GAPP and book price wars

Shoppers at Zhongguancun's Disanji Bookstore were greeted with the following message over the weekend:

Important notice: In accordance with a memo from GAPP, Disanji's promotion offering a 30% discount on all inventory will end on 15 October.

Why does GAPP care about a sales promotion at a local, independently-owned bookstore? Harmonious and smooth economic development, of course.

For the last month and a half, Disanji has been locked in a price war with nearby Zhongguancun Book Building, and according to Tan Wen, vice-director of the circulation department at GAPP, price wars are detrimental to publishing and distribution. This particular price war is particularly threatening since several hundred small booksellers occupy nearby Haidian Book City, and the area around Peking and Tsinghua Universities is also home to several other major independent shops, all of which have been caught in the crossfire.

Our story so far:

· 15 July - Disanji Bookstore opens in Zhongguancun, Beijing. To welcome its new competitor, the Zhongguancun Book Building offers a 25% discount on its entire inventory for a period of one month.
· 16 August - The 25%-off promotion is extended indefinitely.
· 21 August - ZBB sets 15 October as the conclusion of its campaign. Disanji and smaller bookstores begin to complain.
· 1 September - Disanji responds by cutting prices 30% on its entire stock.
· 7 September - Dangdang, the largest domestic online book dealer, offers 31% off 300,000 items.
· 20 September - 49 mid- and small-sized booksellers release a signed agreement to stay out of the price war. Dangdang halts its promotion.
· 13 October - GAPP steps in and advises Disanji and ZBB to halt their discount programs on the 15th.
· 17 October - ZBB announces a new, one-year 20% discount and double points program on everything but textbooks and imports. This applies only to members; membership is open to anyone who buys a book or pays a 1-yuan processing fee.
· Same day - Disanji resumes 30% discounts on 96% of its inventory (minus textbooks)

GAPP's getting ignored here. On the 16th, Disanji general manager Li Song said:

Although Disanji has returned to original prices, ZBB continued discounting. One of our people went over there every hour to buy a book, and through 1:42 they were still marking things down to 75%. And the date on the receipt was the 15th.

Moving to a membership system - even one that is not at all exclusive - and eliminating discounts on textbooks to give other bookstores some profit room, might be sufficient to placate GAPP for the time being.

The affair also highlights the problem of transparency within China's book sector. Disanji moved 20 million yuan worth of books (according to cover price) during its month-and-a-half promotion, while ZZB sold 60 million yuan worth over three months. Both Disanji and ZBB originally claimed that their campaigns were profitable despite the deep discounts, something disputed by the small booksellers' alliance, and Disanji president Ouyang Xu recently said that his store would have to write off the campaign as advertising since it brought no direct economic benefit.

Consumers were generally delighted by the price war, since they have long considered book prices far too high; recent GAPP figures show an average annual price increase of 20% since the 1980s; average prices in 2005 were 30-50% higher than the year before. And in both 2004 and 2005, book publishing was listed among the top ten most lucrative industries, alongside baddies like real estate, patent medicines, and training centers. But industry insiders take a different view, and a recent survey found that 80% of dealers and sellers felt that book prices were actually too low. (See this piece from last year for more insight into the situation.)

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There are currently 3 Comments for GAPP and book price wars.

Comments on GAPP and book price wars

Gosh, gee whiz, so there are still some remnants of Communism there after all.

Very interesting post. I was just writing a report on this precise subject concerning the PRC (as part as a comparative study of the book business between the PRC and other countries in particular the USA). The previous comment is funny because we are here really far from communism. The PRC/GAPP are up to now rather liberal compared to most other developed countries, apart the UK and the USA. The little fights in the Haidian book street area are really far from the big fights in most other countries during the last 2 decades, for example within the European Commission with its member states in the 90's or in S Korea 3-4 years ago with booksellers demonstrating in the streets. Amateurish one may say, yes, but a communist or totalitarian attitude, no, not really. Besides, I don't agree with the 20% growth on book prices in the PRC in these articles, I may agree with a 9-10% for the last 5 years, which is already very high compared to inflation (and this growth is calculated on the cover prices of the full output of publishers; it doesn't consider discounts given later on). In fact roughly Chinese publishers compensated a 5% decline of the book market by a 10% growth in prices. There is no regulations in the PRC concerning list price maintenance and discounts along the supply chain including retail. Nevertheless systematic discounts on books are rather low in the PRC compared to the UK or the USA (retail to individuals: e.g. dangdang 20%, Carrefour 5%, bookmarkets 10-15%)

Concerning other countries, a few details are given below.
Quote "For more than thirty years a debate has raged within Europe: should book prices be fixed or free? Fixed prices are often also called Retail Price Maintenance (RPM) and mean the publisher fixes the price of a book; bookshops and other retailers are not allowed to sell it at any other price. Free prices mean bookshops and other retailers may sell the book at whatever price they choose. The background to this fierce debate is that, in general, the European Union (EU) favors free competition and its member states have in place a competition law that aims at encouraging free prices on all goods, discouraging/disallowing price cartels. In many countries, mainly on the basis of cultural arguments, the book trade has been granted an exemption from this principle of free competition..."

RPM (retail or resale price maintenance) for books has been a very hot subject, in most European countries (between the EC and its member states), Canada, Australia, Japan in the 90's and in S Korea more recently. All these countries mentioned had, or have been trying to have RPM in the past for books (and for a few other cultural products such as press). Often their governments, or otherwise (small) retailers associations with most publishers, had regulations or agreements implementing RPM in order to preserve the small traditional companies all along the book supply chain, in particular because of the specificity of these "cultural products" (all these governments usually consider that press and books are special products and should not be purely left to market forces). They people against RPM are usually in all countries large or online retailers and a few large publishers, supported in Europe by the EC commission. The UK abandoned its Net Book Agreement (NBA) under the pressure of a few large companies, but France still has its 1981 law where retailers cannot give a discount on books lower than 5%, and Germany has a similar RPM. In S Korea the minimum discount for books is by law 10-15%. Japan still prohibit new books from being discounted at all, through specific provisions in its Antimonopoly law.

Abandoning the RPM may have a significant impact. In the UK because of the abandon of the NBA in the 1995, today chains like Tesco are selling books with high discounts on cover prices (e.g. 30-40%), some publishers print some of their books in the PRC in order to afford these discounts, and many specialized bookstore chains, including WHS, are in trouble (WHS was the largest world bookseller still a few years ago, but had to sell its all its US and Asian bookstores to cover its losses in 2004-2005) .

"in the spring of 2002, the European Parliament submitted recommendations to the Commission on the drawing up of a directive for the protection of national retail price maintenance systems. It is recommended that every EU member state should be entitled to introduce, maintain or allow retail price maintenance systems for books. At present, most member states have some kind of legal provision, which does not apply, however, to the sale of books from other countries. The current proposal sets out to prevent an erosion of the retail price maintenance system for books by online trading with other countries."

In the US, contrarily to the EC and Japan, vertical price-fixing (=RPM) has been condemned since 1911 by the Supreme Court, but it seems that the FTC or other enforcement authorities, or the judiciary, have turned a blind eye on the press markets in particular, and that RPM remains a rather controversial subject, with regular court cases with variable results still in recent years.
Concerning books nowadays online stores such as Amazon, B&N, and Wal-Mart offer a minimum of 30% discount, going up to 80% discount sometimes. By consequence, small independent book retailers are disappearing rapidly. Nevertheless, books having traditionally low margins and a short life cycle as hard covers, the whole book industry, starting with publishers, seem to try to avoid price wars at retail level.
This text below is an abstract concerning the US of the very interesting OECD paper presenting the situation in most developed countries worldwide and presenting the debates within the EC commission on the subject
"There is much disagreement about the extent to which each of these anticompetitive or procompetitive theories underlies the actual use of vertical price fixing in the marketplace. Each theory has its critics. The controversy in turn has resulted in different policy prescriptions for vertical price fixing -- per se illegal, rule of reason standard, and per se legal. In the meantime, the rule of per se illegality, though circumscribed in its application by the courts, continues to be the legal standard in the US."

It's interesting to note that, Amazon's Chinese subsidiary, declined to take part in this particular price war. Wang Hanhua, the Joyo president, said that he's more interested in focusing on customers than competing directly with Dangdang and other bookstores. I'm not sure how he intends to do that, but there you go.

It's also been said that if another price war were to take place, Joyo might be forced to participate to keep its book-buying customers.

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