ebooks

Apple’s prospects of a successful appeal against the ruling in the ebooks trial may be improved by a brief filed by two economists from Caltech and NYU who suggest that the ruling was in error and call for it to be reversed.

Apple was found guilty of anti-competitive practices on two grounds. First, it asked publishers to switch from a wholesale pricing model – where publishers sold books in bulk and retailers set their own prices – to an agency model, where publishers set prices and retailers took a percentage cut. This, the court found, reduced price competition … 

Second, Apple sought agreement from publishers that it would never pay more for books than any of its competitors – the so-called Most Favored Nation clause. The court found that this had the effect of keeping prices higher than they would otherwise have been by preventing other retailers negotiating better deals.

Caltech’s Bradford Cornell and NYU’s Janusz Ordover have filed what’s known as an amicus curiae brief – literally ‘a friend of the court’ – an unsolicited legal opinion by someone uninvolved with the case but feels they have information or opinions relevant to that case.

In it, they argue that Most Favored Nation agreements can actually promote competition when there is an existing dominant player (in this case, Amazon), and that the effect of Apple’s entry into the ebook market was to reduce Amazon’s power and thus act in the interests of consumers.

The provisions of the agreements at issue — agency, ‘most-favored-nation’ (MFN) clauses, and price caps—can be instrumental in facilitating new entry, particularly into markets with an entrenched, dominant firm. In this case, the District Court disregarded economic evidence and reasoning that these provisions served Apple’s independent business interest in entering the e-book market, where Amazon was a near-monopolist. The District Court also ignored economic evidence and reasoning suggesting that Apple’s entry into e-book retailing, and not the MFNs, allowed the Publisher Defendants to persuade Amazon to switch from a wholesale to an agency business model.

The District Court also erred in equating price increases for some e-books with harm to competition. Apple’s entry into the e-book retail market dramatically increased competition by diminishing Amazon’s power as a retail monopolist (and its ability to pursue a “loss-leader” strategy that inefficiently priced e-books below their acquisition cost). That increased competition gave publishers more bargaining power, thereby bringing ebook pricing closer to competitive levels. These errors threaten to chill competition by discouraging the use of common vertical contracting techniques that are often essential to facilitating the expensive and risky investments needed for entry into highly concentrated markets. Our antitrust laws should encourage, not penalize, vertical contracting arrangements that facilitate entry and enhance competition.

Courts are not obliged to allow amicus curiae briefs to be admitted into evidence, so we’ll need to wait and see whether this argument is considered. The DOJ plans to file its own response to Apple’s appeal by May.