Deseret Book = Monopoly?

Here’s my rough and dirty antitrust law analysis of the situation.

If a party sued DB alleging monopolization under federal antitrust law, it would have to prove that DB: (1) possessed monopoly power in the relevant market, (2) willfully acquired or maintained that power through exclusionary conduct and (3) caused antitrust injury. That sentence contains three terms of art about which reams have been written. Some quick (although hopelessly incomplete) definitions of these terms:

Antitrust injury: injury to competition in the relevant market, which generally means less selection, higher prices, etc. This is distinct from injury to particular competitors, because particular competitors may be harmed in ways that help consumers. Both sides of an antitrust case will present competing economic models to demonstrate why the alleged actions are pro or anti competitive.

Exclusionary conduct: also called predatory, anticompetitive, and abusive conduct in antitrust jurisprudence. A broad concept that means different things according to context–generally, the specific harmful actions taken by the monopolist.

Monopoly power: The power to control prices or exclude competition. This can be proved directly with evidence of restricted output and supracompetitive prices. This can also be proved circumstantially. To do so, a plaintiff must: (1) define the relevant market, (2) show that the defendant owns a dominant share of that market, and (3) show that there are significant barriers to entry and show that existing competitors lack the capacity to increase their output in the short run. Unfortunately, I just introduced three more thorny terms of art:

Define the Relevant Market: The relevant market consists of two components: product market and geographic market. The product market is the pool of goods or services that enjoy reasonable interchangeability of use and cross-elasticity of demand. Or, in other words, the group or groups of sellers or producers who have actual or potential ability to deprive each other of significant levels of business. The geographic market is the area of effective competition where buyers can turn for alternate sources of supply. Both sides of an antitrust case will present competing economic models that attempt to define the relevant market.

Dominant Market Share: The alleged monopolist generally must have more than a 50 % market share; there is no hard and fast rule how more than a 50% market share is sufficient.

Significant Barriers to Entry and Lack of Capacity to Increase Output: Barriers to entry are additional long-run costs that were not incurred by DB but would have to be incurred by new entrants, or factors in the market that deter entry while permitting incumbent firms to earn monopoly returns. Lack of capacity to increase output considers whether DB’s competitors could respond to a DB contraction (limiting output and raising prices) by increasing their output.

Anyway, turning to the DB/SBT deal, a key unanswered question is how DB will take advantage of the market share it gained by acquiring SBT. Will selection decrease and prices rise in the market as a whole? Will DB seek to maintain its additional girth or even grow larger by engaging in exclusionary or predatory conduct? (Interesting question even if the DB/SBT deal may render it moot: was DB’s threat to cut off SBT that apparently led to the deal predatory conduct?)

Other key questions may only be answered by complex economic modeling. Going into antitrust litigation, it can be difficult to predict whether action that looks monopolistic on the surface truly is harmful to competition.

Still, some facts are in place that would help an antitrust claim against DB. As far as market power goes, it appears that DB has become particularly dominant in the intermountain west states. Assuming a geographic market limited to the intermountain west, it appears that DB would have well over a 50% market share. Also, as far as barriers to entry are concerned, one in particular stands out: DB’s affiliation with the church and the related perception of official church approval.

In short, DB’s acquisition of SBT may give rise to a legitimate monopolization claim, but it is too early to tell. If I were a publisher or bookseller considering antitrust litigation against DB, I would watch for the impact of the DB/SBT deal on the market in the coming months and years.

18 thoughts on “Deseret Book = Monopoly?”

  1. Considering Barnes and Noble, Borders, and Amazon.com have, as yet, not sold out to DB, I think we are safe from monopolization claims for now…

  2. Matt: Yes, but there may be different antitrust claims for the publishing and bookselling sides. Even if DB competes with major booksellers, there are no publishers of Mormon books comparable to Amazon and its ilk. DB was already the biggest. SBT makes it even bigger.

    Also, (not yet abandoning the possibility of a bookselling claim), the alleged monopolist always argues for the broadest possible market definition. Could a plaintiff make a much narrower market definition (e.g., brick and mortar stores in the intermountain west selling a wide range of Mormon books and kitsch) stick? Stranger things have happened…

  3. Great post! You’ve gone where I feared to tread!

    Do you know if there are other possible claims, beyond monopoly claims, that might apply in this situation? If I remember my business law classes, anti-trust also includes claims like “unfair business practices,” “collusion,” and the like.

  4. Matt, I think that the argument for a narrower market is really quite good. Most LDS products are sold principally in LDS bookstores, and a significant portion (especially rings, art and the “kitsch”) are sold no where else!

    In addition, most LDS stores don’t stock ANY non-LDS products, like Amazon.com, Barnes & noble and the like. And outside the mountain west, other bookstores generally do not carry LDS materials at all — most independent LDS publishers don’t even approach them and often don’t sell through the channels that would make their books available to non-LDS booksellers.

    I’m afraid that the market for LDS materials is quite insulated from the national book market.

  5. Kent: as far as other claims go, DB could conceivably fun afoul of state competition and consumer protection statutes. As with federal antitrust law, DB would have to do more than have a big chunk of market share.

  6. S.P. Bailey said: “Also, as far as barriers to entry are concerned, one in particular stands out: DB’s affiliation with the church and the related perception of official church approval.”

    For this reason, I think any lawsuit against DB would be suicide for the alternative LDS publishers in general. They’d be branded as anti-church. Richard Dutcher threw up his hands and gave up after trying to break back into a market he created, but that got a bad reputation while he was out of action. Imagine trying to sell anything published anywhere BUT Deseret Book after some bright entrepreneur tried suing on behalf of the little guys, and the current barriers to reaching LDS readers will seem mild.

    I think anti-trust laws are important, but trusting (no pun intended) in them is hazardous. Apple Computers languished llargely because it stopped being innovative while it went after the market stolen by Mircrosoft, but it lost its suit.

    In this case, there’d be no way to win even a lawsuit went against DB, and no matter who filed it. DB’s biggest weakness — and the way it fails to serve the LDS consumer — is its lack of innovation. Hence it buys innovaters. But it changes in the process, too, and outside innovators can continue serving the LDS entertainment/literature consumer. The problem is, they have to be really innovative and really committed, and that means doing at least something that DB doesn’t do, and doing it well.

    It’s easier to worry about how DB is tilting the playing field. But I don’t think the courts are even capable of solving that problem, even if it were desirable.

  7. Preston’s very right — especially about the value of innovation. The courts are a gamble, and we don’t have the financial strength to out-advertise DB. We produce books that are at good as any DB produces (IMHO), but even the highest quality product can’t survive without attention, which brings me to where I think the innovation needs to happen: branding.

    We’ve actually had authors tell us they wouldn’t submit to us because we didn’t have “the official stamp of the Church” like DB has (that’s a real quote, by the way). If Preston will forgive me, it even came out in his post. We don’t consider ourselves an “alternative LDS publisher.” We’re an LDS publisher with authors who are just as strong in their faith and knowledge of the Gospel as any DB has, and corporate goals for promoting spirituality and the work of the Lord as strong as DB’s — but we’re still seen as an “alternative.” (Sorry for the jab, Preston, I couldn’t help it. :-))

    Branding is an uphill climb. Early in our company’s history some of the independent bookstores asked us if our products were carried by DB or not. It wasn’t a trivial test — they wanted some assurance that we were producing books appropriate for the LDS market. I applaud their desire! But I could have wished for a better measure. Gratefully, some of our products were carried by DB, which got our foot in the doors with the indies.

    Time and experience has overcome most of the perception that we’re not the Church’s publisher, but the bookstores are only part of the battle.

    We’re still working on a larger solution, but I’m betting many of us will need to work together to make it happen. The belief that quality LDS products can be found somewhere other than DB needs to start somewhere, why not here?

  8. [i]Still, some facts are in place that would help an antitrust claim against DB. As far as market power goes, it appears that DB has become particularly dominant in the intermountain west states. Assuming a geographic market limited to the intermountain west, it appears that DB would have well over a 50% market share.[/i]

    Um. You can’t get to 50% until you’ve already defined the product market, and I don’t think it’s glaringly obvious that the “product” market is limited to “books with LDS-related content.”

    The usual way economists go about defining product markets is to ask “if the price goes up X%, what do customers do?” The amount of X is usually subject to some considerable debate and, in expensive litigation, a few econometric studies. DOJ would like the answer to be 5%, but in many industries, the number actually works out to be much higher than that. At any rate, it’s worth keeping in mind that this kind of analysis leads courts to conclude that aluminium foil and plastic wrap are in the same product market.

    So what is the right product market? What happens if DB raises its prices by 10%? I suspect that you’d find that those who were buying LDS-themed books for their own reading or for gifts would buy fewer books from DB and more from amazon.com. If that’s right, then LDS-themed books aren’t the right product market defintion. But even if the reponse were not for shoppers to shift their purchases to differently-themed books, it still isn’t clear that LDS-themed books are a correctly defined product market.

    If customers don’t shift their interests from LDS-themed materials to other-themed materials, then I’d expect them to find other avenues to satisfy the urge for LDS-themed readings. LDS-themed content is available every Sunday for free. The Church’s website provides LDS-themed content for free. The Church itself provides LDS-themed content for free (just call the missionaries).

    But even if a court were to reach such a conclusion, I’d be pretty surprised if the product market didn’t collapse in the face of the question of viable entry. What are the entry barriers to publishing such materials? There are lots of book publishers in the world who would be willing to make money where there is money to be made (and where theoretical monopoly rents are available to be had, there’s money to be made by new entrants unless entry barriers exist), so I assume that the argument would go to the implied Church endorsement. While some authors may prefer DB because of an implied (or even an explicit) Church endorsement, with a few advertisements, I’m reasonably confident that a publisher could find manuscripts and/or writers with ideas that they’d like to develop into published books. Even if the authors are no-name types with rotten ideas, antitrust courts aren’t going to let treble-damages antitrust cases ride on an entry barrier argument that amounts only to “yeah, but I want to publish better authors than the sort I can attract without Church endorsement.”

    Sorry, folks, though I go out of my way to avoid DB publications for lots of reasons, DB’s monopoly power isn’t one of them.

  9. greenfrog, I appreciate your analysis, and I suspect from what you’ve said that you have legal training. Can you tell us where your knowledge comes from?

    A couple of disagreements and observations (not about the law or how things are done, but about the market):

    You wrote:
    I suspect that you’d find that those who were buying LDS-themed books for their own reading or for gifts would buy fewer books from DB and more from amazon.com. If that’s right, then LDS-themed books aren’t the right product market defintion.

    I suspect you are wrong, that in fact those buying LDS-themed books would pay more rather than switch to books without LDS themes. Because of the relatively low number of copies sold of each title, compared to either the national or Christian markets, LDS books tend to have higher prices anyway.

    If customers don’t shift their interests from LDS-themed materials to other-themed materials, then I’d expect them to find other avenues to satisfy the urge for LDS-themed readings. LDS-themed content is available every Sunday for free. The Church’s website provides LDS-themed content for free. The Church itself provides LDS-themed content for free (just call the missionaries).

    Well, there is LDS-themed content, and then there is LDS-themed content. What is sold in LDS bookstores like the chains owned by Deseret Book is NOT the same as what is available on Sunday, or through the Church’s website, or from the missionaries, or even through the Distribution center. The sources you mention do not provide fiction, and carry only the non-fiction the Church is willing to put its own name on (the Church has actually tended to reduce the number of titles it does this with over time).

    To put my point simply, you can’t get what LDS bookstores sell anywhere else.

    Now, there is one other point that complicate’s greenfrog’s analysis slightly — we’re mixing producers in the market (i.e., publishers) with retailers in the market. A different case for claiming Deseret Book is a monopoly, I believe, could be made in the retail area, but much of what greenfrog said in his comment would not apply in that analysis. Publishers are less geographically oriented than retailers, and Deseret Book’s control may be more pervasive on the retail level.

    Regardless, as I think I said above (comment #7, agreeing with Preston in #6), I have doubts as to whether an anti-trust claim could be successful, much as I wish it could be.

  10. My background? Sixteen-odd years of practice as an antitrust lawyer. (After law school, college, and a lengthy stint as a child in Carrollton Ward, of course.)

    Regarding your follow-ups…

    (1) It’s always worth testing hypotheses about what a given market segment will do before spending lots of money in reliance on an assumption. And that applies to my assumptions, as well. You may be absolutely right that the customers currently purchasing DB’s products would not shift their purchases to other publishers’ less-LDS-themed content products if the DB prices went up. But before spending on a lawsuit, I’d exercise some skepticism of that assumption.

    (2) Regarding alternative LDS-themed content, it’s important to recognize that just because two things are not the same in a material way (think Reynolds Wrap and Saran Wrap) does not mean that the demands for them are not cross-elastic with each other. If LDS-themed fiction is less available (because of a price increase), the question still remains whether those seeking LDS-themed content will pay the higher price or shift their consumption patterns to the lower priced (or free) alternatives available, even if those others are not the same — whether non-LDS themed fiction or LDS-themed non-fiction.

    To put my point simply, you can’t get what LDS bookstores sell anywhere else.

    True, but the antitrust question is not whether customers can’t get Reynolds Wrap elsewhere — it’s whether customers are willing to deal with Saran Wrap when DB’s pricing pops up.

  11. Great comments all.

    Preston (no. 6): No doubt litigation against the church involves significant social costs. This should not be so when it comes to legitimate business law claims involving the church’s for-profit holdings. (I doubt that church-held for-profit enterprises would hesititate to sue a member or her business if said member/business breached a contract with the church, infringed a church copyright, etc.) Still, you are probably right about how suing DB might look to the ordinary member.

    Greenfrog (no. 9): thanks for filling in my admittedly rudimentary analysis. I tried to acknowledge that product and geographic market are complex subjects often determined not by neat legal arguments, but by dueling reports of economist experts. As for the statement you corrected, I should have said something like “assuming both geographic market X and product market Y, DB may have much more than a 50% market share.” (Perhaps X = the intermountain west. Perhaps Y = books authored by current general authorities or Angel Moroni keychains. Who knows!?!)

  12. Ah, now I recognize greenfrog. I’m afraid I’m a little slow. You would think after more than a decade hanging out together, I’d recognize him!

    I do agree that these hypothesis should be tested. Now if we could just come up with the tens or hundreds of thousands needed to do the testing!!!

  13. S.P. Bailey,

    I think you’re absolutely right that the church operating as a business should be treated as a business. Sheri Dew’s business judgments are not entitled to the same deference as, oh, say, the family proclamation.

    But regardless of what should be, I think Preston’s point is that it still is the case that members conflate church businesses with the church itself, as you acknowledge. No doubt Sister Dew’s former ecclesiastical position reinforces that perception.

    I wonder, though, how pervasive that attitude is. I mean, if it is true that members in the intermountain west would be loath to see a lawsuit against DB, is the same true for members in Washington, DC, who buy their Mormon books and kitsch from This Is The Place? Kent Larsen can probably tell us about members in New York. Here in Minneapolis, my sense is that most members would probably take the attitude that DB is the church and the church can do no wrong. This may also be reinforced by the fact that most (at least the ones I’ve talked about it with) are also pretty conservative and see anti-trust laws as intrusive government regulation on what should be a free market. I’m not sure if the political attitude or the religious attitude dominates, or if they kind of feed off each other. I wonder if those attitudes are uniquely local, or if they can be generalized to church members as a whole. I guess my question boils down to this: if members conflate the church with DB, why is that the case? Another way to spend a lot of money on testing, huh?

  14. BTW, I do not mean to imply that all conservatives think anti-trust laws are a bad thing, just the few church members in Minneapolis that I’ve talked to about it.

  15. JKC:

    Here in NYC, I think English-speaking Church members are by and large similar to your experience in Minnesota.

    From what I’ve seen, I get the feeling that LDS Church growth in the US is heavily influenced by immigration from Utah. In the past decade here in our stake in Manhattan, we have doubled in size, but the number of converts wouldn’t account for 10% of the growth. A large proportion of this growth, at least in our case, is direct immigration from Utah.

    Regardless of how common this is around the country (I think its quite common in places like New York, Washington DC and Boston, where there is strong economic reasons for in migration), it means that among a base group of LDS Church members (often the local leaders, in my experience), their feelings are similar to those in Utah.

    I guess this is a long way to go to agree with you, JKC.

  16. Forgive my ignorance but who is “SBT”? I work in silicon valley and haven’t heard any news about Deseret Book (DB?) acquiring anything.

    Thanks
    Bob

  17. Bob: SBT = Seagull Book and Tape. See Kent’s post below and the news articles linked in the sidebar on the right.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s