Apple brings out the big guns in ebooks case — economists!

Apple brings out the big guns in ebooks case — economists!

Despite a series of events that would be better suited for a David E. Kelly legal comedy than an actual court of law, Apple is still fighting on in their ebook case, and this time bringing in some economists as backup, namely Bradford Cornell of CalTech and Janusz Ordover of NYU. The goal seems to be to better explain to the court why, according to Apple, they don't understand the market and are getting it all wrong. Philip Elmer-DeWitt extracts the pertinent part on Fortune:

Efficient markets depend on firms acting in their independent business interests. In this case, the District Court's failure to consider the economics of the vertical agreements between Apple and the Publisher Defendants led it to infer that Apple facilitated and participated in a horizontal price-fixing conspiracy. The District Court never considered evidence and economic reasoning that the vertical agreements were in Apple's independent business interest in entering e-book retailing, wholly apart from any horizontal conspiracy.

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.

While I know many would disagree, this case has never smelled right to me. Having lived under Amazon's near-monopoly as a writer, publisher, and customer, everything from targeting Apple in the first place to the remedies imposed by the court to the monitor put in place to enforce them have seemed downright farcical.

Does the excerpt above change your mind at all? More importantly, does it stand a chance in hell of changing the court's?

Denny Crane!

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Rene Ritchie

EiC of iMore, EP of Mobile Nations, Apple analyst, co-host of Debug, Iterate, Vector, Review, and MacBreak Weekly podcasts. Cook, grappler, photon wrangler. Follow him on Twitter and Google+.

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Reader comments

Apple brings out the big guns in ebooks case — economists!


Well, duh.

Of course the actions were in Apples independent interest, otherwise they would not have done it . That doesn't change the facts that, by Apples own admission, they:

1) Induced competitors to cooperate to the detriment of consumers

2) Leveraged dominance in one market to apply pressure in another.

Both of which are explicitly illegal.

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Leveraging your dominance in a market is not illegal.. Hell, if it were, Amazon would have been sued in the ground, considering they were leveraging their own dominance in online e-commerce. Along with every other big company would be sued. It's done all the time. Being part of the reason for a rise in prices are also not illegal.. Price fixing is..

> considering they were leveraging their own dominance in online e-commerce

How they were doing that?

Leveraging your dominance in a market *as a tool in that same market* is legal.

Leveraging your dominance in one market as pressure in another unrelated market is what Apple did, and is most definitely illegal.

Please, show where and how that would even be enforceable? Amazon, Google, Apple, etc all have major leverage with brand name alone.. It would literally be impossible to claim they don't leverage anything coming into a new market.

So please, show me.. I'd love a link to some viable, honest, legal sources to back that up.

If you insist, start with this paper on Lexis-nexis

You not have to read the whole paper, but just the one page abstract outlines 90 years of precedent that leveraging dominant power in one market to influence another is a violation of section 2 of the Sherman act. A few years after this paper, in Verizon Comm., Inc. v. Law Offices of Curtis v. Trinko, the Supreme Court weakened this by ruling that this brand of leveraging behavior is not sufficient in and of itself to secure penalties. (The Seventh Circuit referenced this decision in a 2007 drug manufacturer case.) However, post-Verizon it is still viewed as a significant contributory factor alongside other behaviors. In other words, Apple would have been guilty in 2003, not anticompetitive by the strictest reading of the Verizon case would not be guilty of leveraging had they done nothing else, but when combined with the inducement of competitors it is more than sufficient to levy penalties.

The case never smelled right to me either. Amazon, the near monopolist, gets off free. Maybe Apple should have waited for the DOJ to step in and limit Amazon's grip on the market before they entered ebooks.

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DoJ seemed very pro-Amazon.. I'm not sure they ever would have... It smelled that bad. Amazon, a competitor, being the primary one pushing DoJ for the suit.

What amazes me, is were arguing over a .50 rise in book price, but adding a $1/gallon in gas in price, which many pay weekly or daily, is just grumbled about.. One is generally a convenience, another a necessity.

Seems we are focusing on the wrong markets. lol

In 2007 Amazon had 90% of the ebook market. That's close enough to 100% to be a "near monopoly".

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Considering Amazon didn't come out with the Kindle and the ebook store until November 19th 2007, that's quite an amazing stat (90% of the market in 5 weeks). It's almost as if there wasn't a market to begin with

Sorry. You're right about that. However, some analysts claim Amazon had close to 90% of the market in 2010.

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B&N, before the iPad introduction was able to take 20% of the ebook market share

Take that into account, take into account that there were some other ebook stores and Amazon had less than 75% of the market

It was only from one analyst (Spencer Wang). According to Apples attorneys and the DoJ, Amazon had at most a 60% share. That doesn't sound like a Near monopoly to me.

Interesting given that Apples lawyers said they were going into a market with Amazon having a 90% share. By the end of 2011 Amazons share had dropped to 60%.

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I feel that both e-books and the digital versions of games should be less than the disc price. I am talking like instead of $59.99 for both versions, the digital game is like 10 dollars less. Even books that are like $30 could be less. I feel that prices could be between what Amazon and Apple & the big 5 were doing. Amazon was selling them at a loss, while Apple and the publishers wanted retail price. If you could go in to a book store and buy for whatever eReader you wanted, I would probably pay the prices they are asking because of store overhead.
I didn't even hear about Apple's involvement until I started coming to this site. I started with the first Nook and now I use my iPad and iPhone to read books.

Everyone wants to pay the lowest price possible on anything they buy. But if the seller is losing money on each sale, they will stop selling it. Even if the product is sold by a third party at that party's loss, the public comes to expect anyone selling the product to match that money-losing price. Eventually the product disappears from the marketplace because no one is making a profit and no longer sustain the loss of money.
If publishers and authors can't make money, they will stop producing their product.

The you will glad to know that Amazon was making a profit from the ebook division and that the publishers had more revenue with the wholesale model than with the agency model

Please quote source on that one. As it stood, they couldn't go outside Amazon to sell because if they did, they had to lower, at a loss, their price to compete.. Making them stuck with Amazon.. It's a strong arm tactic, leveraging market dominance.

> As it stood, they couldn't go outside Amazon to sell because if they did, they had to lower, at a loss, their price to compete.

What are you talking about? The five big publishers were selling their books on all major stores, including Google Play, B&N and Sony Store.

Do you people really know what the case is about?

Source for what? For publishers selling outside Amazon? For Amazon having an ebook division profitable? For what?

you can read the ruling if you want the source of that data.

I can say the same for you, do you have any source for bake any of your claims?

"The you will glad to know that Amazon was making a profit from the ebook division and that the publishers had more revenue with the wholesale model than with the agency model"

I'd like to know what universe you got that. Cuz It's not in this one.. lol

It's in the court documents. The publishers all lost revenue once the agency model went Ito affect. It's as if raising prices somehow meant reducing sales. Weird..

When someone doesn't know about something, the humble thing to do is try to learn what the thing is about but when doesn't know about something, don't want to learn and tell others that live in a parallel universe is when one looks like a total ....

Agency model gave LESS revenue to publishers than WHOLESALE model because Amazon was paying FULL price for the books ($13 more less) and with the agency model Amazon kept the 30% so publisher had $9.10 from a $12.5 book.

And, by the way, from
"the Complaint asserts that Amazon’s e-books business was “consistently profitable.”"

As it is clear that you don't even know what those models are perhaps it will be better that you start to read the what the case is about

I was already in the Apple camp. I felt that the evidence was circumstantial at best that Apple was knowingly involved or a first party. I feel it more likely that Apple wanted MFN for good reason, and the publishers, independently or together, used Apple as the cog.

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It seems to me the real issue here, in street language, is price fixing. Being a monopoly isn't the real issue, the court is trying to protect the consumer from price fixing. Lot's of dancing around ambiguities, but that is what is ultimately being claimed with regard to eBook pricing. I'm just saying that's what it seems like.

And I'm also suspicious. The attitude of the court feels the same as the IRS wanting to get into Apple's overseas tax issues - And there, until proven otherwise, I believe Apple followed the letter of the law, and obviously, to its advantage. I get the feeling with eBook pricing that Apple has operated within the letter of the law, and succeeded well that way, and now they're going to pay - for not breaking the law, but succeeding while operating within the law.

Apologies for undoubtedly being to simple.