DOJ's E-Book Antitrust Suit Raises Interesting Issues

This CBS article about how the DOJ may lose the e-book antitrust suit against Apple raises some interesting issues about the government's case.

The basic facts, as I understand it, are as follows: Amazon was selling e-books at a deep discount compared to hardcover books given the lower marginal cost associated with an e-book. Publishers and bookstores were worried these prices were too low. Apple then comes along with its iPad and offers a new "agency" model. Apple would act as a sales agent earning 30% commission, and the publishers were free to set their own resale price. The publishers were then able to convince other retailers to adopt the agency model. The Complaint alleges "Apple facilitated the publisher defendants' collective effort to end retail price competition by coordinating their transition to an agency model across all retailers."

The first question to consider is whether this is a vertical or horizontal arrangement? This is important because vertical price fixing is not per se illegal, although it could violate the rule of reason. Clearly the publishers are in a horizontal relationship with each other, but it seems that Apple was pushing the agency model, and Apple is in a vertical relationship with the publishers. Additionally, Amazon is in a vertical relationship with the publishers.

The relevant line from Steve Jobs biography is:

We told the publishers, "We'll go to the agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that's what you want anyway."

They went to Amazon and said, "You're going to sign an agency contract or we're not going to give you the books."

The only potential horizontal agreement in this quote is the unstated agreement between publishers to jointly insist upon the agency model when negotiating with Amazon. Importantly, the CBS article suggests that Apple was not present at meetings between publishers described in the Complaint.

A second question is whether a joint agreement to move to an agency sales model constitutes an agreement as to price? Not all agreements among competitors that affect price constitute per se price fixing.

Another question is how to define the market and measure market power. Do you look at the market for books or e-books? How does competition between competing devices (iPad, Kindle, etc.) impact competitive forces for e-book sales?

At the time the of the alleged conspiracy before the release of the first iPad, Amazon was by far the most dominant e-book retailer. Apple was the upstart. Thus, Apple argues that its activities improved the competitive environment in the face of competition from Amazon.

Matthew Yglasias at Slate argues that we should not be concerned about cartelization among publishers because they are under pressure from shifting technology. The real area of concern is monopolization of the distribution channel (i.e. where Amazon, Apple, Barnes & Noble). In many ways, the activities that DOJ complains about are the result of Apple trying to break into the e-book distribution market that Amazon had dominated.

Another question is how to measure harm to competition. The DOJ is clearly focusing on the higher prices caused by the agency model. But there may be other things to consider. For example, Scott Turrow, president of the Authors Guild, argues that Amazon's pricing was designed to put traditional bookstores out of business. The agency model, however, protects traditional bookstores as well as direct-selling authors.

It will be interesting to see how these issues play out...