Will Fixed Book Prices Fix It? Common Agency and Vertical Integration of Publishers and Bookstores

Book markets are characterised by common distribution through competing bookstores and vertical integration between publishers and bookstore chains, and in many countries publishers are allowed to set fixed book prices (FBP) in the bookstores. Under vertical separation, FBP can reduce retail prices when publishers have sufficiently strong bargaining power, as the elimination of double marginalisation outweighs the loss of intra-brand competition. We show that vertical integration fundamentally changes this trade-off. It eliminates double marginalisation inside the chain, thereby substantially reducing the scope for FBP to lower retail prices. But since FBP eliminates retail price differences on the same title, the allocative distortions are reduced when imposing FBP and consumer welfare and total welfare are no longer aligned. We find that, in the presence of vertical integration, the introduction of FBP is less likely to benefit consumers and more likely to benefit publishers than in an industry with vertical separation.