Friday, December 5, 2014

Apple, Ebooks, and Antitrust

Interesting article on the Forbes web site the other day about the impending oral arguments at the Circuit Court, which is hearing Apple’s appeal of its price-fixing conviction.

I’m not involved with the case in any way, but I have personal interest in Apple and ebooks and professional interest in competition policy, so I’ve been following the case with some interest. What I never understood was how a conspiracy by publishers translated into price-fixing by Apple. What’s funny about the Forbes piece is that the article, while correctly saying that Apple probably has an uphill battle at the appeals court, points out via a series of parenthetical comments many of the problems with the case.
Apple was breaking into a market then dominated by Amazon, which had an 80% to 90% market share - monopoly power in almost anyone’s book.
While it’s true that market power isn’t a necessary condition for finding a price-fixing violation, it’s pretty odd to think that the entrant into a market dominated by a firm with substantial market power would be interested in elevating prices. What’s unusual here is that Apple, in trying to create its ebooks business, is a middleman and needs to attract attention from both buyers and sellers of books. Buyers of books want lower prices, all else equal, while sellers prefer higher prices - and Apple’s inducement to the major publishers was that they could better control pricing through Apple’s agency model rather than Amazon’s wholesaler model. But Apple is pretty much indifferent to higher book prices. Yes, Apple takes a 30% cut and therefore benefits from higher prices, but not by much compared with its margins on selling additional hardware.
(Notwithstanding the price rise in key categories of books, prices fell overall, its expert testified.)
Seems like a problem for a price-fixing case generally.
Judge Cote later found that when [Apple’s Eddie] Cue showed up at those first meetings [with the CEO of the major publishers], he immediately plunged his company into a price-fixing cabal. ‘Apple's entry into the conspiracy had to start somewhere,' she wrote, 'and the evidence is that it started at those initial meetings in New York City.'
That sounds good, but then we have:
"To prove collusion, the government showed (above) that the publisher CEOs phoned each other while negotiating their contracts with Apple. It couldnít prove, however, that Apple knew of these calls."
Hmm, that’s a problem.

Regarding the agency model:
(Judge Cote acknowledged that negotiating from a standard contract was ordinarily lawful.)
(Cote acknowledged that the agency model was lawful.)
In order to ensure that Apple wouldn’t be at a price disadvantage relative to Amazon,
...Cue decided to propose tiers of price caps, tied to the suggested hardback list prices. (Judge Cote acknowledged that price tiers and caps were lawful.)
Finally, regarding the most-favored nations clause that Apple negotiated,
It gave Apple the right to match the price at which any new-release ebook was being sold by another retailer. (Cote acknowledged that MFNs are ordinarily legal.)
And this is, in antitrust expert Herbert Hovenkamp’s works, “an uphill battle” for Apple? He’s probably right, but this case should never have gone against Apple in the first place.

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