With the death of Steve Jobs, Apple has lost much of its Teflon insulation from government action. Nowhere has this been more true than with today’s suit against Apple and five major publishers for price-fixing in the eBook market. Any charge of collusion always carries with it a certain heft under the antitrust laws, because the fixing of prices among competitors amounts to a per se violation under the antitrust law, at least if those competitors have sufficient market power to alter over prices, which is surely the case when major parties sit down together at the table.
Yet this suit does not fall into the classical model where competitors agree on common prices in cartel like fashion. What is at stake here is the pricing models that will be used to determine prices. Right now under the so-called “wholesale” pricing model, the retailers of eBooks set the prices however low they choose. Clearly they cannot set these prices below the cost of production that has to be paid for the eBooks they peddle. But the marginal price for the production of an additional eBook is close to zero, so the retailers know that if they pay very little under this model the publishers will have no choice but to go along with the low prices. This strategy has let Amazon.com to price eBooks at around $9.99, which is a steep discount over the hard cover version.
In dealing with these matters, Apple proposed to all publishers that they shift to an agency model, whereby the publishers set their own prices and that Apple receive a 30 percent commission for the sales over its network. This same model could be offered to Amazon, which would allow it to compete on even terms with Apple, but would raise its prices, lower its margins and reduce its profits.
In looking at this situation, DOJ sided with Amazon and held that this form of collusion raised consumer prices and therefore caused an injury under the antitrust laws. It sounds pat but here are the difficulties.
First, there is no need for any collusion on this issue. If a single publisher had dreamed up this new scheme, it could have refused unilaterally to sell any books to Amazon or anyone else unless they bought into the model. Why is it illegal for Apple to come up with a bright idea that helps its competitive position with Amazon?
Second, it is not clear that lower prices are necessarily in the long term interests of the public at large. As with all complex transactions, lower prices spell both low costs to consumers and low royalties to authors. The lower royalties translate into lower level of production of new books, so that we do not have here the usual cartel situation where higher prices reduce output. It is plausible that the higher royalties increase the number of titles available, and by increasing competition in the new book market, prices are lowered in the long run.
Third, it is not clear why this arrangement is bad if done by all major publishers simultaneously. If it has justifications for each acting alone, those justifications remain when they act together. Under pure competition we would expect gravitation to a single new model if it proves better overall than its rival. That could be just what is happening here. The cooperative efforts speed the industry toward a more sustainable business platform.
Stated more generally, the usual cartel involves restrictions that have few if any efficiency benefits. These agency transactions have both pluses and minuses for consumers and for overall social welfare. It is a good rule of thumb to hold back from public enforcement when the relative balance is unclear. But note that in the current political climate, that presumption is likely to be reversed by populist forces. Big is bad. It will take some time to hear the whole story, but the betting here is that this law suit is a mistake.