Last summer, a district court judge ruled against Apple for conspiring with publishers to raise the price of e-books, resulting in a $400 million settlement and a de facto victory for Amazon. But now an appeals court appears ready to undo that decision. As Apple and the Justice Department had a second go at sparring last month, a three-judge panel from the 2nd Circuit looked skeptically at the government’s case, at moments even suggesting that officials may have pursued the wrong company.
The main legal issue in the case is technical: Whether the lower court applied the wrong legal standard when assessing Apple's conduct, by using a test for "horizontal" agreements rather than for "vertical" ones. But the court's line of questioning and the case more generally have much broader implications, as they cut to the heart of how power will be distributed in the 21st-century retail economy.
The case highlights three main issues.
First: Relying on price as an exclusive measure of competition is shortsighted. As you might recall, DOJ built its antitrust case on the fact that five major publishers used Apple’s entry into e-books as an opportunity to adopt “agency” pricing, through which they regained control over e-book prices and loosened Amazon’s monopoly. The government's main argument is that Apple and the publisher's conduct was illegal because they hurt competition, by conspiring to raise prices of e-books.
As one judge pointed out during the hearing, only in the narrowest sense is this true: After publishers, through Apple, adopted the new pricing model, the price of some e-books rose. Critically those prices "rose" only relative to prices set by Amazon. Amazon, meanwhile, famously loss-leads on books generally and was discounting heavily on e-books specifically so that it could solidify a monopoly in the e-reader market, with its Kindle. Pricing goods significantly below what you paid for them -- for the sake of establishing dominance or driving out your competitors -- is known as "predatory pricing," conduct that antitrust authorities once policed. But since the 1990s, officials have largely stopped enforcing predatory pricing claims, largely because of a 1993 court decision that significantly raised the threshold of proof.
“These people got together to defeat a monopoly,” Judge Dennis Jacobs noted. “When a monopolist is maintaining a monopoly through low-cost pricing, the erosion of that monopoly will cause prices to rise.”
The government responded that it believed Amazon’s low pricing was good for consumers. Judge Jacobs was overtly skeptical of this narrow line of thinking. “Would you have maintained predatory pricing if it’s good for consumers?” he asked. “That’s really odd.”
What’s more, other outcomes suggested that the market actually became more competitive as a result of Apple’s agreements with publishers. As Apple points out, prices across e-books as a whole actually fell, the self-publishing market expanded dramatically, and the number of e-books produced increased. Most obviously, a market where previously Amazon had reigned with 90 percent control now had two viable competitors (Apple and Barnes & Noble), with Amazon’s share closer to 60 percent.
In other words, low prices alone can be a deceptive sign of healthy competition. Nor is any metric that Apple mentions, alone, a sufficient measure of competition either. We can imagine situations where more of something actually corresponded with less competition, or rising prices with more competition. To gauge the actual effects on competition, assessing changes in the larger market structure and subsequent power dynamic is key.
The second takeaway is that pricing laws appear to be emerging as a key battleground for power in the 21st century retail economy. Pricing laws determine, among other things, which player in the chain holds the right to price the final good and whether there are limits on what that price can be. Though somewhat obscure today, pricing law was a key area of focus in the last Gilded Age, when legislators and regulators understood that companies with concentrated capital could afford to slash prices and endure losses to drive out competitors, benefiting consumers only in the short term while distorting competition for the long term. (In 1914 Congress held a series of hearings titled “To Prevent Discrimination in Prices and to Provide for Publicity of Prices to Dealers and the Public.”)
Today, given that the central players in the Internet economy are middlemen – platforms that connect buyers and sellers – pricing laws will determine how the spoils get split. Internet platforms enjoy significant benefits, due to network effects and their collection of troves of data, which means producers are often dependent on a very small number of companies (or even one) to get to market. Leaving the right to price with the makers of goods – like authors and publishers – can help level the playing field between makers and middlemen.
And third: Perceptions seem to matter. When the Justice Department initially filed its case in April 2012, the public largely viewed Amazon’s services as an unadulterated good. The recent hearing, meanwhile, followed months of Amazon’s highly public dispute with Hachette, whereby the retailer cut off access to the publisher’s books. The move drew outcry from authors and directed attention toward Amazon’s tight grip over America’s industry for books, with calls for the company to be broken up. No doubt, Amazon is still one of the country’s most beloved companies. But it’s hard to think its flagrant exercise of brute power hasn’t affected the opinions of more members of the public – and, perhaps, of some judges on our federal courts.
For readers and writers, the damage from the government’s lawsuit is already done. Amazon notched a win against publishers the day government filed its suit: Four settled and paid up almost immediately, and even Macmillan – which initially announced it would stand its ground – soon realized its coffers would bleed dry if it tried to put up a fight. Pressured to beef up their muscle against Amazon, book publishers since 2012 have consolidated further, leaving even fewer channels for authors. Sure, seeing the court scrap the government’s case might prove somewhat satisfying, a triumph of principle. That the only player who could afford to drop millions to contest and win its case was another tech giant – while the publishers scrimped to keep their businesses afloat – won’t, however, offer much solace.
Lina Khan reports on the effects of concentrated economic power. She is a student at Yale Law School and a fellow with the Open Markets Program at New America.