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It seems like everyone is doing it—buying an e-reader, that is. The market has grown so much and so fast that 20 million U.S. households own some form of electronic reading device. But to put those e-readers to use, people also have to buy the e-books.

When the e-readers first emerged on the market, the price of e-books was a fraction of the price of hardcover versions—a policy that made sense to consumers. But as e-readers have grown increasingly popular and widespread, the price of e-books has become comparable, and in some cases more expensive than, the price of the hardcover versions.

Much of this change is the result of the fierce competition between the Kindle and the iPad. To avoid a situation in which iPad users continually were reminded of Amazon, through their use of the Kindle store, Apple encouraged book publishers to fix their prices. Thus, whether they bought from Amazon or the iBook store, consumers would pay the same price. When the top five publishers agreed, the retail price of e-books jumped. Even Amazon could no longer discount their prices. Hardcover books suffer from no such mandate though, so brick-and-mortar retailers discount as much as they want to get books off the shelves.

The implications for the e-book market appear worrisome. If consumers have to pay full prices for the latest novel, they also will be forced to be more cautious and think carefully about which books they really want to buy, rather than grabbing a quick download with little consideration. Publishers argue though that the fixed retail prices actually benefit e-book sellers, because they guarantee a better profit margin.

Even with higher e-book retail prices, publishers are making less money. They formerly received a specific wholesale price on all e-books and hardcover books. If the retailer discounted the books, it took the loss, with no impact on the publisher. Current agreements instead give the publisher 70 percent of the e-book price, while the retailer takes 30 percent. This pricing setup works out better for retailers, at the expense of publishers. And while profits climb, consumers start to wonder if the electronic file they just downloaded really is worth the same as a book in the hand.

Discussion Questions:

1. Do higher e-book prices affect your decision to purchase books?

2. What kind of pricing strategy does it appear the e-book market has used?

Jeffrey A. Trachtenberg, “E-Book Readers Face Sticker Shock,” The Wall Street Journal, December 15, 2011.