| Abstract: |
Book markets are characterised by common distribution through competing
bookstores and vertical integration between publishers and bookstore chains,
and in many countries publishers are allowed to set fixed book prices (FBP) in
the bookstores. Under vertical separation, FBP can reduce retail prices when
publishers have sufficiently strong bargaining power, as the elimination of
double marginalisation outweighs the loss of intra-brand competition. We show
that vertical integration fundamentally changes this trade-off. It eliminates
double marginalisation inside the chain, thereby substantially reducing the
scope for FBP to lower retail prices. But since FBP eliminates retail price
differences on the same title, the allocative distortions are reduced when
imposing FBP and consumer welfare and total welfare are no longer aligned. We
find that, in the presence of vertical integration, the introduction of FBP is
less likely to benefit consumers and more likely to benefit publishers than in
an industry with vertical separation. |