RudeVC: Don’t judge every regulation by its cover

Feb 4, 2014
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amazon-frownLast month the French parliament voted in favor of a new law regulating the discounts allowed by book merchants. Sponsored by French Minister of Culture, Aurélie Filippetti, the “anti-Amazon law” is aptly nick-named as it set its sights directly on the $150 billion e-commerce giant by prohibiting its practice of combining a 5% price discount with free delivery.

Perhaps Amazon was prophetic when they rescinded their rumored acquisition interest in Vente-Privée in May 2012 in light of France’s regime change.

There are vitriolic arguments on both sides of this book pricing debate, ranging from analogies to resistance of the printing press during the Ottoman Empire to fear-mongering of future monopolistic price-gouging.

Albeit somewhat exaggerated, both claims have some merit. In the U.S., Amazon tilted the playing field against brick-and-mortar retailers by avoiding state sales taxes – completely legal at the time since the company did not have physical locations in most of the states in which it sold products. In high sales tax states like California, this translated into an instant 8~9% discount. Amazon has since supported U.S. legislation for a uniform nationwide sales tax (though I suspect that Amazon calculated that “relenting” made sense now that the company needed to open up distribution centers in most states in order to offer accelerated delivery times).

On the other hand, the Luddite reflex to resist disruption and protect inefficient incumbent industries finds fertile ground among French politicians these days (cue Arnaud Montebourg’s clumsy defense of the anti-Uber law at LeWeb). Why should the government retain the right to fix book prices ?

It’s easy to lump the ‘anti-Amazon’ and ‘anti-Uber‘ laws together in joint condemnation; however, I submit that this would miss a few crucial differences.

First, in contrast with France’s taxi sector, it’s hard to argue with a straight face that retail bookselling is a woefully inefficient incumbent industry. True, residents in rural areas need to drive into town to buy a book. They may indeed need to wait a week for their selection to arrive too, since the town bookshop does not possess endless stocks. But these same country-dwellers have to drive into town for the bulk of their supplies anyway, As for the lack of instant availability, Amazon has cleverly instilled in consumers a craving for immediacy where it does not necessarily reflect a basic need.

Market Externalities

What I like most about Madame Filippetti’s loi sur l’encadrement de la vente de livres en ligne, however, is that it places the spotlight on an important debate which is often overlooked: market externalities. That’s the academic term for hidden costs, where unregulated market prices do not reflect the full social costs of a transaction.

The presence of local bookstores arguably bring value to a neighborhood. I certainly believe they do. Some of my favorite hangouts such as Daikanyama in Tokyo, Dolores Park in San Francisco, and Broadway market in London offer bookshops which contribute to a fantastic neighborhood vibe. There is thus a cost to the community that is not reflected in market forces when a neighborhood’s bookshops shutter.

As Déborah Dupont, owner of the Librairie Gourmande in Paris’ 2eme arrondissement (which also happens to manage a substantial e-commerce sales volume) pointed out: a local bookstore pays rent in the town center, whereas Amazon builds its warehouses in tax-favored zones. A bookstore employs qualified salespeople, not mere manual laborers for stocking and packing. Finally, an independent bookseller pays local taxes and does not possess teams of experts crafting international tax optimisation schemes (Euromonitor estimates Amazon revenues in France at 1.3B€ in 2011, whereas Amazon declared only 110M€, with a taxable income of 5M€).

I applaud the efforts of local councilpeople like Jacques Boutault, mayor of the 2eme arrondissement, who values commerce de proximité. He has employed his authorities such as right of first refusal and regulation to mitigate the demise of local neighborhood merchants by restricting the arrival of international chains in local pedestrian streets. Every few years at the upper end of the historic market street Rue Montorgueil, McDonalds allegedly attempts to open a branch. Or recently a large corporation attempted to encroach on a small park in the Opéra-Comique neighborhood in its building renovation project. Mr. Boutault’s intervention preserved the tranquillity and local commerce of the neighborhoods in both instances.

In my view, bookshops are like restaurants: local matters.