The impact of ending RPM on books: 20 years of evidence from the UK - Matt Olczak Aston University, Birmingham, UK Workshop on the Economics of ...
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The impact of ending RPM on
books: 20 years of evidence from
the UK
Matt Olczak
Aston University, Birmingham, UK
Workshop on the Economics of Fixed Book Price (FBP) Systems
Gieẞen, November 2019Contents • The UK Net Book Agreement (NBA) & its collapse • Key insights from 2008 report for the Office of Fair Trading evaluating the impact of abolishing the NBA • Subsequent developments in the industry – market structure & prices • Some open questions on developments in the UK.
The UK Net Book Agreement
• From circa 1900 – around 1996 the Net Book Agreement (NBA) prevented retailers
from selling a book under the publisher’s chosen (net) price.
• 1962 Restrictive Practises Court (RPC) allowed the NBA to continue: ‘books are
different’.
• Formally abolished by the RPC in 1997. But by then it had effectively collapsed
anyway partly due to:
• pressure from the EC – cross border considerations (UK & EIRE)
• entry of supermarkets – buyer power.2 Research Objectives
1) Use the abolition of the NBA as a case study to assess the impact
of a competition policy intervention on productivity:
- pre v post
- publishers & retailers
- comparison with Germany.
2) To develop a general methodology appropriate for assessing the
impact of competition policy interventions.Decomposing productivity changes
• Within firm effects
• competition, or the threat of entry, puts pressure on firms to use their
resources more efficiently
• Between firm effects / market sorting
• competition can reallocate market share, with higher productivity firms
gaining market share at the expense of less productive firmsEntry
Supermarkets, internet retailers +Borders (1998-2009):
1995 2005
Large/ Multiple Stores 31 42
Independent Stores 28 11
Grocery multiples 1 8
Internet 0 11
Arguably entry was facilitated by freedom to discount
- suggested by comparisons with GermanyOnline market share for book retailing – Germany & UK
14
12
10
8 UK
%
6 Germany
4
2
0
1999 2001 2003 2005 2007
YearQuote I (from 1997)
Reaction from booksellers to Borders expansion to the UK:
‘(some booksellers) expressed fears that expansion of the US chains on
the UK high street would be as ‘reckless’ as it had been in the US, and
that a price war would break out.’UK bricks & mortar book retailers real labour productivity
140
Real Labour Productivity (1997=100)
120
100
80
60
40
20
0
1989 1992 1995 1998 2001 2004
Negative WITHIN firm effect for bricks and mortar incumbents
&
by no mean just affecting small independentsBricks & mortar book retailers in Germany and the UK real labour
productivity
140
Real Labour Productivity
120
100
(1997=100)
80 Germany
60 UK
40
20
0
1995 1998 2001 2004
Year
a similar decline in productivity wasn’t observed in GermanyQuote II
In 2006 Waterstone’s described
themselves as:
‘caught in a ‘pincer movement’ between, on the one hand, the
supermarkets offering a limited range but substantial discounts,
both on best sellers and on an increasing number of deep-range
titles, and, on the other hand, the Internet retailers offering a very
extensive range.’
+ used this as an efficiency defence for Waterstone’s/Ottakar’s
merger (2006)Nominal turnover
sample bricks & mortar retailers v growth industry turnover
135
Nominal turnover (2000=100)
125
115 Sample bricks &
mortar retailers
105
Industry
95
85
75
1999 2001 2003 2005
YearSmkts & Amazon’s productivity = fixed at 3x Waterstone’s level in 2005
105
100
Real Labour Productivity
95
90
Aggregate
85
Within firms
80
Between firms
75
70
65
60
2000 2001 2002 2003 2004 2005 2006
Year
Absolute change % change
Aggregate 3.8 4.3
Within -12.5 -12.1
Between 16.2 18.8UK publishers real labour productivity
160
140
Real Labour Productivity
120
(1997=100)
100
80
60
40
20
0
1990 1994 1998 2002 2006
Year
WITHIN firm productivity gainsUK publishers real labour productivity % change 1992-2005
1992-95 1995-2005
Aggregate 26.3 (8.7 p.a.) 55.1 (5.5 p.a.)
Within 20.5 59.5
Between 4.8 -2.8
Large -2.5 82.9
Small 49.9 42.1
BUT slower productivity growth after the NBA
& smaller publishers disproportionately affectedPublishers in Germany and the UK real labour productivity
160
140
Real Labour Productivity
120
(1997=100)
100
Germany
80
UK
60
40
20
0
1996 1999 2002 2005
Year
On the other hand UK favourable post NBA in comparison to GermanyOverall conclusions from our 2008 report • The abolition of RPM facilitated a wave of new entry in the retail market • AND this impacted particularly on incumbent retailers. • Opponents had for a long time argued that removing RPM would seriously jeopardise small independent retailers, who would be unable to survive in the face of discounting competitors. • But as the new entrants started to grow it was also the much larger chains, that became unable to counter the challenge of new entrants.
Developments since our study
1995 2005 2014
Large/ Multiple 31 42
Stores
Independent Stores 28 11
Bookshops 38
Supermarkets 1 8 7
Internet / 11 46
By 2014 a substantially changed UK retail landscapeComparison with Germany
2005 2005 2014 2014
UK Germany UK Germany
Bookshops 38 47
Supermarkets 8 7
Internet 11 7 46 16UK publishing market concentration
60
50
40
30
%
20
10
0
2004 2006 2008 2010 2012 2014 2016
Year
CR2 CR4
Smallest enterprises increased from 14 to 26% of the number of enterprisesNumber of book retailers
1,200
1,000
800
Number
600
400
200
0
2008 2010 2012 2014 2016 2018 2020
YearNumber of enterprises in book retail by turnover
Turnover % change in no. of
(Thousand £s) enterprises 2010-19
0-49 50
50-99 7
100-199 -7
200-499 -16
500-999 -50
1000-1999 -33
2000-4999 -50
5000-9999 0
10000-49999 50
50000+ 0
TOTAL 8
Smallest enterprises increased from 14 to 26% of the number of enterprisesRetail prices as % of RRP
Year Best sellers Deep range titles
(top 5,000 titles)
2001 88% 93%
2002 84% 93%
2003 82% 92%
2004 80% 90%
2005 75% 90%
Increasing discounts on RRPs, especially for best sellersRetail Price Index: books v all items
500
450
400
350
Price 1987=100
300
250
200
150
100
50
0
1985 1990 1995 2000 2005 2010 2015 2020
Year
Books AllWholesale price discounts
Retailer type Estimated wholesale prices paid as
% of RRP in 2005
Independent retailers 60%
Major chains 50%
Internet retailers 55%
Supermarkets 60%
Significant differences in wholesale prices paid across retail typesPrices of top 10 best sellers
8.00
7.00
6.00
5.00
Price (£)
4.00
RRP
3.00 ASP
2.00
1.00
0.00
2000 2002 2004 2006 2008 2010
YearBack of the envelope welfare estimate:
In 2005:
Best sellers (top 5,000 titles): 57% of titles by volume
BUT:
Deep range titles: 43% of titles by volume & only 10% discounts on RRP
So:
Estimate of average price = 0.57*(ASP Top 10) + 0.43*0.9*RRPEstimated average selling price
7
6.5
6
Price (£)
5.5
5
4.5
4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
YearRole of the RRP • Some books sold at (or close to RRP) • Others at considerable discount on RRP • Potentially RRP increases used as a means for suppliers to counteract discount retailers • response to retailer bargaining power? • An aside in hub & spoke cartels – RRP can play be the focal point for coordination.
Previous literature on RRPs
• Consumer-side
• Loss aversion/gains relative to a reference price: Puppe & Rosenkranz (2011) and Fabrizi et
al. (2016)
• RRP influences consumer search: Lubensky (2017).
• Firm-side
• the RRP allows a supplier to communicate info on its costs: Buehler & Gartner (2013)
• RRPs may facilitate collusion: Faber & Janssen (2017).
• The previous theoretical literature has typically considered symmetric retailers
that receive take-it or leave-it offers from the supplier
-> no consideration of role RRPs in the bargaining process & differences across
products/retailers.Some open questions on developments in the UK industry • What have the price effects been and what are the distributional implications? • What role do RRPs play in bargaining & pricing? • Are we really seeing a revival of independent bookstores?
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