Epstein: Why Apple May Win Their eBook Pricing Suit

Not Proven: The DOJ suit Against Apple for eBook Pricing
Richard A. Epstein
Ricochet.com
April 12, 2012

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.

Faculty: 
Richard A. Epstein