Companies nowadays are facing a major challenge to cut costs, remain efficient, and maintain customer loyalty and retention simultaneously. Not only the pricing power of internet and discount retailers are growing, but the recent Great Recession also make consumers pay close attention to their spending habit and everybody seems to be going to shopping with pay-less state of mind. Unfortunately for sellers, price can be a double-edge sword: it can be an excellent strategic weapon in a highly competitive market while it can also destroy profits and hurt consumers at the same time.
One such situation was apparent in the recent price war in books between Walmart and Amazon.com. In this paper, I would like to argue that the price cutting strategy that Walmart and Amazon.com executed was not only contradicting the stakeholder theory but also violating the three categorical imperatives of Kantian business ethic. On the other hand, Walmart and Amazon.com did not show any intention to monopolize the book industry and thus it is debatable what kind of obligation the two firms owe to its competitors. Therefore, the situation presents an ethical dilemma that is worth exploring.
Currently, online sales account for only 4-5 % of overall U.S retail sales but within the next decade, the online sales are expected to soar to an estimated 15 percent of total US retail sales. During last year, Amazon.com captured the most on online sales; it attracts more than 70 million visitors to its website monthly and one analyst estimated that more than half of online consumer start their search at Amazon.com (Armstrong & Kotler 2011). Realizing the great potential of online retailing, Walmart has finally decided to take the battle online, by using its best weapon in its arsenal: low price (Armstrong & Kotlet 2011).
The price cutting began on Thursday, October 15, 2009 when WalMart announced that it would take pre-orders for 10 yet-to-be-published hardcovers _ such as Sarah Palin’s memoir, “Going Rogue”; John Grisham’s short-story collection, “Ford County”; Stephen King’s “Under the Dome” among others_ for $10 apiece on its Web site, Walmart.com. In response, Amazon quietly began cutting the prices of the same titles to the same $10 price later that day. Wal-Mart again lowered the prices to $9. Amazon quickly matched the $9 price, and Wal-Mart lowered the prices again, to $8.99, by late afternoon (Rich 2009).
Both Wal-Mart and Amazon made a loss on the sales of the discounted titles because publishers generally charge retailers 50 percent of the list price and the discounted prices represented a 59-74 percent reduction off the list price (Amgstrong & Kotler 2011). David Heupel, a senior equity portfolio manager at Thirvent Financial in Minneapolis said that the main purpose of the book discount was to draw traffic to Walmart and Amazon.com websites and tempt shoppers to buy a higher margin product along with the books (Gregory 2009).
As a result of the price cuts, share of consumer visit to Walmart’s website soared in the next few days from 4% on October 14 to 46% to October 16. The purchase rate of the discounted books in that week also increased sharply to 20%, up from usual 2% purchase rate of online site visit for all books. On the other hand, Amazon.com also seemed to capture its visitors back the next day by dropping prices. In the next few days, the share of Amazon.com visitors increased sharply back and the purchase rate of discounted books also increased to 16% from usual 4% purchase rate (Appendix IV) (Arbesman 2009).
Amazon founder and chief executive Jeff Bezos later said Amazon’s profit soared 68%, to $199 million, for the quarter that ended Sept. 30, 2009 (Gregory 2009). And Amazon.com’s profit margin in 2009 was record highest at 3.68% since 2005 (Appendix II). He always maintained that “there’s plenty of room for all competitors in the big world of retailing” but Paul Vazquez, CEO of e-commerce Walmart.com, said, “Even in books, we kept going until we were the low-priced leader, and we will do that in every category we need to. Offering the low price is in our DNA” (Amstrong & Kotler 2011).
The impact on the book industry from the reckless price-cutting was massive. In the long run, the reckless price-cutting was doing more damage than good. Price wars can turn whole product categories into unattractive, low margin commodities, and lower the perceived value (Amgstrong & Kotler 2011). The publishing industry was severely hit by the online price war. According to the Bureau of Labor statistics, the change in producer’s prices dropped to -4% in 2009. In the same period the retail sales growth in the bookstores dropped to -1% (Appendix I).
According to the NetAdvantage industry survey, Azmazon used a “wholesale model” with publishers for digital book sales, and set a price of $9.99 on digital titles for its Kindle. The company is taking a loss and use attractive sales prices to entice consumers to buy its Kindle e-reader (Appendix III). The publishers are particularly concerned because Amazon was gaining significant market power due to aggressive retail pricing and would eventually push for a lower wholesale pricing, thereby weakening the pricing power of physical books (Agnese 2010).
Publishers are also voicing discontent because the price of the book is usually listed on the front cover, and Walmart and Amazon were taking the loss to gain more market share on the Internet in the book industry. This kind of predatory pricing, in which a product is sold below cost, was not only deteriorating the customer’s perception of the book industry, but also giving less incentive for the writers and publishers to publish a work if the book actually is not making profit. Small bookstores and publishers are at risk of losing business if people are starting to expect pay less for books. American Booksellers Association, ABA board of directors also sent a letter to the department of justice to investigate the bestsellers price war.
“What’s so troubling in the current situation is that none of the companies involved are engaged primarily in the sale of books. They’re using our most important products — mega bestsellers, which, ironically, are the most expensive books for publishers to bring to market — as a loss leader to attract customers to buy other, more profitable merchandise. The entire book industry is in danger of becoming collateral damage in this war” (ABA board of directors 2009).
One interesting argument was that books do not constitute a huge chunk of both Walmart and Amazon’s business portfolio. For this reason, many publishers and bookstore owners were worried that Walmart and Amazon.com were turning books into an unattractive merchandise and capture market share with low price tactics.
Ethically speaking, I would like to argue that the business practice Walmart and Amazon.com executed was unethical for several reasons. On the other hand, there are also several reasons why the practice is still ethically fair.
First, the practice violated stakeholder theory. According to business philosopher Edward Freeman, “the business should be accountable to others and it is precisely some of these “others”, who can affect or be affected by the firm, to whom some accountability is owed” (Freeman 2000). Walmart and Amazon.com’s decision to engage in price war incurred a collateral damage on the book values and hampered business opportunities of book publishers and small bookstore owners. Since publishers are suppliers to the giant retailers, pursing a business strategy that hurt a stakeholder in their supply chain directly violates the stakeholder theory. On the other hand, Walmart and Amazon.com could keep out small bookstores in the long run by selling books below cost, and monopolize in the book sector. However, doing so would hamper open and free competition in the market place in long term, and eventually harm consumers, the primary stakeholders in retail business.
“A monopolist, however, can increase profits by raising prices above competitive levels. Higher prices may mean more profits for the monopolist, but it means fewer goods and services for consumers. Worse, a dollar’s worth of goods and services lost by consumers will translate into something less than a dollar increase in profits for the monopolist. In other words, society as whole becomes poorer when a business monopolizes a market” (Hawker 2003).
Therefore, the total welfare of the society would be less for a market with monopoly in it when compared to a free and open market system according to Hawker. For this reason, monopoly can be considered unethical according to utilitarian ethics.
Second, the practice also violated all three required categorical imperatives of Kantian ethic. According to Bowie, the three imperatives of Kantian ethic can be summarized as follow:
- Act only on maxims in which you can will to be universal laws of nature.
- Always treat the humanity in a person as an end, and never as a means merely.
- Act as if you were a member of an ideal kingdom of ends in which you were both subject and sovereign at the same time (Bowie 2007).
The practice of cutting prices and taking loss can’t be made universal because not all stores can continually sell below cost. In doing so, they were driving small bookstores out of business and causing financial problems to store owners and publishers. According to Norman Hawker, a research fellow from the American Antitrust institute, “competitors have the right to compete, and it is unethical to ignore this right in the quest for profit maximization just as it is unethical for one athlete to exclude another from participation in the game” (Hawker 2003). Hence, Walmart and Amazon should not treat victimizing publishers and competitors as a mean maximize their market share in online retailing sector. Furthermore, the giant retailers also had a lot of market power to negotiate lower price from the suppliers and gain profit by economy of scales, but the losses on the books were passed to the publishers. This directly violates the third imperative because publishers, being a stakeholder in retail supply chain, should be treated with respect and the giant retailers should not diminish their profit margin.
On the other hand, Kantian ethic does not state explicitly on what obligations a business legitimately owes to its competitors. Monopolizing in a market by using predatory pricing, in which a seller sells a product below cost to minimize competition violates antitrust law. But this exclusionary conduct was attacked because it harmed economic efficiency, not because exclusion of rivals was a harm in and of itself. In Walmart Vs Amazon case, Both retailers not only maintained that the price-cutting was only a promotion, they also didn’t cut prices on all the books, just a few of them. And both giant retailers did not show any intent on making profit by raising book prices higher after the incident; they made profit by selling something else along with the books. For these reason, the ABA’s claim that Walmart and Amazon.com destroyed free and competitive market and violated antitrust law did not make sense.
In addition, Apple’s iPad and Amazon’s Kindle electronic readers were also gaining popularity in the market at the same time and the cost of producing electronic version of a book was much lower than publishing a physical paperback. Amazon.com could sell an e-book on its e-reader for $9.99, and still make a profit due to the lower production cost. The impact on the publishing industry was more likely due to a better technology in the form of e-readers rather than book price war. Moreover, deontological ethic requires a motive from the part of two giant retailers to deprive small bookstores the right to compete in the market for the price-cutting to be deemed unethical. In this case, Walmart and Amazon.com were fighting each other to gain more market share on the Internet, but did not necessarily tried to monopolize in the book industry. Hence, their conduct could not be considered unethical.
With the emergence of the new e-reader technology, the era of printing a book on paper was coming to an end and the industry was open to new market opportunities in which publishers could reach to consumers at a lower cost. Being entrepreneurs in this new market, Apple and Amazon have monopolistic power to influence the price of an e-book. But Kant’s third imperative requires Apple and Amazon to “act as if they were a member of an ideal kingdom of ends in which they were both subject and sovereign at the same time”. In this situation, how could Apple and Amazon create an ethically responsible market medium in which all the stakeholders, including competitors, conduct business without decreasing the overall efficiency of the market system?
Appendix I: Impact on book industry
Source : Hoovers financials for book publishers and bookstores industries
Amazon.com Net profit per year
Major Take away point from here: Amazon.com’s profit is the greatest in 2009, coinciding with the price war and decline in book industry
Excerpt from NetAdvantage industry trend report
Initially, Amazon had been using a “wholesale model” with publishers for digital book sales. While publishers were to receive higher wholesale payments (in line with what booksellers typically pay for print editions) under Amazon’s original deal than under the iPad arrangement, Amazon controlled the final selling price of the books it sold. Under this arrangement, Amazon had set a price of $9.99 on digital titles for its Kindle, taking a loss on the difference between the wholesale and the retail price. The company planned to use the attractive sales prices to entice consumers to purchase its Kindle e-reader, essentially subsidizing losses on books with profits from e-reader sales.
While Amazon’s agreement is more likely to result in greater growth in volumes sold initially (due to more aggressive retail pricing), publishers were concerned that if Amazon gained significant market power, it would eventually push for (and receive) lower wholesale pricing. Meanwhile, publishers feared the lower sales prices were weakening pricing power of physical books, which account for the vast majority of current sales and sell at significantly higher prices than digital books. Therefore, publishers welcomed the arrival of Apple and its competing product as it allowed them to gain greater leverage in future pricing negotiations with Amazon. Following the launch of Apple’s iPad, Amazon was forced to re-negotiate with book publishers due to the risk they might withhold books.
ABA Board of Directors. “Book Selling this Week.” ABA Asks Department of Justice to Investigate Bestseller Price Wars. American Booksellers Association, 22 2009. Web. 6 Nov 2012.
Agnese, Joseph. “Publishing & Advertising.” CURRENT ENVIRONMENT Electronic readers offer opportunity as advertising market fragments. NetAdvantage, 27 2010. Web. 6 Nov 2012. <http://www.netadvantage.standardpoor.com/NASApp/NetAdvantage/showIndustrySurvey.do?code=pub&date=/pub_0510/pub_0510.htm>.
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Hawker, Norman. “Antitrust Has an Ethical Component that Has Not Been Fully Understood or Developed, AAI Research Fellow Norman Hawker Tells NAAG Antitrust Task Force at Oct. 1 Meeting in Washington..” Antitrust Task Force of the National Association of Attorneys General meeting. AAI. DC., Washington. 1 Oct 2003.
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