

As Hal Varian notes, used goods are now 23% of sales at Amazon. Book publishers cringe at this, but Varian notes that the spread of the used market may in fact help sales of new books.
When used books are substituted for new ones, the seller faces competition from the secondhand market, reducing the price it can set for new books. But there's another effect: the presence of a market for used books makes consumers more willing to buy new books, because they can easily dispose of them later.

A car salesman will often highlight the resale value of a new car, yet booksellers rarely mention the resale value of a new book. Nevertheless, the value can be quite significant.

This is particularly true in textbook markets, where many books cost well over $100. Judith Chevalier of the Yale School of Management and Austan Goolsbee at the Chicago Business School recently examined this market and found that college bookstores typically buy used books at 50 percent of cover price and resell them at 75 percent of cover price. Hence the price to "rent" a book for a semester is about $50 for a $100 book.
I see another example of this here in St. Cloud. My favorite music shop, Electric Fetus, keeps a nice collection of used CDs. They advertise that they buy, sell and trade, unlike Best Buy or Media Play here in town. I get fairly decent value for my CDs, somewhere between $2.50 and $4 (occasionally $5), which combined with the cheap storage of ripped MP3s gives me the opportunity to buy and keep some additional music I might not otherwise. I no longer need 8 or 9 of 10 songs to be good. I could buy one where five songs I like, rip them and sell back the CD. (I don't think anyone has ever claimed that one loses the copyright to the MP3 you made from your own CD if you lose or sell the CD, right?) Combined with some nice discounting from the store and my relationship with the staff -- which might fetch a slightly better price in selling my used stuff as well as their holding me a copy of something they know I want -- the cost of my music love is reduced.

What about the used books and CDs, though? Do they displace sales of new? Varian says not, citing this study. A 10% increase in new book prices only raises used book sales by 1%. Amazon is gaining revenue from selling used books as well as new, even though a used book generates less than 60% of the profit of a new one.

H/T: Liberal Order.