Apple Anti-trust Case
Facts to the case
The publishers of the books were able to control the prices of e-books but with Amazon Company selling the books at a cheaper price, the publishers could not control or raise the prices at will. Amazon was using a discounted model strategy to sell the publishers' books, but the publishers could not keep up competition. This is because they considered the price to be very low and could not compete individually with Amazon.
The publishers, therefore, ganged up and collaborated in order to alienate and force the Amazon to sell the books at the publishers set price. This was done by signing unilateral agreements with Apple Company.
As a result, the publishers had to adopt the agency model from the wholesale model. The wholesale model involved the publishers selling books to the retailers who then had the power and freedom to set the retail prices. The new model, the agency model, involved the publishers replacing the retailers with agents who would act as distributing agents and therefore no power or freedom to set the retail prices. This was all done to coerce amazon to raise the e-books prices.
As a result, the e-books prices increased from $9.99 to $12.99 and $14.99 and hence the non-price and price competition among the publishers and the retailers was eliminated.
Anti-trust Laws Violated
One of the anti-trust laws violated by the defendants was the Sherman act of 1890. This is a law that prohibits activities that are considered by the United States government to be anticompetitive and one that require the government to investigate and follow up on trusts. The act bestowed upon the federal government power to start and carry on with proceedings against suits in a bid to dissolve combinations. These are trusts that were limiting trade among several states or with other countries.
The motive of the act was to resolve and restore order and competition though the act failed clearly to define terms such as a combination, monopoly and conspiracy. Basing on this law, the defendants violated the law on fair competition and the formation of cartels in order to benefit them at the expense of the consumer. The act itself was intended to benefit the consumers more than the competitors by not affecting any market gains made honestly.
There are multiple cases that are relevant to this case such as:
• Northeastern Telephone v. AT&T (1981)
• Barry Wright Corporation v. ITT Grinnell (1983)
• Matsushita Electric v. Zenith Radio (1986)
• Utah Pie v. Continental Baking (1967).
However, the most relevant will include:
- United States v. E.C Knight Co
This is the case also known as the sugar trust case that was conducted by the United States Supreme Court to regulate the government power in controlling monopolies. As per the Sherman act, trusts and combinations were illegal since they reduced competition between businesses and hence the state sought to control power concentrations such as monopolies. As such, the American sugar refining company had acquired control of E. C. Knight Company and numerous other companies in the sugar refining industry.
The case was instituted in order to prevent the acquisition of the company and several others since this would have given the American sugar company the power to control production and prices and hence monopolize the market. The court held that in it was in its power to determine the case since it was related to commerce and also that action against manufacturing monopolies should be instituted by individual states.
- United States v. American Tobacco Company
The American tobacco company was started in 1890 by James Duke, who was a member of the W. Duke, sons and company of Durham. The company was a large firm in the manufacturing of cigarettes and later expanded to become the new American Tobacco Company. This was a result of merging with five large retailers in order to form an influential company and monopolize the market. When the case was instituted by the government, the company and not the other defendants were found guilty of violating the Sherman act. The ruling was appealed both by the government and the company, and the court held responsible all the parties involved and directed the federal circuit court in New York to dissolve the combination.
- United States v. Colgate & Co
This is the case that involved Colgate & co and which the court decided that the company has the power to decide which entities to deal with while conducting its business affairs. Colgate & Co applied a policy of refusing to deal with vendors that were selling below a suggested retail price and the company cut ties with any company that refused to continue abiding by the stated price rules. The court held that, although the Sherman act intends to limit monopolies and combinations, in the absence to create or maintain monopoly, it is the discretion of business to decide who to work with in the business fronts.
- Product market
- Market Demand Elasticity
Market Demand Elasticity is one of the dimensions that is involved in the market power structure that is directly associated with antitrust laws. In principle, the higher the market elasticity of demand, while holding other things constant, the higher the firm elasticity of demand as stipulated in the Lerner indexing. Therefore, it implies that a firm’s prices will approach the marginal costs at the point of profit maximization output. In other words, high market elasticity is an indication that there are available good substitutes for a product in the industry and the presence of the substitutes creates the limiting effects that will bar the any firm from creating a monopoly.
- Market price
The market price is the price of a commodity or service that is determined by al the actions of the buyers and sellers in the market. In a competitive market, the price is determined by the demand and supply forces and hence the equilibrium price. For instance in this case, before the defendants colluded to set the market price, the price of e-books was $9.99 as a result of Amazon discounting method and compliance by the publishers. If the market was to remain this way and no collusion is observed, the publishing firms would have to change their strategies individually in order to sell at the market price as set by the market structure.
This is an act by players in the industry to combine their efforts or agree to take similar strategic actions in order to influence the market to their benefit. It may involve colluding to sell a product or offer a service at a set price in order to ensure maximum benefit. Such a collision may be observed in the oil industry where firms collaborate to charge a certain price for petroleum products at the detriment of the consumers. Collusion may also be done in order to limit entry of other participants. As such, firms may agree to lower prices of products in the short run to ensure that a new entrant suffers losses and exits the market.
After the new entrants exit, the firms raise the price of the product again and enjoy continued profits. Such behavior is referred to as predatory pricing. In this case of Apple, the publishing firms collude with Apple to use the same platform and therefore force amazon to raise the minimum price for the e-books. Through such collaboration, the companies can raise the price of the product and hence achieve their objective of increased revenues.
- Monopoly (market) Power
Monopoly or market power can be as a result of several factors that includes sole access to a resource, patents and copyrights among others. Holders of monopoly power can alter the market price since they are the sole providers of a product or service in the market and are thereof able to achieve high profitability. They set the market price, and smaller firms have to follow suit or face exit either. Monopolization can also involve one large firm that has control of a large percentage of the market share and other small firms that share the remainder of the market. Due to this, a large firm sets the market trends, and others have to follow. In addition, it may involve several firms combining efforts to control the market. In this case, the publishing companies form a strategic alliance geared towards ensuring that Amazon follows suit and raises the price of e-books. This is also evidenced by the alleged violation where the defendants can distribute a wide range of popular books, which comprises half of the New York Times fictional and non-fiction bestsellers list.
- Consumer and Producer Surplus
Consumer surplus is the difference between the price the consumers are willing to pay for the quantity demanded and the actual price of the purchase. Sometimes, the producers raise the price in order to tap into consumers' surplus and therefore derive extra benefit. When the prices are low, consumers derive a greater benefit than when prices are high since they can preserve some money to be used in the purchase of more goods. In addition, they are in a position to buy more of a good using the same measure, hence maximize their utility. On the other hand, when price is increased, the consumer surplus reduces and they are not able to buy as much as they would have wanted due to a decrease in the purchasing power. In this case of Apple, the actual price for the e-books through fair market competition is set at $9.99. However, when the publishing firms collude, the prices of the books raise to between $12.99 and $14.99 reducing the consumer surplus and their purchasing power.
On the other hand, producer surplus is the difference between the revenues that sellers take in terms of the goods sold and the minimum price they would be willing to produce it. When the prices are low, the producer's surplus is low and when the prices are high; the producer's surplus is high. This is illustrated by the law of supply, whereby, the higher the price, the higher the quantity supplied. At a high price, the producers are willing to produce more than at a lower price. In this case, therefore, by the publishers colluding to increase the price of the e-books, they increase the producer's surplus.
- Fringe Supply Elasticity
In principle, the higher the elasticity of supply of the competitive fringe, ceteris paribus, the higher the elasticity facing the firm, and hence it results to smaller market share. High supply elasticity indicates that in the event that there is a slight change in price upwards, there will be a large incremental change in the output of the competitive fringe. As such, in order for a firm to maintain its price at a given level, it has to ensure that it reduces its output to a level that is greater than the supply elasticity of the fringe. Moreover, in the event that the elasticity was infinite in a specified range, it implies that the demand that a given firm will be facing will also be infinite. The implication here is that such a firm will not possess any market power
- Geographical Market
A geographical market is an area that businesses or operators sell their products and or offer services through the supply and demand forces. The geographical dimension in this case is worldwide since the publishers use electronic gadgets to sell the e-books. This is through use of smartphones, personal computers among others.
- Actual and potential sellers
The actual sellers are the publishing companies that includes Hachette, HarperCollins, Macmillan, Penguin and Simon $ Schuster. They are the defendants in the case and form a collaborative group with Apple in order to sell their books through the iPod. Potential sellers may include new entrants in the publishing industry and who will also be affected by such combinations.
- Actual and potential buyers
The actual buyers are the consumers of e-books and its services and may include students such as undergraduate, researchers among other scholars.
- Spot market, short-term vs. long-term contracts
Spot market involves selling of goods at cash point at the set market prices. Short term contracts are obligations that have to be met in the short term and whose duration is a short period. On the other hand, long term contracts occur over a long duration if time. In the case of Apple, the contracts signed are long-term where the defendants agree to sell the products at cash instant and support each other in the future endeavor.
As indicate by the evidence brought against the defendants, the defendants may be found guilty from several fronts. This includes:
- Illegal Agreements
The defendants enter into collusion agreements that are geared towards concentrating market power in their hands and hence influence the market prices to their advantage but to the detriment of Amazon and consumers.
- Discriminatory alliance
The defendants form an alliance with apple that is intended to alienate Amazon Company specifically from offering products at a lower than the agreed price. They also support Macmillan when Amazon delists Macmillan e-books from its lists in a bid to force Amazon to comply with their resolutions. The executives of the companies even concur that they were taking the actions in order to coerce Amazon into a deal.
- Sharing of firms policies and marketing strategies
The companies share their marketing policies and strategies even when signing of agreements with Apple. There is undue influence from Apple Company since its makes available all the information it shares with one company with the others in order to influence others to enter into a contract. Sharing of such information is illegal.
The firms' alliance is formed with the intention of forming a cartel that is bale to influence the prices of books at the will of the firms. In addition, it is intended to consolidate market power and ensure any other player in the market complies with the defendants' resolutions of charging higher prices.
- Clearance and Runs
The defendant is found culpable of scheduling e-books to be playing in stores of their own selection at any given time that has to be approved by the firms. As such, it should then be presumed that the defendant was conducting such activities to eliminate competition thus creating a monopoly power that is exploitative to the consumers due to its insensitivity to changes in consumer tastes and preferences and market prices.
- Pooling Agreements
the defendants the defends agreed to support each other in attempting to raise the prices, employed ostensible joint venture meetings as a disguise to disguise their intention of raising prices, fixed retail books tiers an developed a fixed method of and formulation for setting retail e-book prices. These actions amount to pooling agreement that is disadvantageous to consumers since they bar competitiveness in the market.
Rebuttal to the Judgment
The firms' case may be rebutted on the basis of the Colgate case. This is whereby; the court determined that Colgate was free to choose who to do business with and alienate any distributor whom it felt was charging a lower price against the company's policy. Therefore, the firms have the discretion to choose to work with Apple and not Amazon, which charges a lower price.
In addition, by the defendants' colluding, they can realize optimal diversification and homogenization of their products according to the needs of the demanders. This would also ease the process of decision making in terms of the marketing strategies and the economic benefits to be realized by the individual firms.
Moreover, the defendants are against amazon pricing strategy. As such, the situation from the defendants is that they are ganging up to compel amazon to revise the prices upwards. The price should be set by the market forces. As such, the action by the defendants could be interpreted as a strategic alliance to consolidate their competiveness.
The strategic alliance is founded with the aim of offering quality books at affordable prices while still ensuring that the defendants operate profitably. Therefore, the collective effort is seen to be aiming at creating disequilibrium in the market place such that the involved firms can push the price to high new equilibrium that is reflective of the total operation cost and reasonable profit margin.