Google and Market Failure: Think Wal-Mart, Not Microsoft

British Library by Steve Cadman (2007) CC-BY-SA

As in just about all the coverage I’ve seen of the Google Books deal with the Author’s Guild,
Friday’s NY Times story raises the familiar specter of Google-as-monopolist. This continues the longer-term trend of tarring the Mountain View, CA based firm with the same brush as it’s older, bigger, and more widely-distrusted rival from Redmond, WA. I’d like to point out a problem with this storyline that stems from the nature of the particular terms of the agreement.

In my mind, the nastiest and most inexplicable aspect of this agreement is not the bare fact that Google is about to buy the rights to a massive proportion of the world’s books. That has been a long time coming and is not a surprise. As many have pointed out, it could, in principle, lead to price manipulations when Google turns around to sell access back to libraries. However, I suspect we won’t see anything like that. Google’s lawyers aren’t stupid – they know that the Justice Department will be hot on their trail as soon as they get the faintest whiff of something like this. They will not want to let this happen if they can help it.

No, as I understand it, the truly nefarious part of the agreement preserves Google’s right to pay the same rate for licenses that publishers might offer to a hypothetical Google competitor in the future. This means that Google has effectively cornered the market for buying digital books – putting it in a position to shape the market to its liking in a way that looks much less evil to consumers.

The likely outcome is that buyers of access to Google Books won’t necessarily pay a premium price as they would with a typical monopolist. Instead, it is the organizations that sell rights to the books to Google in the first place who will be paid less than they would in a more competitive retail market.

Back in the 1930’s, the industrial economist Joan Robinson termed this kind of market failure a “monopsony.” The ideal typical form of monopsony arises in situations where the market for a particular good only has one buyer. This monopsonistic buyer is able to manipulate prices in much the same way that a monopolistic vendor would. The result is a market where the pricing mechanism fails to reflect supply and demand, perpetuating distortions and the breakdown of all the nice side effects that come along with a working market such as quality control, incentives to innovate, and adequate compensation for the producers of the goods in question.

Monopsony makes for less exciting headlines because it does not threaten consumers. Monopsonistic retailers slowly suck profits from their suppliers, forcing them to accede to their demands through the threat of massive revenue losses. The paradigmatic examle of a monopsonist in recent years has been Wal-Mart. The giant firm gets low prices for consumers by manipulating the prices of vendors (and by systematically undermining the labor market, but that’s another story). As soon as Wal Mart threatens to stop carrying their product, a seller has little bargaining leverage since they cannot afford to lose such a massive customer.

At least one person (who I don’t feel comfortable naming or quoting directly without permission) in the Berkman Center’s cyberlaw clinic assures me that the terms of Google’s agreement with the Author’s Guild are not totally clear on this point. Nevertheless, the fact that such an interpretation is not inconsistent with the text of the agreement should be reason enough to worry anyone who reads, writes, buys, or sells books.