How fixed book pricing can benefit consumers and the economy

Many countries across Europe have fixed book price (FBP) policies designed to discourage fierce discounting of bestsellers while promoting non-price competition through diverse titles and a broad retail network of bookstores. But what is the actual effect of such systems on both book pricing and sales volume? 

Research by Rhys Williams (MRes 2022), a PhD candidate at Cambridge Judge Business School, sheds light on this topic through what is believed to be the first detailed cross-border examination of FBP policies – which are a legal form of resale price mechanism (RPM) agreements through which producers restrict the ability of downstream retailers to set their own pricing for a product. 

The research finds that countries with FBP policies see higher book sales relative to countries without such a policy, and with no noticeable effect on the average price of books. Given that book sales have generally declined over time, the findings are more precisely stated that FBP policies “result in book sales declining less than would be the case without such a policy”.

Study finds retail price mechanism agreements may have positive competition effects

“The research suggests that FBP policies promote non-price competition that increases the quantity of books offered and a wider network of retailers, while at the same time changes in publisher-retailer bargaining power offsets any upward pricing pressure from RPMs”, says Rhys, a PhD candidate in the Economics & Policy subject group at Cambridge Judge.

”While these results are limited to the book industry and are based on a limited number of countries, they nonetheless highlight that RPM agreements – which are illegal in many jurisdictions – do have the ability to confer positive competition effects, so policymakers should think twice about an absolute prohibition of such agreements”.

What is the real effect of retail price mechanism? 

The reason RPMs are prohibited in many jurisdictions rests on the argument that they merely lead to higher prices with little improvement of service quality, so consumers suffer. But because of the widespread illegality of RPMs the actual pro- or anti-competitive effect – rather than the presumed effect in theory – has rarely been tested. 

The research by Rhys therefore focuses on a legal use of RPMs, the fixed book price policies that have a history dating back to 1900 in the UK (known as the Net Book Agreement) and which currently exist, among European Union countries, in Austria, Belgium, Croatia, France, Germany, Greece, Italy, the Netherlands, Portugal, Slovenia and Spain. The research focuses on the period of 2008 to 2019. In 2019, book sales in Europe totalled 22.4 billion euros. 

“While many have hypothesised about the effects of FBP policy along similar lines to the pros and cons of RPM, very few have empirically tested its effects”, says the study published in the Journal of Competition Law and Economics. 

“We find evidence to suggest that between 2008 and 2019, such policies had no noticeable effect on book prices, with evidence suggesting possible downward effects on prices, but resulted in increased book sales. Using a longer time series of data for book prices, available between 1996 and 2020, we continue to find no evidence for price effects of RPM across a wider sample of policy changes”.

How do European countries apply fixed book price policies? 

Fixed book price policies range from legislation such as the Loi Lang in France to long-established pacts such as Norway’s Bokavtalen agreement between the Norwegian Bookstore Association and the Norwegian Publishers Association. 

The duration of such agreements vary widely: while Slovenia’s FBP policy applies only for 6 months, post publication, countries including Austria, France and Spain have 24-month periods. For most books, the key commercial life in which sales largely occur is 4 months to 2 years depending on the title, meaning that most FBP laws cover the period where a book’s sales is the highest. 

Bestsellers subsidise special interest books: variety and pricing in the book industry

One of the key motivations behind FBP policies is to prevent heavy discounting by low-service retailers, such as supermarkets, who mostly stock popular bestsellers, thus reducing the variety of titles available. Higher quality booksellers, in contrast, stock many titles – with full-price bestsellers subsidising special interest books that will sell relatively few copies.

Other services provided by bookshops such as knowledgeable staff, reading recommendations and a pleasant browsing atmosphere “promote the value of books in general and help book sales across all retail formats. In addition, they help bring about a form of retail competition that is not based on low prices alone”, Rhys writes in the study.

The counter argument of those who oppose FBP policies is that discounting allows a wider range of consumers to access books and may restrict low-income consumers from an important source of knowledge and insight.

So why do these findings seem at odds with theoretical predictions of higher prices through RPMs? 

How publishers increase their bargaining power 

On pricing, the study suggests that FBP policies offset any price effect predicted by the theory through increased bargaining power of publishers. Because FBP policies discourage strong price competition, this results in a reduced exodus of bookselling retailers compared to non-FBP countries. In turn, this increases the range of retailers that publishers sell to, boosting the bargaining power of publishers, lowering the retailer’s royalty share, and causing downward pressure on consumer prices. 

Higher book sales caused by FBP policies, the research says, may be explained through both an increase in the number of bookshops and enhanced non-price competition (such as quality service from book-knowledgeable staff).

When should retail price mechanisms be considered?  

As for broader policy implications, the research findings “suggest that outright bans on RPM may be imprudent, and to the potential detriment of consumers”. 

Yet owing to the relatively narrow book sector involved, this does “not suggest that RPM is universally pro-competitive and should be permitted, without regard, in any sector. Instead, we believe that finding pro-competitive effects of RPM in a large industry in Europe gives impetus to competition authorities to consider the use of RPMs in certain industries based on an analysis of effects, rather than a blanket ban”. 

What’s next for Rhys Williams?’ 

It is not an everyday occurrence for a PhD candidate to have sole-authored paper published in a leading peer-reviewed journal. Rhys’ article was, following its publication, one of the “most read” articles in the Journal of Competition Law and Economics. 

Since then, Rhys has been invited to a competition conference in the Czech Republic to discuss his research, and he is involved in additional research on retail price maintenance by analysing more extensive data from the book market in Belgium and other EU countries.