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E-BOOK PRICES, AMAZON AND APPLE – TWO ELEPHANTS IN THE ROOM

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TWO RECENT DEVELOPMENTS IN THE BOOK MARKET – ARE HIGHER PRICES ON THE WAY?

On July 4, 2013 The New York Times reported that Amazon had announced it was cutting its discounts on books because the competition was waining. As quoted by David Strieifield  in his New York Times article, “As Competition Wanes, Amazon Cuts Back Discounts,” “Stephen Blake Mettee, chairman of the board of the Independent Book Publishers Association, said that Amazon was simply following in the tradition of any large company that gains control of a market. ‘You lower your prices until the competition is out of the picture, and then you raise your prices and get your money back,” he said.'”

Strietfield points out the implications for customers,

Higher prices have implications beyond annoyed authors. For all the hoopla around e-books, old-fashioned printed volumes are still a bigger business. Amazon sells about one in four printed books, according to industry estimates, a level of market domination with little precedent in the book trade.

Now, with Borders dead, Barnes & Noble struggling and independent booksellers greatly diminished, for many consumers there is simply no other way to get many books than through Amazon. And for some books, Amazon is, in effect, beginning to raise prices.

On July 10, 2013 the NY Times reported, “Judge Rules Against Apple in E-Books Trial.” As the Times article stated, “Government lawyers argued in court last month that Apple had colluded with five big American publishers to raise prices for electronic books across the publishing market.

“’Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did in the spring of 2010,” the judge, Denise L. Cote of United States District Court in Manhattan, said in her ruling.'” [160 pages]. 

BTW, WHAT IS ANTITRUST ANYWAY?

The essence of an antitrust case is that the actions complained of have an adverse effect on the consumer by reducing competition, and thus resulting in higher prices. As the judge points out (p.  104-105) an antitrust conspiracy charge [known as a horizontal restraint, that it by parties at the same level, i.e. publishers] is governed by Section 1 of antitrust law, known as the Sherman Act,

Section 1 of the Sherman Act (“Section 1”) outlaws “[e]very contract, combination . . . , or conspiracy, in restraint of trade or commerce among the several States.” 15 U.S.C. § 1. To establish a conspiracy in violation of Section 1, then, proof ofjoint or concerted action is required.

As noted in the Times article,

The antitrust battle underscores the turmoil in the book industry as readers shift from ink and paper to electronic devices like tablets and smartphones, where they can buy content with the push of a button. While the publishers want to embrace new media,  they are also trying to protect their profits and retain control of their businesses. Apple’s lawyers noted at the trial that the publishers had long complained that Amazon.com’s uniform pricing of $9.99 for new e-book titles was too low.

ALL FOR THE CONSUMER?

Person with BookNow we have an apparent dilemma. On the one hand it appears that Amazon, if it is acting by itself, can raise prices because they have eliminated the competition, but this may well have an adverse effect on the consumer. On the other hand, publishers, acting together, can’t raise prices because that would have an adverse effect on competition and therefore the consumer. Does this mean that once a publisher eliminates competition, it may raise prices as it pleases, even though that also has an adverse effect on the consumer?

A VERTICAL ANTITRUST VIOLATION

The antitrust law also prohibits a vertical price restraint. Think of the famous Standard Oil case where it controlled everything to do with oil, up and down the line, from drilling to selling at the gas station, hence “vertical.” As the Judge in the Apple case notes,

 “[V]ertical price restraints, such as resale price maintenance agreements, that do not involve price fixing are subject to the rule of reason. A manufacturer has a right to refuse to deal “with whomever  it likes, as long as it does so   independently.”

The judge defines the “Rule of Reason” (p. 106) in antitrust cases clearly and simply,

[U]nder the rule of reason, “the plaintiffs bear an initial burden to demonstrate the defendants’ challenged behavior had an actual adverse effect on competition as a whole in the relevant market.”(Emphasis mine.)

WHITHER THE BOOK, AND THE CONSUMER?

The fact that Amazon has admitted to eliminating the competition as a motive for raising prices poses an interesting question for the future – has Amazon engaged in a vertical antitrust violation? Time will tell. There is much at stake. The Times:

“A recent survey of the publishing industry revealed that in the United States, e-books account for 20 percent of publishers’ revenue, more than $3 billion, up from 15 percent the year before. E-books have had a slower rate of adoption in Europe and the rest of the world, but analysts expect that major growth will develop in the next several years. A report by Forrester predicted that by 2017, Europe will be the largest e-book market in the world, generating revenue of $19 billion.”

It remains to be seen whether anyone will bring an antitrust suit against amazon claiming that it achieved a vertical monopoly through anti competitive practices which illegally drove out the competition, thus harming consumers. It also remains to be seen what happens to the Apple decision on appeal, and at the trial for damages. Essentially, the claim for damages for lost profits due to lost sales will have to be weighed against higher profits reaped from higher prices.

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