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Ebooks

Dear Author

Is genre fiction creating a market for lemons?

In 1970 George Akerlof (Nobel Prize winner in Economics 2001) wrote a scholarly article called “The Market for Lemons: Quality Uncertainty and the Market Mechanism.” In true academic fashion, the article was deemed trivial by the top journals and he finally landed it in a highly-ranked but not flagship publication. It has since gone on to become one of the most cited economics articles and his insights about the used-car market in the US have been shown to have a much wider application.

Briefly put, a market for lemons can be created when buyers and sellers have asymmetric information. In the olden days, sellers of used cars would withhold information about the cars’ past performance and repair history in order to fetch the highest prices. Sometimes this was borderline or outright unethical behavior, and sometimes they just didn’t know. As a result, people approached buying a used car with the enthusiasm they generally reserved for root canal surgery.

“Wow, I got a great deal on this used car! It is better than I thought it would be!” said almost no one, anywhere, ever, in those days. If you did get a good deal and a good car, it was basically a miracle. This was mostly because people who had good cars to sell knew they wouldn’t get the price the car was worth, because there was often no way to convince the seller that it was a good car. So they found other ways to offload the car (sell to friends, trade it in, etc.) and many good cars were kept out of the market. That turned the used car market into a market for “lemons,” slang for a bad car.

It wasn’t that good cars weren’t around, or that no one could buy them, it was that the market didn’t have a reliable way to signal to sellers which were the good and which were the bad cars. Today we have Carfax and other computerized, easily available information about used cars, and the market thrives for both buyers and sellers. The information asymmetry has basically been erased.

What does this have to do with books, you might ask? Well, thanks to the brouhaha over the Author Earnings report and the influx of new commenters to my DA post, I wound up reading a number of threads at the Kindleboards. Most of the time I forget that the Kboards community exists, given I don’t share their interests, and since I gave up Amazon discussion groups and Goodreads I don’t notice mentions of them in my various Twitter and blog streams.

While I was immersed in the Kboards threads, my Twitter stream happened to be featuring a conversation about self-published books that purportedly featured purchased reviews (here is a roundup by Mike Cane of the blog posts they were discussing). And then Jane wrote a column asking readers about their price-sensitivity in reviewing books, and it started to come together for me.

The phrase “Gresham’s Law” had been bouncing around in my head, but I knew that wasn’t quite the right concept. Gresham’s Law is about currency circulation, where everyone knows that two currencies that have the same official value may differ on other value dimensions (e.g., gold coins and base-metal coins that have the same value when used as currency). But the book market seemed to me to be an asymmetric information situation.*

The result of the two processes is the same: the bad product drives the good product out of the market. But the way it occurs and why it occurs are different. In the case of Gresham’s Law the good money leaves because its official valuation is lower than its real valuation (people take the good money out of circulation). In the case of lemons it’s because the better product cannot be sold for more than the worse product, since there is no transparent way to guarantee to buyers that a quality difference exists.

Two decisions have converged during the rise of ebooks to make low-production-value, low-priced books much more commonplace. The first is the original decision by the Big 6 publishers to conspire illegally to set and maintain high prices for their ebooks. The second is the decision of authors to self-publish their books and price them much lower than Big 6 books in order to gain market share. The second decision was facilitated on a large scale by Amazon’s willingness to provide a retail portal for these author-publishers.

By the time the Big 6 (now the Big 5) were forced to stop price-fixing, the average price of ebooks had decreased because of the influx of self-publishers and the willingness of readers to take a chance on these books. This trend was especially true in genre categories like romance and SFF. As a result, a $7.99 book not only looked awfully expensive to the average high-volume romance reader, it was competing with many lower-priced and even free books in the same genre. (An aside: this is Jane’s point about anchoring. $7.99 wouldn’t look nearly as bad if it weren’t near the top end of a price scale that begins at $0.00.)

Worse, the price points didn’t necessarily reflect quality differences, or even easily measurable criteria like length. Consider the following examples:

  • A “self-published” rerelease of a NY-published author’s backlist
  • A new self-published book from a previously NY-published author
  • A self-published debut from an unknown, newbie author
  • A loss leader from a NY publisher trying to drum up readership

Four very different types of provenance, but all four books could have price points of $3.99. With that price confusion, what rational consumer is going to take a chance on a $7.99 book unless she has additional information about the book or the author?

So the primary differentiator, price, is becoming a very noisy signal. At $3.99 you can get a very good book or a very bad book or something in between.

Price, of course, is not the only signal. A second signal is review rating. Amazon has review ratings for everything from hair dryers to Montblanc fountain pens to The Great Gatsby (1-star review: “I was really glad when the story was over. I felt no depth in any of the characters and was not intrigued by his writing style.”). Amazon loves reviews of the products they sell, and all you have to do to write one for any product is buy one thing from Amazon, once. Reviews range from careful, well-thought-out critiques to “this book had a torn cover when I received it: 1-star.” This is not surprising, since practically anyone can post a review, and in my opinion it’s fair, because the consumer is buying a product and has the right to review the purchase as a product.

Book reviews exhibit an interesting pattern: reviews of popular and best-selling genre books are systematically higher than reviews of corresponding general fiction and literary fiction. Some have hundreds of ratings with very, very few in the 1-star category. Looking at the list as I’m writing this, I see that Donna Tartt’s The Goldfinch has a 3.8 rating, while H.M. Ward’s Stripped (The Ferro Family) has a 4.7. In addition, well-known self-published books often have very high rankings, especially compared to Big 5 and other major publishers’ releases. For example, compare the positive (4- and 5-star reviews)  percentage of Wool to the percentages of other well-known SFF books:

Wool (Omnibus): 93.6%
Harry Potter #1: 94.4%
Neuromancer: 71.7%
Cryptonomicon: 77.6%
Ender’s Game: 90.1%
Ready Player One: 89.4%

Only Rowling’s first Harry Potter book has a higher reviewer rating than Wool, and of the rest, only Ender’s Game reached 90%. Neuromancer arguably established a genre, Cryptonomicon and Ender’s Game are both critically and popularly acclaimed, and Ready Player One was a word-of-mouth hit. All have substantially lower approval ratings, and the three books that are clearly targeted at not-young adults have far fewer ratings than the YA-friendly novels. Neuromancer, which is 30 years old this year, has 726 ratings, which is less than a tenth of the total numbers racked up by Howey, Rowling, and Card.

It’s entirely possible that readers of the Ward and Howey books were more satisfied with their reading experience than readers of the Tartt, Gibson, etc. (I tend to think of Rowling as being in a category of her own).  I have more trouble with the idea that the Ward and Howey books are better books. And herein lies the problem with Amazon reviews. They’re only partially about quality.

Quite apart from whether reviews are genuine or fake, written by people with a stake in the book/author or by an unconnected reader, I don’t find it believable when a best-selling book has a 93.6% positive rating. But even if I were convinced of the overwhelming love for it, when so many books get 4.5+ star averages, two things happen to me, the unconnected reader:

  1. I have trouble knowing which book to pick;
  2. When I read it and find out it is not a 4.5 star book in objective terms, i.e., technique/production issues, I start to mistrust reviews. A lot.

And when I mistrust reviews, there goes my second signal. Rather than having helpful signals, I now have two measures that provide noise. So how do I choose among the vast numbers of books Amazon offers me? I can flip a coin, read a lot of samples, or throw up my hands and decide to stream something on Netflix or Amazon Prime instead.

Because the ultimate competition to books isn’t other books. It comes from other forms of entertainment. If sifting through the book recommendations becomes too difficult, a lot of people will just turn to other media. I’ll keep looking because I have a lifelong investment in being a reader. But for younger people who don’t, why should they bother?

Right now we have ways of sorting amongst the enormous slush pile that is the Kindle bookstore. We can follow NY authors to their self-published efforts and hope they have kept their same standards. We can feast on the backlist releases (there are luckily many, many of those). We can follow word-of-mouth and reviews from people we trust to discover new writers.

Two of those three options involve people with connections to traditional publishing, that hoary old dinosaur that self-publishing is supposed to render irrelevant. Right now, the majority of self-publishing success is almost certainly built on the foundation provided by New York. You won’t find that information in most evangelical tracts about self-publishing, including the Author Earnings report, because it undermines the “all self-publishing is great and we are all in this together!” message. But I haven’t seen any evidence to disprove it.

If you vanquish New York, though, you undermine self-publishing. What will be left, in overwhelming numbers, will be the inexperienced, still-working-on-the-writing-thing authors, and that will make good authors wary of entering, for fear of being lost in the slushpile.  And that’s when readers will realize they’re shopping in a market full of lemons.

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*ETA: I’m not the first person to use the Akerlof paper to talk about the book market. See this post by Balder Bjarnason written last year. We have slightly different foci but lots of overlap as well.

Does what you paid for a book affect how you’d rate it?

Does what you paid for a book affect how you’d rate...

REVIEW:  tight-money.gif

When I first started buying my own books some twenty plus years ago, I had very little money. My favorite authors were starting to come out in hardcover (Julie Garwood, for example) and unless I wanted to wait to be the 80th person at the library to read the book, I had to fork over $22.00 or more which, at the time, was a lot of money for me. It basically meant I wasn’t going to be able to buy another book or maybe even eat anything but ramen and macaroni for the month.

Most of the time, however, I bought my books used at the Half Price Bookstore or some other used bookstore that sold romances for $0.10 or $0.25.  And when I bought the hardcover, I knew that I was sacrificing at least four other reads for that one book.

As I got older, I was able to buy more books but my reading habit got to be really pricey so I instituted a book budget of no more than X amount of dollars to be spent a month.  Because I read three to five books a week, I was only able to purchase about eight titles a month new and the rest would have to be library lends or used book store purchases. During the heydey of chick lit, I was really struggling!

Price has always been a big thing for me when it comes to books and from what I’ve heard from industry professionals, mass market purchasers are very price sensitive. Most romance readers are mass market purchasers although the new readers coming in to the market after Fifty Shades are probably not.

There’s an interesting concept called anchoring. Anchoring is the tendency of humans to rely on the first piece of information offered. In economic terms, anchoring means that the first price a consumer encounters for widget A is likely the price that the consumer believes she should always pay for widget A.  (Widget is an official economic term. No lie.)

When the ebook market was doubling every three months in the period between 2011 and 2013, experts told publishers that if they could raise the ebook price, the anchor for those incoming customers would be different (read: higher) than the existing prices set by Amazon.  The agency price model was designed to raise the anchoring price and to some extent, I think that they were successful for the high end books.

The problem was that while the traditional publishers were trying to elevate prices on the high end of the spectrum, self publishers were attempting to grow their own market share and doing it with largely lower priced goods. For established hardcover authors and other genres that are hardcover heavy like thrillers, literature and science fiction, the inroads made by self publishers on the low end were not significant. But for romance, where the most price sensitive purchasers were, the lowered indie prices presented a perfectly acceptable substitute.  (In economic terms, a substitute is a good that the consumer purchases in place of a higher priced good. A complementary good is what an ebook reader would be to an ebook)

Part of the reason that romance readers were so resistant to the higher priced Agency goods were that ebooks have lower value. There’s no resale (used bookstore); there’s no trade (paperbackswap); there’s no lend (friend to friend).  The reduced utility of the ebook decreased the value. That’s another anchor to the digital reader.

Other anchors include encountering lower value goods meaning that the early digital books were rife with scan errors. Random House was one of the worst offenders of scanning, converting, but not proofing the end result in its rush to push out legitimate digital editions of their backlist. Pirates were providing better, more professionally produced editions.  And early self published books also were rife with terrible covers, hideous grammar, and bad storytelling.

Overall, the digital book had an anchor to the reader of having less value. (Value is different than price, but can be related. Economic value is what a consumer is willing to forego in other goods. So in my hardcover terms, I valued certain authors enough to forego other goods).

While price may be fluctuating at the higher ends for non substitutable goods, it’s settling at the $0-$4.99 range for many romance readers. A non substitutable good is an auto buy author who you buy at any price. Nalini Singh and Meljean Brook are to non substitutable authors for me. JR Ward or Nora Roberts are non substitutable authors for other readers. Most authors to readers are NOT non substitutable. Meaning that a reader will wait for the price to decline or obtain the book through a lend/trade in order to read.

This is the long way of saying that books in excess of $5.99 or so become problematic in ways that lower priced books are not. I recently purchased Elle Aycart’s Deep Down. At $7.99, this book requires a reader to forego at least one, if not more, other book.  John Locke famously said that when he priced his books at $.99, other books had to be ten times better to beat him out. You certainly see this played out in the reviews at Amazon where reviewers/readers will say that for a 99c read, they were willing overlook editing issues or that at $3.99 the book was three stars, but may have been 4 stars if it was $.99.

When I recommended this book via email to a couple of reader friends, both emailed me back with exclamations over the cost which made me re-evaluate my recommendation. I provided more  detailed thoughts and some caveats when I replied.

To some extent the base value of a romance book has become $3.99 for me. A higher price and I’m wondering why the author thinks her work is so much better than every one else. And yes, I know that Elle Aycart publishes with LooseId and it’s LooseId’s practice to price everything high. The same with Ellora’s Cave and a few of the m/m publishers. But even knowing that, my gut reaction is to question whether this book is twice as good as a book priced at $3.99 or 6 times as good as the $.99 book.

When I read a book I enjoyed that I got on sale or I paid only $.99 for, I think part of the high at the end isn’t just book related. There’s the “good deal” feeling that is intertwined with the “good book” feeling.

Objectively I know I shouldn’t take price into consideration but I remember when I would recommend a trade paperback book and wincing about the cost. In my reviews, I try to provide enough information for a reader to decide for herself if the book is for her, but I know that a recommendation from any reader friend (and not just me although I assume I’m some of you folks’ reader friend) carries weight.

Ultimately my question is this. Does price affect how you feel about a book? Are you likely to rate a book higher if you paid less for it than if you paid more for it? Would it affect whether you recommended a book?