(1) Cost plus: how much did it cost to make the thing or service available for purchase, including not just whatever ingredients it has, but labor, advertising, shipping, blah, blah, bleeping, blah. The plus is there to cover a variety of things like the risk undertaken by the person attempting to sell it, their labor, shrinkage, etc. And, you know, they have a right to a profit, being part of this theory.
(2) The current or recent prices of substitutable goods: if I can buy a hamburger in one place for $2.49, I might be more than a little surprised if asked to pay, say, $7.99 in another place that looks exactly like the first place in every way and happens only to be located two blocks over and one down. So surprised, I might pitch a fit and walk out of the place and walk the three blocks to buy the $2.49 burger. If the burger purveyors actually want to _sell_ their burgers, they'll have to come up with a price closer to the $2.49, and probably do something to deal with the pissedness of their customers. But it does have to be substitutable: if the place is a lot different -- in a fern bar, instead of a bright red and yellow themed place where the chairs and the tables are not only bolted to the floor but positioned at an uncomfortable distance from one another -- then the ambience might justify the difference in price, even if it is in every other way exactly the same burger. Anyone familiar with meals-to-takeaway pricing vs. meals-to-sit-down-and-eat pricing in Paris, for example, has run up against this price difference. Or, for that matter, a cup of coffee.
(3) "What the market will bear"
Currently, if I want to buy a book, I have a lot of choices. If I don't care what book it is, and price is the only factor, I can chat up a friend and find someone who has a bin of books they are looking to get rid of and they'll let me have some. If I care a little about what book it is, but price is a driving concern, I might go to a Goodwill or other thrift store. If I care more about what the book is, but price is still an issue, maybe a used bookstore. If I really need a particular book quickly, I would probably check online to come up with whoever had the best discount in combination with shipping. That's sort of the bottom up view of book pricing -- and the bottom is not mass market paperbacks. The bottom is a lot lower -- and that's excluding people who _borrow_ books as opposed to own them.
Publishers of books are people who make books and they have customers, but those customers are not you and me (unless you buy for a bookstore or book wholesaler like Ingram or B&T, or run a school or other bulk consumer of books). Their customers are, in very rough order of importance: Amazon, the big chain bookstore, book wholesalers, WalMart, Target, and then very, very late in the sequence, independent bookstores. It is _very_ important to publishers that they have customers. If they lose their customers, they go out of business. It is very, very simple.
Historically, publishers have fronted the money to their customers to purchase their books, with generous terms -- return the item and you get all your money back (assuming it is within a particular time frame, and not too manhandled), no interest, the time frame is weeks or months. Depending on the deal, the publisher may pay both ends on shipping. They do this for the same reason that food processors pay shocking amounts of money to grocery stores to get shelf space: to get shelf space. The reading public, generally speaking, buys what is right in front of them, or they don't buy at all. You _can_ order anything you like, and Amazon grew slickly fat by figuring out ways to put right in front of people what they might like to buy for a lot of people who had a habit of leaving bookstores empty-handed or unhappy with what they had purchased because what they had wanted to buy wasn't on the shelf. One of the effects of Amazon is to increase the likelihood that people won't even bother to _go_ to the bookstore in real life, or, if they are in a bookstore, to leave it without a book if it wasn't exactly the one they wanted. They know they can go home and order it easily and have it quickly (believe me, as a person who used to frequently order books through regular bookstores, it was an unreliable and slow process).
In some important ways, buying a particular book -- not just the same words, but the same format, on the same day, etc. -- at Amazon is _not_ the same as buying it at B&N or WalMart. You knew it was going to be at Amazon, and you could do your shopping without packing up the baby gear or finding the car keys or wondering whether you'd make it before it closed. Buying a kindle edition on Amazon has a whole host of additional benefits (permanent backups, multiple copies, can carry dozens of books with you at a time...) that make it weirder still.
It is clear what publishers were thinking with this agency model idea: that's been how they always did business, until the wholesalers came along. Unlike the rest of the retail world, wholesalers never dominated in quite the same way, so the publishers have always thought of retailers as representing them to the reading public. When the publishers loan retailers the money to buy a book, and then the book sells before the retailer pays the publisher back (or returns the unsold merch), you can sort of understand that the publisher might still think of it as their book -- despite the accounting to the contrary.
I actually know what Amazon's pricing theory was, at least a little over a decade ago. They weren't looking to be the lowest price option on everything, and they've never marketed that they were. They were presenting themselves as a value proposition: (1) we'll have the book(s) you want to buy and get them to you quickly (2) there probably won't be a problem, but if there is, we'll try to fix it quickly and (3) you won't pay appreciably more than if you'd shopped around ahead of time. The goal was to cultivate repeat custom: heavy users who trusted Amazon enough to stop comparison pricing, and start buying all their books at Amazon (and, hopefully, a whole lot of other stuff, too).
If you sell a lot of stuff, day in and day out, to a predictable set of customers, you should think about pipelining. The kindle is essentially converting Amazon's heavy book consumers (who, unsurprisingly, are not heavily consuming things with charts and graphics and pictures, but rather running through text at an appalling rate) to a pipeline model. These people were Prime customers (as in, paid for the shipping deal) and I _have_ to believe that Amazon was losing money on these people anyway, at least on shipping. They didn't have to make much on the books -- it's sort of like you don't need to get much money when you recycle, or, really, any, just cheaper than what you were paying to landfill it or whatever.
Once the heavy users were converted, Amazon had a couple possible future scenarios: raise the prices, leave the reader price high to make up for lost money on content, discourage additional adopters by keeping the reader price high -- and probably a lot more besides. Instead, the publishers showed up and insisted that Amazon raise prices and take a larger cut. Why would they do that?
Because (and I keep saying this) there are a tiny number of people who buy most of the books that are sold in this country. And Amazon was converting this group at a shocking rate, leaving the chain bookstores with a lot of expensive retail and customers who came in, bought a coffee, a muffin, leafed through some magazines, and left with a paperback, if they were lucky. There are still heavy users out there who still will not even consider buying a kindle. The publishers were god damned if they were going to let anyone talk them into switching. And, also, out of business, because once the chains were gone, there was going to be a brutal truth on the table, which is that the way the supply chain works with publishers isn't the only old school thing about that business.
So the publishers did what the publishers had to do: make the temptation to switch a lot less tempting. Gone were the days when they could price ebooks at full hardcover forever, no discounting, and count on a very high gadget price to keep participation low. Their returns rate had gotten horribly out of hand as they were shipping books to bookstores whose heavy customers had recently converted to kindle and were no longer coming in very often and leaving with heavy bags of books. Worst of all, kindle owners (and I didn't think of this consciously -- I picked it up from Megan McArdle's piece on the subject) who couldn't get what they wanted for the kindle often bought it from Amazon when previously they would have bought it in person. I mean, they were already looking at the detail page and one click was turned on and they had Prime shipping anyway. The best they could do was accept the theory that ebooks should be less than paperbooks, but then maintain the price differential they'd been chowing down on between hardcover and trade paperback.
About that price differential. Looked at from the cost plus perspective, it seems wrong -- it doesn't cost much if any more to make a hardcover as a paperback. But the publishers have disciplined themselves to wait to get the paperback sales until they're pretty damn sure that there aren't any more suckers out there prepared to pay full trade or at least discounted hardcover prices. It's a hard thing to do, because you do all this publicity for the hardcover release, and a lot of people aren't going to buy it and you risk them forgetting by the time it's out in paperback. Or them seeing it at the library or at a friend's house or whatever. (Or, worse, finding out what a dog it is based on reviews or a friend slamming it in her blog or whatever.) This is pricing under theory three: whatever the market will bear. But a lot of epricing critics are attacking ebook prices that are still at hardcover levels for books which are already out in paperback -- they're saying this is a violation of the substitutable good rule of pricing.
My biggest complaint about someone saying that an ebook should be cheaper when the paperback is out is that people say that about ebooks _before the paperback is out_. In the tech industry, we call this kind of shit vaporware, but on the off chance some of my readers speak bar but not tech, that's like expecting half price appetizers during peak dining time. Ain't gonna happen. Secondarily, there's a legitimate price theory behind paralleling the price to hardcover, dropping it for paperback, and then going to some unknown other price when the hardcover and paperback are no longer available new-in-paper -- expecting a book published in hardcover almost a decade ago, and in paper a year after that and long since gone from bookstores other than used to still be priced as a mass market paperback for the ebook version seems to me a little odd. Me, I'd baseline it off whatever the used copies were going for. If used copies were moving at $30+, I'd for damn sure want some of that juice for the ebook.
Finally, I've been a little disgusted that a lot of people have been flailing about on this topic without putting forth even tiny amounts of effort to accurately collect sample data. Not knowing that Amazon discounts paperbacks? For real? Not being able to tell that the paperback's release date is in the future (and not just on Amazon) when figuring that out requires only a click through to a detail page and a short scroll down, if that? To be fair, there may well be some intent to confuse: the online store, whether Amazon or other, would kind of like you to click a buy button, whether they have that sucker right at the moment or not. They _don't_ want you mad, however, so they put a little effort into making clear to you that this is a preorder. A shopper is going to notice. _A critic should notice too._
In our society at least, and perhaps in all human societies, critics are perceived as more intelligent just by the act of criticizing. I think critics have a responsibility to try to live up to that perception.
A few more comments about Amazon pricing: if you preorder something, you pay the price it was when you preordered it, even tho the money won't be collected until the book ships. If you put something in your shopping basket for later, however, and then return periodically, you'll get these little red letter notifications at the top of your screen saying that prices have changed. Generally speaking, I see a lot of nickel and dime gyrations that don't amount to anything I care about, altho I've seen more substantial changes on academic books on occasion that can run small dollars (still a small fraction of the price on the book). My husband tells me that he has seen prices change from before he was logged in as himself, and after he logged in as himself -- I don't flush my cookies often enough to run into that so I can't comment. Certainly, it would be absolutely the kind of thing I would expect Amazon to pull. Hey, I _know_ she'll pay a buck more for this without even thinking, or, she won't pull the trigger unless it's a better deal. Nothing wrong with that -- it's like a flea market or bazaar where the sellers size you up and your past history with them matters, or like a restaurant that you're a regular at that gives you extras for free, or a casino comping your drinks or whatever.
B&N and Borders discount best sellers and new releases, so people who are shopping the display tables and buying things written by authors currently making appearances on talk shows and public radio have an impression that everything there is discounted. It is not so. If you go buy a copy of _Animal, Vegetable, Miracle_, say, after it has been out for 7 or 8 months but before the paperback is out, you won't be getting 30-40% off. You'll be paying full list, and sales like yours are how B&N and Borders stay in business. Amazon has always had a much, much wider range of discounting on hardcovers and paperbacks than B&N or Borders in person, even tho the depth of the discounting is not always as deep as it is in the physical bookstore. This is another example of trading off dollars and cents against other factors (the discount in hand may be less than but worth more than the discount that might or might not be available in the bookstore, particularly once you factor in any value associated with one's time or transport).