We have written quite a few blog posts on the Department of Justice’s lawsuit against Apple. Allegedly, Apple is involved in a price-fixing scheme with publishing companies. While the publishers (HarperCollins, Simon & Schuster, Penguin, Hachette Book Group, Inc., and MacMillian) settled with the Department of Justice early on, Apple decided to litigate. Eventually, Judge Denise Cote found the company guilty of conspiring to fix pricing.
Prior to litigation, people were surprised that the DOJ involved itself in the battle between Amazon, publishers, and Apple. While Apple and the publishers were clearly no small fish, people were even more surprised that the DOJ sided with Amazon; a company that dominated the E-books market.
Based on Amazon’s power over pricing, many publishers felt like they had no choice but to conspire. While performing an action as a result of lack of choice does not necessarily make it legal, there are many people who believe that Judge Cote’s decision against Apple was misguided (including Apple, who plans to appeal the decision).
Two of these critics:
Bradford Cornell: a professor at CalTech. He also served for 25 years as the Bank of America professor of economics at UCLA. Cornell has testified in a number of business cases involving the application of economic theory.
Janusz Ordover: the director of New York University’s Master’s program in economics. Ordover has testified in a number of cases and specializes in anti-trust. He has been on the board of editors for Anti-Trust Report for fifteen years. Additionally, he served as a deputy assistant attorney general for economics in the Anti-Trust Department of the Department of Justice.
According to a brief filed on behalf of Cornell and Ordover, Judge Cote made several errors with respect to economic theory in her decision. They are as follows:
The Economics of the Relevant Contractual Arrangements
According to the brief, Judge Cote failed to exercise care in considering Apple’s behavior as a factor in the conspiracy, as it was in keeping with its independent business interest. The pursuit of these interests is what allows for a competitive market that benefits consumers. According to the economists, in order to determine whether or not Apple’s conduct constituted a horizontal price-fixing conspiracy, it would be important to consider whether or not the behavior was consistent with the company’s own business goals separate from any of the conspiracy alleged by the DOJ. If it was determined that Apple’s behavior was in keeping with its business objectives, then it can also be determined that the behavior was not part of a conspiracy. “It is only if the conduct would not have made business sense but for a conspiracy that economics allows us to conclude that the conduct is evidence of a conspiracy” (page 4).
The court acknowledged that Apple entered into these agreements with publishers in conjunction with its iBookstore launch in order to protect its own business interests by challenging Amazon’s monopolization of the E-books market. However, the court then argued that the agreements do not exist to increase competition, which the brief points out, is contradictory.
Equating Price Increases with Harm to Competition
The brief states that the court’s reasoning that increased e-book prices limited competition in the market is inconsistent with economic principles. Increases in e-book prices after the launch of the iBookstore were the result of the end of Amazon’s monopolization of the market and did not cause a reduction in competition or harm to the consumer.
The Court’s Decision Threatens to Limit Competitive Behavior in the Marketplace
In addition to the above-referenced errors, the economists also point out the anticipated effects of this decision. Cornell and Ordover maintain that businesses, for fear of legal recourse, will stray away from the commonly-used vertical contracting terms that are beneficial to competition and consumers. The contracting tools necessary to challenge large powerful corporations like Amazon are likely to be utilized less often, thus limiting competition and a healthy marketplace.
While our firm’s blog has yet to issue a formal opinion on this particular case, it is important that we make clear the opinions of those who oppose the DOJ, as there are many of them, particularly within the publishing industry.
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