Apple was last week found guilty in the US for its role in the fixing of e-book prices. A subsequent hearing will now be held to determine the damages that Apple will be forced to pay. However, Apple vehemently denies the allegations and looks set to appeal the decision.
To understand what the US Department of Justice (the European Commission has also brought a case) is objecting to, we need to look back to how pricing in this rapidly growing market has evolved over time.
Until the end of 2009 e-books were sold under a wholesale pricing model. Here, publishers charge retailers a wholesale price per book and retailers are then free to charge final consumers whatever price they choose. This all changed in the US (there were also similar developments in Europe) during an eventful period of a few days in January 2010 when Apple unveiled its iPad for April release.
The publisher Macmillian proposed that Amazon switch to an agency pricing model under which the publisher sets the retail price. This is typically referred to by economists as Resale Price Maintenance (RPM). Interestingly, RPM has a long history in the book industry. In the UK for example, throughout most of the last century publishers set prices under the Net Book Agreement, until this broke down in the mid 1990s. In addition, in some countries, for example Germany, books continue to be sold under RPM.
Macmillan also threatened Amazon that if it preferred to keep wholesale pricing it would delay the supply of e-book releases to them. Amazon initially responded by refusing to stock Macmillan titles. However, soon after Amazon ceded to Macmillan’s proposal. Despite this, Amazon made clear its dissatisfaction to its customers:
We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles. We want you to know that ultimately, however, we will have to capitulate and accept Macmillan’s terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books.
It turned out that 5 of the 6 major publishers (including Macmillan) had already agreed the same agency terms to sell e-books for Apple devices. Like Macmillan, the other publishers all then also imposed agency pricing on Amazon. Furthermore, crucial to the contracts agreed with Apple was a so called ‘most-favoured customer’ clause which guaranteed that e-books would not be sold elsewhere at prices below those charged to Apple customers. Effectively, therefore, this clause made it necessary for the publishers to impose agency terms on Amazon. The Department of Justice objected to this and believed consumers would be harmed due to higher prices. All of the publishers involved eventually decided to settle the case, leaving Apple alone to fight the case in court.
In the decision Judge Cote concluded that:
the publisher defendants conspired with each other to eliminate retail price competition in order to raise e-book prices, and that Apple played a central role in facilitating and executing that conspiracy. Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did in the Spring of 2010.
It is interesting to consider the reasons why the publishers would be keen to take control of the prices Amazon charges for e-books. Evidence suggests that Amazon was frequently retailing e-books at substantial discounts and even below wholesale costs. One explanation for this is that Amazon was keen to increase demand for Kindle devices. The publishers, on the other hand, might well be concerned about the implications of Amazon dominating the e-book market. Potentially, this would give Amazon significant bargaining power over them.
Of course, such dominance might also have knock-on effects on consumer prices in the long-run. Whether the publishers will be permitted to use agency pricing to mitigate such concerns in the future remains unclear and depends on whether the competition authorities object to agency pricing per se or just the coordinated way in which it was achieved.
As the articles below demonstrate, opinion is strongly divided for and against the judgement against Apple.
EU raids ebook publishers in price fixing investigation The Guardian, Benedicte Page and Leigh Phillips (4/3/11)
Apple Faces Damages Trial Over E-Book Antitrust Violation Bloomberg Businessweek, Bob Van Voris, Adam Satariano and David McLaughlin (10/7/13)
Apple played ‘central role’ in ebook price-fixing conspiracy, says federal judge The Guardian, Amanda Holpuch (11/7/13)
US: Apple found guilty, but what happens next? Competition Policy International (11/7/13)
Why It’s Insane That No One Cares About Apple’s Price-Fixing Conspiracy (AAPL) Seattle pi, Jim Edwards (13/7/13)
Apple Learns The Hazards Of Innovation With E-Book Antitrust Ruling Forbes, Daniel Fisher (10/7/13)
Questions
- What are the important features of the e-book market?
- What are the key differences between the traditional and e-book markets?
- To what extent do Amazon and Apple have different incentives in the e-book market?
- Do you think Resale Price Maintenance is more likely to harm competition in the market for traditional or e-books?
- What do you think might be the short and long-run implications of this decision?
The Competition Commission (CC) recently completed their provisional investigation into the cement and concrete market in Great Britain (press release). They concluded that coordination between the main cement producers is resulting in high prices.
In contrast, to illegal cartels (see for example the recent post on this site), the firms in this market are not accused of doing anything illegal. Instead, the CC’s concern is with tacit collusion. Here, no illegal communication between firms takes place, firms simply do not compete intensely due to a mutual understanding that high prices are collectively beneficial.
Economic theory suggests that one key factor that facilitates tacit coordination is a low number of firms in the market. The UK cement market certainly meets this criteria as it is an oligopoly with just three main players plus a new entrant. The CC concluded that:
In a highly concentrated market where the product doesn’t vary, the established producers know too much about each other’s businesses and have concentrated on retaining their respective market shares rather than competing to the full.
They estimate that this cost consumers over £180m in a 3 year period.
Whilst tacit collusion is not illegal, competition authorities can try to prevent it from arising by intervening in mergers that they believe will make it more likely. In fact, the new entrant to the cement market came about due to sales required by the CC before they would allow a joint-venture between two of the main players to go ahead. Clearly the CC’s recent findings suggest that this intervention was not sufficient to ensure intense competition in the market. However, an additional tool available to the authorities in the UK is to be able to remedy harm to competition undercovered as a result of an investigation into the market. In some cases this may even involve breaking-up firms in the market (see for example the decision to force BAA to sell several airports).
When deciding on how to remedy the problem in the cement market, the CC will be keen to avoid the past mistakes of their Danish counterparts. In a famous case, in 1993 the Danish authorities attempted to increase competition in the concrete market by publishing individual sellers’ prices. The idea was that this would stimulate competition by encouraging buyers to shop around. However, evidence published here suggests that this in fact increased prices by around 15%! Why? The paper examines possible explanations and concludes that the information published by the competition authorities helped firms to monitor each others behaviour and therefore facilitated tacit coordination in the market. This is entirely consistent with economic theory which shows that another key factor which facilitates tacit coordination is market transparency.
The CC suggest that such monitoring is also possible in the GB market:
Established information channels such as price announcement letters can signal their plans, and tit-for-tat behaviour and cross-sales can be used to prevent or retaliate against any moves to disturb the overall balance between the different players in this market.
According to the above press release, the remedies the CC are considering include: the sale of capacity or plants by the leading players in the market, creation of buying groups, prohibition on price announcements and restrictions on the publication of industry level data. This suggests that the CC are well aware that reducing market transparency can play a key role in preventing coordination. It will be fascinating to, first, see what the CC opt for, then, what impact this has on competition in the industry.
Articles
Same product, same price? Competition in the UK Global Cement (22/05/13)
Competition Commission uncovers `serious problems’ in cement market Graham Huband, The Courier (22/05/13)
Competition Commission call for cement sell-off Mark Leftley, London Evening Standard (21/05/13)
Competition Commission documents
CC looks to break open cement market Competition Commission Press Release (21/5/13)
Aggregates, cement and ready-mix concrete market investigation Competition Commission core documents (various dates)
Questions
- Explain tacit collusion using a Prisoner’s dilemma game.
- Is cement the type of product where we might expect coordination to be most likely?
- Why is cement an important market in the UK economy?
- The first article above suggests that most of the management team at the new entrant came from the other main players in the market. Do you think this may significantly affect the likelihood of tacit collusion?
- Evaluate the pros and cons of the alternative remedies the CC are considering.
Much has been written on Margaret Thatcher following her death at the age of 87 on April 8. But getting a calm assessment of both her time in office and her legacy is not easy. And it’s clear why: she created both stronger loyalty and stronger opposition than any other UK Prime Minister.
As economists, however, we should try to be as dispassionate as possible in assessing the effects of policies. There is always a normative question of the relative desirability of different economic outcomes – and you will have your own views on the relative importance of objectives such as economic growth, greater equality and greater social cohesion – but to determine cause and effect, or at least correlation, requires a careful examination of the evidence. Also, drawing lessons for future policy requires a careful modelling of the economy and the effects of changing economic variables.
The following articles have been selected from the hundreds that have appeared in the press in the past few days. Whilst they cannot be claimed to be totally ‘objective’, taken together they give a good overview of her economic policies and her economic legacy.
You may well have been surprised by the amount of coverage of her death and at the fervour of her supporters and critics. But this bears witness to the huge effect she had on both the political scene and on the UK economy – for good or bad.
Articles
Margaret Thatcher’s timeline: From Grantham to the House of Lords, via Arthur Scargill and the Falklands War Independent (8/4/13)
Overhauls Are Still Felt, Debated Decades Later Wall Street Journal, Charles Forelle (9/4/13)
Margaret Thatcher’s Four Ages of Monetary Policy EconoMonitor, David Smith (10/4/13)
How Mrs Thatcher smashed the Keynesian consensus The Economist (9/4/13)
Margaret Thatcher: The economy now and then BBC News, Stephanie Flanders (10/4/13)
Did Margaret Thatcher transform Britain’s economy for better or worse? The Guardian, Larry Elliott (8/4/13)
A look back at Margaret Thatcher’s economic record Washington Post, Dylan Matthews (8/4/13)
Margaret Thatcher’s legacy for business and economics—the world weighs in Quartz, Gwynn Guilford (8/4/13)
Data
Economic Data freely available online The Economics Network, see especially sites 1, 2, 3, 6 and 9
Questions
- Summarise the macroeconomic policies followed by the Thatcher government from 1979 to 1990.
- Chart economic growth, unemployment and inflation over Margaret Thatcher’s time in office. How does the performance of each of these indicators compare with the period from 1990 to 2007 and from 2008 to the present day?
- What is meant by ‘monetarism’? Did the Thatcher government follow pure monetarist policies?
- What is meant by the ‘Big Bang’ as applied to the financial sector in 1986? Assess the long-term consequences of the Big Bang.
- What elements of ‘Thatcherism’ were retained by the Labour government from 1997 to 2010?
- To what extent can the current Coalition government be described as ‘Thatcherite’?
Since the late 1990s the European Commission (EC) has been concerned with trying to prevent Microsoft from abusing its dominant position. As described previously on this site, in the latest instalment last week Microsoft was fined for accidentally failing to adhere to an earlier commitment automatically to allow Windows users a choice of web browser.
This is the first case of fines being imposed for failure to comply with commitments required by the EC. In part because of Microsoft’s compliance, the fine imposed was well below the maximum level it could have been. However, it still means that Microsoft has now in total contributed enough to the EC’s coffers to cover the competition department’s budget for over 20 years.
Commitments appear to be increasingly the EC’s preferred solution for resolving competition disputes, especially in the rapidly changing IT sector (see for example Google and e-books). In contrast to a lengthy litigation process, in theory such commitments can quickly fix the problem and increase competition. The EC hopes that the fine imposed on Microsoft will send clear signals to firms that agreed upon commitments must be adhered to. However, this case also highlights that behavioural commitments require close monitoring by the competition authorities. As one industry consultant argues:
While it’s highly likely that it was a technical mistake that broke the browser choice facility the fact that it remained broken for 14 months raises significant questions about Microsoft’s ability and willingness to comply with the voluntary agreement with the EU.
At the same time the situation also raises concerns over the EU’s ability to actually monitor the outcomes of antitrust agreements.
Microsoft offers web browser choice to IE users BBC News (19/02/10)
Microsoft faces hefty EU fine The Guardian (06/03/13)
Microsoft fined €561m for ‘browser choice’ error The Guardian, Charles Arthur (06/03/13)
Questions
- Why is it essential that competition disputes in the IT sector are quickly resolved?
- What are the problems with monitoring company behaviour in this sector?
- What are the pros and cons of agreeing commitments rather than litigation for competition law infringements?
- How might Microsoft respond to this latest fine from the EC?
In 2009, the European Commission investigated Microsoft’s practice of bundling its own browser, Internet Explorer, with new copies of Windows. It found that this was an abuse of market power and created an unfair barrier to entry of other browsers, such as Firefox.
An agreement was reached that Microsoft would include a ‘choice screen’ in which users in the EU would be given a full list of alternative browsers and asked which they would like to install. On making their selection, a link would take them to the browser site to download the installation program. This screen would be available until 2014. Between March 2010, when the choice screen was first provided and November of the same year, 84 million browsers were downloaded through it.
In May 2011, however, the screen was no longer present on new Windows 7 purchases. The Commission took some time to realise this: indeed it was Microsoft’s rivals that pointed it out. The screen reappeared some 13 months later, after some 15m copies of Windows software had been sold.
For this lapse, the Commission has just fined Microsoft €561m. Commission Vice President in charge of competition policy, Joaquín Almunia, said:
In 2009, we closed our investigation about a suspected abuse of dominant position by Microsoft due to the tying of Internet Explorer to Windows by accepting commitments offered by the company. Legally binding commitments reached in antitrust decisions play a very important role in our enforcement policy because they allow for rapid solutions to competition problems. Of course, such decisions require strict compliance. A failure to comply is a very serious infringement that must be sanctioned accordingly.
This may seem unduly harsh, given that Internet Explorer’s share of the browser market has fallen dramatically. In 2009, it had around 50% of the European market, with its main rival at the time, Mozilla’s Firefox, having just under 40%. By 2013, Internet Explorer’s share has fallen to around 24% and Firefox’s to around 29%. Google’s Chrome, which was just starting up in 2009, has seen its share of the European market rise to around 35% and is now the market leader. Partly this is due to the rise in tablets and smartphones, a large proportion of which use Google’s Android operating system and the Chrome browser.
Not surprisingly, the European Commission is investigating Google to see whether it is abusing a dominant position. Is Google’s case, it’s not just about its share of the browser market, it’s more about its share of the search market, which in the EU is around 90% (compared with around 65% in the USA). As The Economist article below states:
The Commissioner believes that Google may be favouring its own specialised services (eg, for flights or hotels) at rivals’ expense; that its deals with publishers may unfairly exclude competitors; and that it prevents advertisers from taking their data elsewhere.
Joaquín Almunia asked Google to respond to these concerns by January 31. Google delivered its suggestions on the deadline, but we await to hear precisely what it said and how the Commission will respond. It is understood that Google’s proposal is for clearly labelling its own products on its search engine.
Articles
Microsoft Fined $732 Million By EU Over Browser eWeek, Michelle Maisto (6/3/13)
Microsoft faces hefty EU fine The Guardian (6/3/13)
Sin of omission The Economist (9/3/13)
Microsoft fined by European Commission over web browser BBC News (6/3/13)
EU commissioner Joaquin Almunia announces Microsoft fine BBC News (6/3/13)
Microsoft’s European Fine Comes in an Era of Browser Diversity Forbes, J.P. Gownder (6/3/13)
Life after Firefox: Can Mozilla regain its mojo? BBC News, Dave Lee (11/4/12)
Google responds to European commission’s antitrust chief The Guardian, Charles Arthur (31/1/13)
Google May Clinch EU Settlement After ‘Summer,’ Almunia Says Bloomberg Businessweek, Stephanie Bodoni and Aoife White (22/2/13)
European Commission Press Release
Antitrust: Commission fines Microsoft for non-compliance with browser choice commitments Europa (6/3/13)
Questions
- Why did Microsoft’s share of the browser market continue to decline between May 2011 and June 2012?
- Why would it matter if Microsoft had market power in the browser market, given that it’s free for anyone to download a browser?
- In what ways might Google be abusing a dominant position in the market?
- Can Mozilla regain its mojo?
- According to the second Guardian article, the Microsoft-backed lobby group Icomp said “To be seen as a success, any settlement must … include specific measures to restore competition and allow other parties to compete effectively on a level playing field with Google in the key markets of search and search advertising.” Give examples of such measures and assess how successful they might be.
- Would “clearly labelling its own products on its search engine” be enough to ensure adequate competition?
Apple was last week found guilty in the US for its role in the fixing of e-book prices. A subsequent hearing will now be held to determine the damages that Apple will be forced to pay. However, Apple vehemently denies the allegations and looks set to appeal the decision.
