The US Justice Department filed an antitrust suit against Apple and five of
America’s largest publishing companies last week, charging them with price
fixing. Even as these companies are being charged with monopolistic behavior,
many observers view their agreement as the bulwark against monopoly, fearing
that no company alone can stop Amazon from sole domination of the book
The elephant in the room is of course Amazon. In 1995 the company
started selling books online and rapidly became a major competitor to
No trip to the store was needed, and the selection was far
larger than that found in even the largest bookstores. By 2007, it was estimated
that Amazon was selling about 15 percent of all books in the United States. This
slow trend of dominating the US book market became a rapid trend in 2007. Amazon
began selling electronic books that caught on rapidly due to their convenience,
immediate access and low price, and it expects to have the majority of the US
market within a year.
Perceiving a “chicken and egg” situation where
people wouldn’t buy electronic readers without an adequate selection of titles
and wouldn’t buy e-books without readers (even though it is possible on a PC),
Amazon began cutting prices on both devices and titles in what is widely
perceived as a “loss-leader” strategy in which losses on one product are meant
to bring profits, or future profits, on another. Amazon also demanded price cuts
The publishers did not stand idly by. They conceived an
ingenious plan that would enable them to maintain control of e-book prices. In
the traditional model, publishers sell their inventory to retailers, who resell
them. But there is an alternative.
Retailers can act as agents of the
publishers. In this case, the publishers retain ownership of the book and pay
retailers a fee for displaying and selling.
In the wake of Amazon, its
Kindle reader and its $9.99 price for a digital version of $25 hardcover books,
the publishers adopted an agency strategy for electronic books. Thus, they and
not Amazon would be in charge of prices.
An agency deal was cut with
Apple and subsequently presented as an ultimatum to Amazon.
an end to Amazon’s loss-leader strategy and higher prices for
But the Justice Department found many aspects of this process
problematic. The first issue was the agency model itself.
between reselling and agency is meaningful in the “bricks and mortar” world. For
example, if there is a fire, the retailer takes the hit under the traditional
model and the publisher under the agency model.
But digital books seldom
go up in flames, so the Justice Department concluded that this was no more than
a fiction to create de facto collusion among sellers.
Beyond the agency
model per se, the alleged anticompetitive actions included giving Apple
“most-favored nation” status; that is, the publishers guaranteed that no Apple
competitor would undercut Apple. Promising a customer that he is getting the
lowest price is not that uncommon in the business world, but the practice has
not been tested in court and Apple was not a customer, given that the agency
model made it merely an agent.
Another problem is that the five
publishers named in the suit seemed to have acted in coordination, meaning that
the publishers not only created effective collusion in retailing but also
engaged in collusion among the publishers themselves. (An alternative charge is
that Apple acted as a “hub” to create de facto collusion among the “spokes.”)
Three of the publishers agreed to a settlement with the Justice Department. But
as of this writing, two publishers and Apple are sticking it out and defending
themselves in court.
So who is the monopolist: Amazon or Apple and its
allies? Amazon’s conduct could be considered monopolistic if it fit the category
of “predatory pricing.” In predatory pricing, a monopolist dominates an industry
and offers high prices. But it defends its monopoly by sharply reducing prices
just long enough to drive competitors out of business.
One problem with
this diagnosis is that this model does not seem to suit the book
Predatory pricing, or the threat of predatory pricing, is
plausible in industries where huge investments are necessary to go in. If
airlines are charging high prices, I may see an opportunity for profit by
starting my own airline and charging slightly less. But the investment needed to
break into the airline industry is enormous; the prospect that existing firms
could ride on their existing capital and the cash cushion from their monopoly
profits to drive prices rock bottom for a few months could be enough to deter
me. This model doesn’t suit the book business. Selling books online requires a
very modest investment.
Another problem is that it doesn’t take into
account that the threat of competition is also competition. Amazon could have
90% of the market but still not be a monopolist if they have to keep prices
competitive to keep others from entering the market.
If $10 is the price
a competitive market would fix, it doesn’t matter if I pay $10 to Amazon if
Amazon is the only game in town; they may be changing me only $10 because they
know that if they charge $11 someone else will set up shop across
Again, if there are few barriers to entry, even potential
competition can keep sellers in line.
The anticompetitive aspects of the
agency agreement are fact. In their wake, e-book prices rose sharply. The
pro-competitive aspects of keeping Amazon from domination are speculative and
unpersuasive. A competitive market for e-books will be present when each
publisher makes its own agreement with each retailer.
preclude agency agreements, but it does preclude that audacious coordination
that accompanied the current model, the one the Justice Department has begun to
firstname.lastname@example.org Asher Meir is research director at the
Business Ethics Center of Jerusalem, an independent institute in the Jerusalem
College of Technology (Machon Lev).