The Consumer Welfare Standard and E-Book Pricing ⇥ newyorker.com

Remember how I wrote that consumer pricing is not the only factor in determining the success or failure of policy? On a related note, remember Apple’s e-book price fixing scheme?

Vauhini Vara, the New Yorker, in December 2014:

Last year, a federal judge named Denise Cote found that Apple had, in fact, collaborated in a horizontal price-fixing scheme, not that it had orchestrated a vertical one. Cote noted that Apple executives kept the publishers informed about what other publishers were up to; she also pointed out that Apple made clear to the publishers that it was important for as many of them as possible sign on to the proposed deal. Both of these activities, among others, Cote argued, showed that the company had facilitated horizontal price-fixing. “Here we have every necessary component: with Apple’s active encouragement and assistance, the Publisher Defendants agreed to work together to eliminate retail price competition and raise e-book prices, and again with Apple’s knowing and active participation, they brought their scheme to fruition,” she wrote. As such, there was no need for Cote to consider arguments, made by Apple’s lawyers, about the company’s intentions and the effects of its actions, which might have been used to justify vertical price-fixing.

The U.S. Department of Justice in June 2016:

On March 7, 2016, the U.S. Supreme Court denied Apple’s petition for certiorari and made final the lower court decisions in the case. The Supreme Court’s action triggered Apple’s obligation to pay $400 million to e-book purchasers under Apple’s July 2014 agreement to settle damages actions brought by the attorneys general of 33 states and territories and a private class of e-book purchasers. With the $166 million previously paid by the conspiring publishers to settle claims against them, Apple’s payment brings to $566 million the amount repaid to e-book purchasers overcharged as a result of Apple’s and the publishers’ illegal conspiracy.

This is a case where both Amazon and Apple were wrong. Amazon’s Kindle model mimicked that of the iTunes Store by pricing e-books at a flat rate, though publishers argued this was keeping prices artificially low by using its overwhelming dominance of the market for e-books and readers. In attempting to compete with the launch of the iPad and the iBookstore, Apple coordinated with publishers to set their own prices. Amazon’s position was anticompetitive; Apple’s actions were ultimately ruled illegal. Yet the agency model, where publishers set the price, ultimately became standard for Amazon, too.

If a simplistic approach to consumer pricing is all we ought to care about, Amazon’s original model is the ideal. But it would require competitors to take a loss and encourage a race-to-the-bottom approach that devalues books. The response to this should not have been Apple’s colluding behaviour. Rather, antitrust law should have corrected the predatory nature of Amazon’s model at the time. Because it was not, and Apple’s attempt backfired, Amazon now has an 80% market share of online e-book sales.

The price paid by customers is only one of several factors to consider. In the case of the Digital Markets Act, it is factor the European Commission is considering, but only by way of more choice within and between platforms.

(Thanks to Sam Gross.)