The two competing models of pricing are simplified as:
- Wholesale model (preferred by Amazon) - the retailer pays the publisher a set wholesale price and sets the retail price at whatever they like - often taking a loss on a popular title to draw customers to their platform. This model is what allows Amazon to use the $9.99 or $2.99 pricing for Kindle titles.
- Agency model - the publisher sets the retail price of the book and keeps 70% of that price, giving the retailer 30%.
Over the last several decades, big box retailers and Amazon have driven home the process of discounting titles - often to the point where smaller stores cannot compete. Where, in the past, an independent retail bookstore would almost be guaranteed a respectable income due to the pre-set profit margin, customer expectations have driven independent stores to either get extremely creative, cater only to those who don't shop online, or give customers discounts/sales (customer loyalty cards, 25% off bestsellers, etc.)
In the eBook world, despite Google's saving grace of bringing eBook retail capability to Indie bookstores, Amazon's pricing model was already forcing them to be unable to compete with Kindle pricing of many bestselling ebooks.
Random House's switch to the agency model, pioneered (and pushed) by Apple levels the playing field in pricing for one of the largest publishers of eBooks and sets the stage for the other major houses to follow.