Amazon.com Battles Crony Capitalism

Last week, Amazon.com(AMZN) announced that it would try to enhance its service in Canada through Amazon.ca by expanding its distribution centers within the country.

Chapters Indigo, the No. 1 bricks-and-mortar bookseller chain in Canada, has cried foul to the Canadian government, appealing to an obscure law that any distribution center in Canada needs to owned by a majority of Canadians.

Chapters Indigo is the top online competitor against Amazon in Canada. The same products sold on Amazon.ca are up to 40% more than the ones sold on Amazon.com. An increased cost of doing business in Canada for Amazon from a less efficient distribution means that Chapters Indigo can keep its margins up at the expense of consumers.

But there is a much longer back story to this relationship than just this latest scuffle about distribution centers. It goes to the heart of how governmental regulation -- whether in Canada or elsewhere -- can be capricious and work against the interest of consumers and in favor of those with the money and access to power to shape it for its own ends.

Chapters Indigo, a national bookseller chain, is no different from Barnes & Noble(BKS), Borders(BGP), or Books-A-Million(BAM). It's the result of a merger of two old chains -- Chapters and Indigo -- that struggled with profitability. The old head of Indigo, Heather Reisman, became the new head of Chapters Indigo.

Why aren't any of the big American booksellers in Canada? They have never been allowed to enter the market. Back in the late 1990s, when the super-store bookseller chain idea emerged and Chapters and Indigo both were founded, the two Canadian chains appealed to the Liberal federal government to block American companies like Barnes & Noble and Borders from entering the market.

Their argument went that Canadian literature, opinion, and news coverage was culturally unique and deserved to be protected by the Canadian government. The large American chains had much more capital. In a true free market system, they would have been allowed to enter the market and sell their wares. With more capital, presumably they would have undercut the Canadian booksellers until the big ones had suffered enormous losses and been forced to withdraw from the market, leaving the American firms with a stranglehold on the Canadian bookselling market.