Monday, April 29, 2013

Price fixing and the Apple e-books litigation.

Apple, Inc. is the only one of six defendants remaining in a price fixing suit alleged by the Department of Justice. All other defendants have settled. The other defendants were book publishers who contracted with Apple when Apple began offering iBooks with the iPad, to compete with Amazon's Kindle. Before the introduction of the iPad, the publishers provided their books to Amazon, and Amazon would then sell the e-books for $9.99. Foer and Patterson, American Antitrust Institute, E-books and Amazon, (last visited February 20, 2013). Apple alleges that Amazon's $9.99 price was predatory, but Amazon is not a party to the case. Amazon might be investigated for predatory pricing, but I have seen nothing authoritative substantiating the proposition that Amazon will be investigated -- only that they should be. Id.

The $9.99 price at which Amazon sold e-books prevented competitors from entering the market, and Apple contracted with the other defendants to allegedly fix prices in order to force Amazon to raise its price. The publishers threatened to withhold well over half of their fiction titles from Amazon in order to coerce Amazon to raise its prices. Eventually, Amazon agreed to adopt the publishers' price structure. Id. Consumers were harmed, because the prices of e-books rose.

It will be interesting to see how the case is resolved. The trial is scheduled for June 5, 2013. Apple is a corporate giant. Many companies do not have the resources that Apple has in fighting the government in an antitrust suit.

Courts take several steps in conducting a price fixing analysis. First, the court asks whether alleged price fixing is illegal on its face. If it is, the case is over and the defendant loses. If it is not, the second step is for the plaintiff to show the anticompetitive effects of the arrangement. "Anticompetitive effects" are the bad things that happen in the market as a result of the putative price fixer's conduct.

The third step is for the defendant to provide a plausible procompetitive justification. A "procompetitive justification" is when conduct literally constituting price fixing has a good reason for the restriction. The good reason for the restriction must benefit competition and the market.

If the defendant cannot provide a plausible procompetitive justification, the case is over after the second step. If the defendant can provide a plausible procompetitive justification, the fourth step is to check whether a very obvious less anticompetitive alternative exists. If there is, the defendant will be required to provide a very good explanation as to why it did not adopt the obvious less anticompetitive alternative. If the defendant provides a good explanation as to why it did not adopt the less anticompetitive alternative, the final step is a "Rule of Reason" balancing analysis.

The fact-finder, which is usually the jury, typically decides the outcome in a Rule of Reason analysis. It is a balancing of the anticompetitive effects and procompetitive justification. If the anticompetitive effects outweigh the procompetitive justification, the plaintiff wins. If the procompetitive justification outweighs the anticompetitive effects, the defendant wins. In antitrust law, Rule of Reason balancing is something of a "no holds barred" inquiry. There is no roadmap or set of factors that a court consults to determine whether the procompetitive justification outweighs the anticompetitive effects, or whether the anticompetitive effects outweigh the procompetitive justification.

Price fixing requires concerted action. Obviously, Amazon "fixed" its $9.99 price. Since it was a single company, Amazon cannot be guilty of price fixing. When Apple entered the e-books market, Amazon reportedly had about a 90 percent market share. Predatory pricing occurs if the prices complained of are below a measure of a rivals' costs, and the alleged predator had a reasonable probability of recouping its investment from below-market pricing. If a defendant prices its goods at or below its average variable cost, there is a very heavy burden on the defendant to show that their prices are not predatory. To have a reasonable probability of recouping one's investment, the defendant practically has to have monopoly power.

With a 90 percent market share, id., Amazon certainly had monopoly power when Apple entered the e-books market with the iPad. If Amazon engaged in predatory pricing, consumers would have been harmed, because the predator has to eventually raise prices in order to recoup its investment. Since Amazon is not a party to the suit, we do not know whether Amazon is in fact engaging in predatory pricing. Those are just the allegations.

When Apple and the other publishers coerced Amazon to adopt their pricing structure, the price of e-books rose, harming consumers. If the Department of Justice wins the case, which is probable, Apple's ability to compete in the e-books market is diminished. This would essentially give monopoly power back to Amazon, which could harm consumers again if it engages in predatory pricing.

The case has not been tried yet, so we do not how many steps the court will need to dispose of the case. The biggest question is whether Apple's conduct will get Rule of Reason treatment, or whether the government will win after Apple's asserted procompetitive justification regarding Amazon's conduct. I would be surprised if Apple ends up winning. If they do, it will certainly be in a Rule of Reason analysis.

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