Could a little anti-competitive behavior actually be pro-competitive?
That is what five leading book publishers are arguing in explaining why they simultaneously accepted an offer from Apple, just before the release of the iPad, to change the way e-books are priced and distributed. Their actions moved the industry from a “wholesale” model, in which they sold e-books to retailers and let them set the retail price, to an “agency model,” in which the publishers set the retail price and pay the retailers a fixed commission on every sale. In the process, they managed to break up Amazon’s e-book monopoly and raise the price of online books by 30 to 40 percent.
Now you might ask at this point why breaking up a monopoly would raise prices rather than lower them.
The answer has to do with how Amazon went about building its e-book monopoly in the first place — namely, by setting a price that was lower than what Amazon was paying publishers for the book. What looked to consumers like a great bargain at $9.99 a book looked to others in the industry suspiciously like predatory pricing, or selling below cost today in order to gain a monopoly and raise prices in the future.
So which is better: a market in which Amazon uses low prices to maintain its e-book monopoly and drive brick-and-mortar bookstores out of business, or one in which the major book publishers, in tacit collusion with Apple, break Amazon’s monopoly and raise prices?
For the moment, the government has come down on the side of lower prices. Under threat that they will be taken to court for conspiring to fix the price of e-books, the book publishers are trying to work out a settlement with Justice Department’s antitrust division.
The talks largely focus on two provisions of the publishers’ contract with Apple: one that prohibits the publishers from entering into “wholesale” arrangements with Amazon or any other major distributor, and a second that guarantees that no other distributor will be allowed to sell books for less than Apple. It was those provisions, ostensibly imposed by Apple but greatly welcomed by the publishers, which allegedly gave the publishers the incentive and the confidence to challenge their biggest customer, threatening a cut-off of books if Amazon did not accept the new arrangement.
It’s not just the government that is after Apple and the publishers, however. Even if they are able to settle this case, they face a class-action lawsuit, filed on behalf of all e-book customers, that is pending in federal court. At stake are several billion dollars in compensation and punitive damages, along with hundreds of millions of dollars in legal fees.
It is certainly possible, as the plaintiffs’ lawyers allege, that executives of Apple and the publishing companies did conspire and collude with one another in meetings or e-mails or phone calls. The lawyers claim to have a “confidential” and “highly credible” source who has provided them with documentation of such direct communication. Even if there is no “smoking gun” document, however, it is possible that the publishers were able to tacitly collude through separate conversations with Apple.