Friday, 13 April 2012

Indigo as a Monopoly


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Indigo as a Monopoly
Andrew Dent and Alex Curry







History
In the 1990s the hard copy book market in Canada changed dramatically. Governments had not allowed large American book stores like Borders to expand into the Canadian market in order to protect smaller stores; This lead to the market being full of small, mostly independent book stores. However two new chain stores named Chapters (1994) and Indigo (1996) opened and shifted the market share enormously.  Within the space of only a few years the two retail stores became giants in the market and were the only contenders for market dominance. The previous abundance of small local book stores was pushed out of business by low prices and the massive selection that these massive stores could offer.  In 2001 the two book stores merged creating the largest book retailer in Canada by far. Over the next few years the newly created Indigo(now including Chapters) bought Coles and Worlds Biggest Books giving it almost complete market share in Canada through its 88 super stores and 179 mall based stores.  Indigo continued its run of success with ever increasing revenues and net income gains resulting in 1 billion dollars total revenue in 2008. This prompted John Lornic to write that "no other sizable developed country has let ownership of bookselling become so concentrated." He even stated that Indigo was, "The closest thing to an unregulated monopoly in Canada's private sector."  However the entrance of Amazon into the Canadian market in 2006 (which was strongly opposed on the legal ground that American owned book retailers could not operate in Canada) lead to Indigo losing some of its Monopoly power. This power was further reduced in 2009 when the kindle, Ipad, and other Ebook fridly hardware companies came out with reading tablets leading to the digitalization of books on a massive scale. No longer was Indigo the sole supplier of books in Canada, thanks to the completive prices offered by digital books and Amazon, Indigos monopoly power was smashed.

Characteristics
In this segment Indigo will be examined in order to determine if indigo met the criteria of being a monopolistic firm during the height of its in 2006.
 1. The only seller of a good or service
·         Indigo was the only major retailer with more than 4 locations in all of Canada
·         The only competition was individual book stores or very small chains such as tattle tales
·         Large American book stores could not enter
Verdict: Not the only seller of books but took up the majority of sales: impure monopoly

2. No viable substitutes exist
·         Were a very small number of small chains
·         Were a small number of small single book stores
·         This was before online book sellers like Amazon existed in Canada
Verdict: A few viable substitutes: impure monopoly 

3. Monopolists are Price Makers
·         Indigo relies on low prices to prevent firms from entering the industry therefore they have little control on prices over a certain amount
·         They did not worry about losing customers to small individual stores that could not advertise small prices or set prices due to their high cost of production or buying the books
Verdict: had non monopolistic ability to change price

4. Significant/Total Barriers to Entry Exist
·         Indigo had created a tough environment to enter due to its brand recognition and dominance over prices

Finial Verdict: Indigo is the type of Monopoly that is a firms responsible for the majority of sales in a market

Control of Essential Resources
·         The resources needed to make the books that indigo sells are not under indigo’s control
·         All these materials such as paper, printers and the ability to purchase the rights to books from publishers are available to most small book stores
·         Also there is an unlimited amount of areas where book stores are able to be created

Legal Barriers
·         There are no legal barriers preventing a book store from entering the market in Canada
·         There are also no financial restrictions placed on entering the book retail industry by the government
·         One major legal barrier that has allowed Indigo to thrive was the law preventing American owned book retail companies from entering the Canadian market
·         It was this law that originally prevented the large book stores like Borders from entering the Canadian market creating a demand for more books
·         This demand lead to the original success of Canada’s first major book retailers Indigo and Chapters
·         This Law still prevents American owned book sellers from breaking Canada’s monopoly


Pricing Strategy
·         Indigo prices its books significantly lower than any potential competitor in the material book industry would be able to
·         This was how Indigo was able to drive previous competitors out of the market
·         An example of another firm who was pushed out of the industry by this competitive pricing strategy was Litchman’s which filed for bankruptcy due to its inability to produce enough revenue while staying competitive with Indigo’s pricing
·         This was the largest independent bookstore in Canada and it failed to continue running, with this in mind it is clear that no other bookstores could compete with the corporate monster which is Indigo
·         Indigo is able to place these low prices because of their size
·         With huge amounts of retail locations across the country, Indigo has the ability to profit greatly off of smaller profit per unit amounts
·         Unlike other monopolistic firms, Indigo is unable to use their monopoly to increase the price of books due to the necessity for competitive pricing which keeps other firms out of the industry
·         This makes them less profitable than they would be if there were distinct entry barriers into the industry and Indigo was the only viable option
·         The firms average total cost is not a huge amount lower than other firms, but does instill a competitive advantage for Indigo

The loss of Indigo’s monopoly
·         Due to the up and coming Ebook technology, indigo’s monopoly over the book market has been almost fully taken away
·         Currently, a person is able to buy an Ebook for a significantly lower price than buying the hard copy of a book
·         This is understandable due to the lack of costs associated with producing an Ebook (simply licensing and software design)
·         The situation that indigo currently faces with the Ebook is very similar to the that independent firms previously faced with indigo
·         Because indigo would no longer be profitable selling their books at the low price which is offered for an Ebook, they are unable to price competitively and thus will lose a large chunk of consumers who are looking for a ‘better buy’
·         From a monopolistic point of view, Indigo could arguably still be a monopoly in the HARD COPY book market
·         Looking to the future, this market is not very profitable with increasing technology and access to Ebooks
·         The graph below displays the sales compared to the change in profit
·         As you can see, the sales of Indigo increased as the lowered prices attracted a larger quantity demanded, but the actual profit decreases due to the smaller profit per unit
Description: http://www.4-traders.com/reuters_charts/1,2,360,280,Indigo+Books+_+Music/A2A0A/2/Income+Statement+Evolution.png

Conclusion
In conclusion Indigo has enjoyed a successful decade as near perfect monopoly with control over the Canadian market for books through its ability to buy books in bulk, set prices and compete in a market were American firms cannot enter. However in recent years this monopoly has ceased to exist due to the introduction of Amazon in to the market as well as the mass digitalization of book which have made hard copy books near obsolete, much like how albums became obsolete when music went digital.  In the future Indigo will have to continue attempting to branch into different markets like the toys and games market as well as the gift market because their main product books is losing value fast.


Works Cited
"Our History." Coles. Indigo Books. Web. 13 Apr. 2012. <http://www.chapters.indigo.ca/our-company/timeline/>.
News, CBC. "Lichtman's Files for Bankruptcy Protection." CBCnews. CBC/Radio Canada, 07 Mar. 2000. Web. 13 Apr. 2012. <http://www.cbc.ca/news/business/story/2000/03/07/lichtman000307.html>.
"Amazon.ca Debuts in Canada | CTV News." CTV News. Web. 13 Apr. 2012. <http://www.ctv.ca/CTVNews/ExclusivesBusiness/20020625/amazon_canada020625/>.
"Monopoly." Investopedia. Web. 13 Apr. 2012. <http://www.investopedia.com/terms/m/monopoly.asp>.

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