Joel Waldfogel on the economics of Amazon's purchase of Goodreads:
Am I the Only One Ambivalent about Amazon’s Acquisition of Goodreads?, by Joel Waldfogel: The New York Times reported recently that Amazon’s buying Goodreads, the largest book review site online. It’s easy to see the appeal of Goodreads to Amazon. Goodreads apparently has 10 million ratings and reviews of over 700,000 titles. ...
But when I think about Amazon’s sources of market power in book retailing, one of the first things that comes to mind is the indirect network effects: Amazon’s existing collection of user-contributed book ratings and reviews provide lots of information to potential buyers. The more customers who use Amazon, the more information they make available, and the higher the quality of subsequent customer experience at Amazon. In short, the more that people use Amazon, the more that additional people will want to use Amazon. This source of market power is fairly gained, I guess, although the customer/reviewers who create all of this information might want more compensation than the words “top-rated reviewer” after their names.
Buying Goodreads substantially increases the amount of information at Amazon’s disposal. Given how adroit Amazon is at using information, we can expect them to find a way to improve the customer experience. Some part of me is actually excited about that.
But Amazon’s acquisition of Goodreads will also enhance the market position of the market’s largest player. If Amazon owns Goodreads, then no other book retailer does. It seems entirely possible that some other book retailer could have combined with Goodreads to offer Amazon some serious competition. If this is a done deal, we’ll never know.