Friday, August 09, 2013

"But Their Monopolization Strategy Was Legal"

The New York Times comments on Apple's antitrust verdict,
At a hearing on Friday, the department will argue that its plan to remedy Apple’s misconduct will “restore lost competition.” In a narrow sense it may, but the problem with this case all along was that the department ignored the potentially bigger anticompetitive force in the e-book market — Amazon — while focusing on Apple.
Due to the timing of its entry into the market, its dominance as an Internet bookseller, and a pricing strategy that often involved selling eBooks below cost - something Amazon doesn't appear to in other markets - Amazon managed to gain 90% of the eBook market, and was thus fairly categorized as a monopoly. The Times suggests that it was Apple's agency contracts and price matching requirements that got it into trouble, although it was the court's finding that Apple played a vertical role in an otherwise horizontal price fixing conspiracy between publishing houses that actually resulted in the antitrust finding. Apple will certainly challenge the theory of its liability on appeal, as traditionally the only vertical participants accused in such conspiracies were major participants in the market, while Apple was merely considering entering the market - and quite reasonably would likely have declined to do so had it not been able to break Amazon's pricing stranglehold such that its eBook operations could actually be profitable. Also, the government's theory focused on the "most favored nation" clause of the contract (allowing Apple to match in its bookstore the lowest price offered by its competitors), despite the fact that such clauses are not uncommon and appear to have never before been found to form the basis of an antitrust violation.

The editorial speaks of the Justice Departments proposal as being about "keep[ing] Apple from getting back to its old tricks", but in context Apple would be a one-trick pony. The controversy over agency pricing extends to the book market only because of the way Apple entered the market. The agency model, which is Apple's consistent "trick" is otherwise a perfectly legal, appropriate business model. The Times notes that the danger of penalizing Apple in this context is that the net effect may be to restore Amazon's monopoly:
[The Justice Department plan] does not address the need for a counterweight to Amazon’s dominance. Amazon controls an estimated 65 percent of the market, with Apple at 10 percent and other retailers splitting the rest. (Before Apple started selling e-books, Amazon had 90 percent.) The case against Apple has done nothing to solve that problem.
On one hand, the purpose of the plan is to punish Apple for its misconduct, and to prevent recurrence. To my eye, the plan is absurd and overreaching, but perhaps the DOJ is following the principle that you won't get what you don't ask for, or the fact that they'll almost certainly get less than they propose so why not start by shooting for the moon? But on the other hand, if the proposal ends up restoring Amazon's monopoly - and the relief requested by the DOJ would prevent Apple from entering into any contracts that would enable it to run a profitable eBook store once Amazon, shielded by the terms of the proposal, starts once again selling eBooks at a loss - the DOJ looks a bit ridiculous. Coming down like a sledgehammer on a company that broke a monopoly by establishing an even playing field for eBook vendors, in order to protect and restore the company whose monopolistic practices had previously deterred any appreciable competition.

Following the settlements with the various publishing houses involved in the conspiracy, the market has effectively sorted itself out. Amazon still controls a whopping 60% of the eBook market, prices have stabilized, and consumers have their choice of platforms and vendors. I thus think that the remedy should focus on prevention and punishment, not on trying to tamper with the markets. If the DOJ's concern is that Apple is going to profit unreasonably from its conduct over the next few years, and it can prove that theory, increase the fine accordingly. Sure, it may be that the DOJ's plan will take us back to the days when Amazon sold many eBooks as a loss to deter competition, but even if I believed prices would be lower I think we're far better off over the long-run if Amazon's monopoly is not restored.

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