Apple Price Fixing
Apple went on trial this week (02/06/2013) to face charges brought by the US department of justice (DOJ) that, in 2009, it knowingly conspired to fix the prices of eBooks in the US. Last year Apple and five publishers (Macmillan, Penguin, Hachette, Simon & Schuster and the News Corp owned HarperCollins) were brought to book over alleged price-fixing, and while the five publishers have settled, Apple continues to dispute the price-fixing claims. The government is seeking to stop further collusion rather than impose fines for alleged past illegal activities.
At the core of the price-fixing is the alleged forcing of publishers to switch from the existing ‘wholesale’ pricing model to the Apple-favoured ‘agency’ model, through which the publishers set the price. In this model, Apple would act as the ‘agent’ earning a fixed 30% commission on sales. The DOJ is arguing that, without some form of collusion it is highly unlikely that such a well established wholesale pricing model would have been ditched. The implication is that, by gaining control over pricing, which the agency model allows, publishers would reduce or even eliminate price competition.
The trigger for this alleged collusion is assumed to be the entry of Amazon into the eBook publishing market with its Kindle e-Reader, with a price-point of $9.99 for popular titles. Amazon used the established wholesale price model and was able to reduce its prices to consumers. The DOJ is claiming that Apple positioned itself as the leader of an illicit price ring by claiming that only it had the dominance to force up prices and ensure long term profits from eBook publishing. The government is alleging that average eBook prices went up to between $12.99 and $14.99 as a result of Apple’s involvement in the price ring.
If proven, it is compelling evidence of the lengths that major companies will go to in an attempt to manipulate market conditions in their favour, and yet further support for the founding father of economics, Adam Smith, who noted in 1776 (The Wealth of Nations), "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." While Apple is expected to vigorously defend its reputation by claiming that there was no conspiracy, and that it wanted to increase rather than decrease competition in the newly emerging e-Book market, the other publishers involved have ‘settled’ with the DOJ. Whether Apple is found guilty or not, expect the US government to continue its aggressive anti-trust stance against technology companies and electronic media and entertainment oligopolies.
For more on the difference between the wholesale model and the agency model please go to macstories: