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%
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:
- I have trouble knowing which book to pick;
- 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.
*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.