Evidence that e-books aren't price elastic

When Amazon called authors to arms against Hachette at the beginning of August, its main argument was that reducing e-book prices would increase total revenue:

Moreover, e-books are highly price elastic. This means that when the price goes down, customers buy much more. We've quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000. 

I wasn't convinced that e-books are price elastic. People working for traditional publishers, short-sighted as they are, have been in the book industry for decades. If demand for e-books was elastic, they would knew this and they wouldn't resist Amazon's request of lowering prices.

I looked for recent empirical evidence on price elasticity and found this nice paper written by Imke Reimers and Joel Waldfogel. They calculated price elasticity for e-books and traditional books sold by Amazon between 2012 and 2013. They found that price elasticity is, in absolute value:

• between .39 and .53 for non-self-published e-books
• between .08 and .22 for self-published e-books
• between .88 and 1.23 for physical books

What does this mean in terms of revenue? Let us take the example made by Amazon. The price drops from $14.99 to $9.99, which is a 33.3% decrease. If this is the price of an e-book that isn't self-published, and assuming that price elasticity is at the top of the range (.53), the number of books sold increases by .333 * .53 = 17.7%.

If customers would buy 100,000 copies of the e-book at $14.99, then they would buy 117,700 copies at $9.99. Not 174,000, as Amazon Books Team wrote in the letter. Total revenue would drop from $1,499,000 ($14.99 * 100,000) to $ 1,175,823 ($9.99 * 117,700). So, it is much better for publishers and for authors (who earn a percentage of the total revenue) that the price stays at $14.99.

Reimers and Waldfogel mention an interview in which Jeff Bezos adamantly says that price elasticity studies suggest that Amazon's prices are too low. Just what Reimers and Waldfogel found out and the opposite of what his team stated. You can see the video of interview here; the relevant passage is (emphasis added):

Jeff Bezos: In the long run, if you take care of customers, that is taking care of shareholders. We do price elasticity studies. And every time the math tells us to raise prices. 

Charlie Rose: But why don’t you do it? 

Jeff Bezos: Because doing so would erode trust. And that erosion of trust would cost us much more in the long term.

A different and common explanation of Amazon's low-price policy is that it uses books and other product categories as loss leaders. Another is that Amazon's prices are predatory, that is they are intended to put rivals out of business or to allow Amazon to dominate the book market in a delicate stage of transition from old to new technologies. This is a legitimate strategy, although I see some possible anti-trust issues in it. However, when Amazon tries to convince authors that e-books are price elastic it simply isn't honest.