After the Department of Justice announced an antitrust lawsuit against Apple and five major publishers, three of whom settled immediately (see “DOJ Files Antitrust Suit in E-Book Pricing Case”), Amazon, the nation’s leading retailer of e-books, responded by announcing that it was planning to lower e-book prices. So it appears on the surface at least that consumers were the big winners, though representatives of Penguin and Macmillan warned that the Department of Justice’s actions were actually fostering a monopoly that will result in higher, not lower, prices in the long run.
And it certainly appears that they have a point, at least about the effect on marketshare of the agency model, which the publishers adopted just as Apple was about to introduce the iPad and the e-book market was ready to take off. Before the major publishers adopted the agency model in 2010, which let the publishers set the retail price of their ebooks (and kept e-book retailers like Amazon from selling below the publishers’ retail price), Amazon controlled 90% of the e-book market. The agency model helped other retailers such as Barnes & Noble and Apple gain share to the point that Amazon now controls just 60% of the e-book market.
So how does one explain the Department of Justice taking an “antitrust” action that would appear to reverse a trend that was moving away from a monopoly situation and towards one that was more competitive? The answer lies in the mechanics of “trust-busting” at the Federal level. The antitrust statutes were written over 100 years ago to combat both business organizations (trusts) that voluntarily banded together to avoid competition and set prices, and to break the power of giant corporations like John D. Rockefeller’s Standard Oil that acquired their competitors one by one until they controlled entire markets. Hence the Feds have solid legal grounds to prevent collusion on pricing by prominent producers in any category and to review mergers and acquisitions that could lead to one corporation gaining a dominant monopolistic share of any market.
The situation with Amazon is different in that Amazon, which released its Kindle e-reader device in 2007, was the prime mover in creating the e-book category. If Amazon attempted to buy its chief e-reader competitor Barnes & Noble, the Feds could step in, but in this situation, it wasn’t Amazon that was attempting to fix prices, it was the publishers who agreed on the “agency model” and who gave Apple a “most favored nation” clause that explicitly stated that no one could sell an e-book for a lower price than Apple (see “Multiple Investigations of E-Book Pricing”). The chief goal of antitrust actions is to protect the public from artificially high prices resulting from collusion or monopolistic practices.
The irony of the situation is that going to the agency model did make the e-book category much more competitive and reduced Amazon’s monopolistic share of both the e-book and e-book reader markets considerably, and the Department of Justice’s actions may well allow Amazon to regain its monopolistic position, where it could potentially dictate prices to both publishers and consumers. But it is also clear that the agency model, which raised the price of some e-books by as much as $5, cost consumers an estimated $100 million. The three publishers that settled have agreed to provide more than $51 million in compensation to consumers that bought e-books.
Lawyer and author Scott Turow, the President of the Authors Guild summed up the anti-Amazon side of the argument in an open letter released last month in which he stated that the Justice Department “was on the verge of killing competition in order to save the appearance of competition.” But given the way the antitrust statutes were written and have been interpreted over the years, it doesn’t appear that the DOJ could have acted in any other way given the collusion among publishers, who according to the New York Times, admitted that they held regular meetings where they discussed how they “could solve the $9.99 problem,” a reference to the price point that Amazon had set for e-books.
