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Play by the book?

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Although still a tiny market in continental Europe, there is no doubt that e-books have a large potential when we consider their growth and share among total book sales in the US and the UK [1]. From its nature, sales of e-books depend on device penetration, with the most successful e-book reader being the aggressively marketed Amazon Kindle. Other competitors followed such as Apple which has also been selling e-books for its devices, including the iPad which has been launched across Europe by mid-2010. In its attempt to compete with Amazon, it entered in arrangements with several book publishers (Hachette Livre, Harper Collins, Simon & Schuster, Verlagsgruppe Georg von Holtzbrinck, and Penguin) which have been alleged to restrict competition and thus illegal, both, in the US and the EU [2][3].

Specifically, the publishers jointly switched from an independent distributor agreement to an agency agreement with Apple where publishers controlled the price of e-books that Apple, solely as an agent, sold via its online store. Additionally, a “most favoured nation” clause (MFN) among the publishers ensured that if an e-book was available at a lower price elsewhere, its publisher would have to match that price in Apple’s iBookstore. Both sides, Apple and the publishers, hoped to end the downward spiral of e-book prices mainly spurred by Amazon’s e-book store. Apple might also be able to gain competitiveness as a distributor against Amazon. From the publishers’ perspective, this would furthermore induce other retailers to enter into similar agency agreements. As the agent model allows the publishers to control the price on Apple’s and other participants’ stores, this would indirectly establish a resale price maintenance (RPM).

From an economic perspective, RPM is likely to increase welfare effects when it affects intra-brand competition [4]. More specifically, the horizontal externalities of services or promotion offered by a retailer could induce free riding. Retailers which do not invest have lower costs, but would still benefit from the additional services. RPM avoids that free-riding retailers cut prices and gives incentives for investments in non-price competition, especially additional services and marketing efforts.

Whether this is true or not for the e-book market, there are concerns that the MFN clause hinders price competition. Publishers are unlikely to reduce the price for other retailers because they would have to offer the same discount to Apple, implying a “double cost”. This would additionally support to overcome a commitment problem among the publishers by inducing them to prevent Amazon from continuing to sell cheaper e-books and finally to establish a similar agency model with Amazon.

The motivation of the RPM and the joint switch to an agency model increases the likelihood that the agreements have not been set merely bilaterally between each publisher and Apple, but rather indicates the existence of “horizontal” collusion. Based on this, a US District Court and the European Commission (EC) have started investigations in April 2011 and December 2011, respectively. In its preliminary assessment [5], “the [European] Commission took the preliminary view that to achieve such a joint switch, each of the four publishers disclosed to, and/or received information from, the other four publishers and/or Apple, regarding the four publishers’ future intentions”. Regarding the MFN, the EC expressed the concern that “the financial implications for publishers of the retail price MFN clause were such that this clause acted as a joint ‘commitment device’. Each of the four publishers was in a position to force Amazon to accept a change to the agency model or otherwise face the risk of being denied access to the e-books of each of the four publishers […]”. The fact that publishers coordinate the market conduct and the prices through Apple in order to increase retail prices of e-books, or at least limit retail price competition, would pose an infringement of EU competition law.

Subsequently, while Apple and four publishers (Hachette Livre, Harper Collins, Simon & Schuster, Verlagsgruppe Georg von Holtzbrinck) accepted the remedies and agreed to terminate the agency agreements already in December 2012, the last publisher in scope, Penguin, followed in July 2013.

Although agency agreements and MFN clauses are not unlawful per se, this case sheds light on how vertical agreements can be used to facilitate horizontal collusion. Apple, as a retailer, indirectly acts as a “hub” for the coordination of prices of the publishers that compete with each other and therefore facilitates the enforcement of the “horizontal” agreement.

Trieu Pham #578

Sources:

[1] http://www.letsgoconnected.eu/files/Lets_go_connected-Full_report.pdf

[2] http://www.nortonrosefulbright.com/knowledge/publications/104551/competition-world-a-global-survey-of-recent-competition-and-antitrust-law-developments-with-practical-relevance

[3] http://www.lexology.com/library/detail.aspx?g=7d27a1ac-46c4-469a-aba2-242a75edb178

[3] http://nautadutilh.nl/PageFiles/9151/07-12-Resale-price-maintenance-economics-call-for-a-more-balanced-approach-kneepkens.pdf

[4] http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2013:073:0017:01:EN:HTML

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Author: studentnovasbe

Master student in Nova Sbe

2 thoughts on “Play by the book?

  1. I think that one of the most interesting features of this case lies in the role of Amazon and how the efforts made by the publishers and Apple fundamentally represent their “answer” to that.
    Amazon entered this market with a bang, deliberately bringing retail prices of e-books down, especially when compared to their paper counterparts – as part, of course, of their strategy to market Kindle.
    These publishers were obviously unhappy, as their margins were being tightened by this move. This was especially worrying for them as Amazon was, to a great extent, first-mover in this market, with respect to the large scale sale of e-books, and so the pricing strategy it used would likely set the tone for how this new market would play out over the ensuing years. It was against this setting that Apple’s entry was seen as the perfect opportunity for publishers to deal with this “problem”.
    It is also important to understand the source of these publishers’ market power – where does it really come from? If, in principle, printing some books isn’t, in itself, very costly, this is even truer for e-books: anyone can write a book and publish it online, making it widely available. However, these publishers engage in exclusive agreements with authors, who provide the content for the books. If Amazon is to sell e-books on a large scale, it needs the most in-demand, popular authors and titles (and variety thereof), and that’s why it was subject to being “played with” by the publishers (with Apple’s aid).
    Finally, another thing that sparks my curiosity about this is the way the case ended in Europe. The Commission never formally charged the publishers, rather saying it had “concluded that this behaviour could possibly constitute an infringement”. These, along with Apple, however, presented a series of “commitments” that would allow free pricing decisions by e-book retailers. These “commitments” were never made legally binding, so these, in practise, were mere promises in good faith: they were not actually “forced” to follow them, as no sanctions would be looming – except for the fear of being scrutinised again by the Commission. Of course, Apple and the publishers denied any wrongdoing along the whole process. The fact, however, is that they seem to have abided by their promises, as no investigations were raised later. In brief, nothing happened, no-one did anything wrong, but fair competition was still successfully restored.

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