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A Lawsuit on the Books
The Department of Justice has filed an antitrust suit to block the merger of two of the US's largest book publishers.
Last summer the Biden administration announced an executive order aimed at improving competition in the economy and then filed a suit a few months later to block the merger of two major book publishers in the US: Penguin Random House and Simon & Shuster. That trial begins today as the Department of Justice attempts to block the proposed $2.2 billion merger on the grounds that it would violate antitrust policies, raise book prices for consumers, and decrease the amount paid to authors.
The publishing industry in the US, broadly, includes everything from textbooks to children’s books. The industry earns about $33 billion in revenue each year with about 62% of the market comprised of textbooks and technical/scholarly books. The DOJ lawsuit, however, focuses on publishers of adult trade books, which are aimed at much broader audiences:
There are close to 2,000 different book publishers in the United States, but the market for top sellers is dominated by 5 large firms. These five companies (Penguin Random House, Simon & Shuster, Hachette, Macmillan, and HarperCollins) comprise close to 90% of the market for anticipated top-selling books according to the DOJ’s filing. These are the primary publishers of the books you find listed on The New York Times Best Seller lists. The DOJ argues that allowing this merger would violate antitrust laws:
The proposed merger would further increase consolidation in this concentrated industry, make the biggest player even bigger, and likely increase coordination in an industry with a history of coordination among the major publishers.
Coordination is a major concern in oligopolistic markets in which a few firms hold a large share of the market. Fewer major companies make coordination easier, which results in markets that look like monopolies. The DOJ relies on the Herfindahl–Hirschman Index to measure the level of industry concentration for its antitrust lawsuits, but another popular measure involves summing the market share of the four largest firms in the industry. Other significantly concentrated industries, based on the sales of the top four firms, include:
Silver ore mining (100%)
Securities and commodity exchanges (98.8%)
Iron ore mining (98.4%)
Deep sea passenger transportation (96.9%)
Commuter rail systems (96.7%)
Home centers (96.3%)
Guided missile and space vehicle propulsion unit and propulsion unit parts manufacturing (96.0%)
All other pipeline transportation (95.7%)
Warehouse clubs and supercenters (94.4%)
Couriers and express delivery services (91.2%)
This form of imperfect competition is characterized by significant barriers to entry that keep other companies from competing with the incumbents. The primary barrier that keeps new firms from easily entering the market is caused by incredibly high upfront costs that can only really be recovered if the firm sells a large number of products. For book publishers, the fixed costs of producing a best-seller (namely production facilities and publishing advances) can be incredibly high compared to companies that publish books targeted toward more niche audiences.
The Big 5 firms benefit from increasing returns to scale because they can spread those fixed costs over millions of copies instead of hundreds or thousands of copies. A smaller publisher either can’t afford to participate from the start or doesn’t have the production facilities to produce millions of copies. At first blush, it may seem beneficial for an industry to be dominated by a single company (or a few companies) that can produce a large volume of products at lower average costs than markets with more firms. These “natural monopolies” could pass on those cost savings to customers, but there’s no guarantee that they would. That’s why regulators are concerned about coordination among the remaining competitors.
Fewer companies in a market have two implications on two sides of the market. On the selling side, it gives the remaining major firms more monopoly power to raise the prices of the final product for consumers. Publishers already enjoy some monopoly status when it comes to the publication of original novels thanks to copyright laws, but they still compete with other popular books on bookshelves. Limiting the number of competitors results in more shelf space that can be allocated to the remaining big publishers. If the two companies are allowed to merge, the DOJ estimates that they would represent 49% of the market for the top 100 best-selling print books based on data from NPD BookScan.
On the other side of the market, fewer competitors in markets limit the number of opportunities authors have to publish their work. As the publishing market contracts, it becomes more monopsonistic. Authors of potentially top-selling books submit their proposals to publishers through an auction system in which publishers bid on the right to publish the book. Book advances can be million-dollar deals for some of the most famous authors, but fewer major publishers mean that there are now fewer opportunities for big-time contracts. Monopsonistic labor markets often result in decreased wages compared to more competitive markets in addition to fewer job opportunities for workers, in this case, authors. One of the key witnesses in the DOJ’s case is novelist Stephen King who argues that limiting the number of big-time publishers would also hurt young authors:
The more the big publishers consolidate, the harder it is for indie publishers to survive, and that is where the good writers are currently starting out and learning their chops.
Penguin Random House’s parent company, Bertelsmann, must prove that this merger will benefit consumers and not harm authors. Their main argument is that it will provide Simon & Shuster with access to a larger distribution network and that merging will allow the two firms to reduce duplicative costs and thus allow the company to pay authors more, not less. This case will be a test case to determine the DOJ’s ability to mount more antitrust lawsuits against companies based on how much workers are paid.
There are an estimated 54,900 people employed in the book publishing industry in the United States [US Bureau of Labor Statistics]
Bertelsmann is the largest company in the publishing industry in the US and represents 8.87% of the entire publishing industry’s revenue [IBISWorld]
Penguin Random House releases about 2,000 books a year while Simon & Shuster releases roughly 1,000 titles each year [The New York Times]
23% of US adults say they haven't read a book, in any format, in the past 12 months [Pew Research Center]