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I am at a loss to understand how the "agency" model is anti-competitive or price-fixing.

I am hoping someone can just explain it rather than saying that it simply "is."

The agency model is what keeps the price of apps on the app store low. Developers (agents) can charge whatever they want, but clearly that doesn't equate to automatic sales at whatever price. It is in fact a very competitive market.

Nothing about the agency model, as I see it, in the example of the App Store has even a hint of being anti-competitive.

How is this different for books? I just don't see it. But I am open to explanations.

If anything is anti-competitive, it is selling at a loss so that nobody else can enter the market. That is what Amazon was doing.

Price fixing requires collusion between the producers to all sell at the same price point. It's certainly possible this is going on with the big publishers in Apple's store, but that doesn't require Apple's participation in the collusion. It doesn't exonerate Apple either, it's orthogonal.

In the wholesale model that traditional booksellers and Amazon use, it's still possible for publishers to price fix. It's possible for book sellers to price fix.

It seems to me that Agency vs Wholesale doesn't really have much to do with the concept for price fixing.

What am I missing?

This link makes some sense of it: http://blog.nathanbransford.com/2012/03/why-dojs-potential-l...

It isn't the agency model that is the problem, it is how the Apple et al. coerced/enabled the publishers to price-fix and then allowed/enabled the publishers to impose that price fixing on Amazon. I still don't exactly understand why Apple and Google are being sued and not the publishers.

[edit] It is Apple and five publishers according to the WSJ: "Three of the publishers have agreed to settle, according to court documents. Those are Hachette Book Group, Simon & Schuster and HarperCollins Publishers Inc. Under the settlement, those publishers will terminate any agreement they have with Apple regarding electronic books." http://online.wsj.com/article/SB1000142405270230444460457733... [/edit]

Money quote:

Along comes Apple and the iPad. Steve Jobs talked the publishers into the agency model - publishers set their own prices and they get 70% of the proceeds.


Publishers then turned around and imposed that agency deal on Amazon, which is the subject of the DOJ investigation [the agency model, not Amazon - gvb]. The end result: There really is more competition in the e-book world, but prices are higher than they likely would be if Amazon and others were able to discount as they saw fit.

Right - basically the argument is that publishers cooperated with Apple to raise prices, and prices actually did go up. Which raises a red-flag of anti-competitiveness.

The counterargument is that this took place at a time when prices were artificially lowered because of Amazon's leverage over the publishers. When competition was restored, prices returned to a level set by the market.

Prices weren't lower because of Amazon's leverage over publishers. They were lower because Amazon was willing to lose money to build a platform and a market. Remember, pre-agency publishers made more money along two dimensions:

1. Wholesale prices were often higher than their share of an agency price.

2. Since the prices to end-users were lower sales were higher than they otherwise would have been.

And don't forget, publishers had a much simpler, pro-competitive response if they were afraid of Amazon's dominance: drop the DRM. Then they could have sold ebooks to all of Amazon's customers (including Kindle device owners) without Amazon.

You might be in favor of dropping DRM, but that would in no way provide publishers with comparable access to the Kindle customers.

Kindle customers buy titles using 1-click from their devices or from the Amazon website. How does just 'dropping the DRM' compete with that distribution channel?

And the counter-counter argument is that if it were really the prices set by the market that we were returning to, collusion would not have been required.

Well we don't know whether there was what actually amounts to collusion, but assuming there was it might have been required to break Amazon's leverage over the bookseller which was artificially depressing prices.

That wouldn't make it less illegal, but it would be a reasons why it was necessary to restore the market as a pricing mechanism.

Thank you for the link to Bransford's blog.

You quoted from his post:

"Publishers then turned around and imposed that agency deal on Amazon, which is the subject of the DOJ investigation. The end result: There really is more competition in the e-book world, but prices are higher than they likely would be if Amazon and others were able to discount as they saw fit."

How can something be anti-competitive if it increased competition? Whether prices went up or down is irrelevant. The whole point of anti-trust law is to make sure that the market has competition. Not to make sure that prices are low.

It seems to me that the real issue is that nobody has figured out the right way to deal with digital goods where supply is effectively unconstrained. We have constructed laws to create artificial scarcity of digital goods. If the government wants to lower the price of digital goods, what they should do is find a way to relax the regulations that artificially constrain the supply.

> How can something be anti-competitive if it increased competition? Whether prices went up or down is irrelevant. The whole point of anti-trust law is to make sure that the market has competition. Not to make sure that prices are low.

You're conflating all of the different markets here. There is the publisher and retailer and the retailer and the consumer. The latter now no longer exists, as the publisher chooses the price for both markets.

That the ereader market, a third market in this equation, is now more competitive (which is a debatable subject) isn't relevant, as you can't use anti-competitive measures in one market to increase competition in another.

It is also worth considering Apple's stake in this. Just because they were launching the iPad didn't mean they had to sell ebooks. There were already plenty of ebook vendors and readers on the iPhone, after all.

One effect of the agency model is to make end users care less about which retailer they buy a book from (because the price is the same). A device manufacturer might be interested in encouraging that. For instance, they also might be interested in selling ebooks that only work on their devices to create additional lock-in for the future. An alternative spin would be that they might not want to be hostage to a powerful ebook vendor in the future (the way platform owners often depend on the developers of their key apps).

In any case, Apple's stake was and is altering and, arguably, restricting competition in markets related to ebooks. That's something else the DoJ should be interested in.

Something about what you have written doesn't sit right with me.

If Macmillan decided not to use the iBookStore and sell their ebooks on their own to the customer (the reader of the book), and all the other publishers saw that and thought, "Hey, that's a good idea", that would lead to the destruction of what you have called the publisher-retailer market.

Is it anti-competitive to choose not to participate in a market? It doesn't seem that way to me.

If I produce a product, am I not free to choose (or create) a market to sell this product? And can I not withdraw from that market whenever I see fit?

You can withdraw from the market, of course. It's not anti-competitive to destroy a market by rendering it redundant. But that's not what is happening here.

but that doesn't require Apple's participation in the collusion

The kink that I think you may be missing is that the agency model dictates the retail sale price and the retailer profit margin. The agency model sets the price the publishers sell to the retailer at and the price that the retailer can then sell the goods at.

So retailer A and retailer B can't really compete against each other on price because they're both locked into selling at the same price. If Publisher A and Retailer A collude to their mutual benefit, Retailer B can become royally screwed.

[Edit: This Charlie Stross post talks about the different pricing models in the context of last year's Amazon/Macmillan kerfuffle http://www.antipope.org/charlie/blog-static/2010/01/amazon-m...]

Anti-competitive and price-fixing are two different things in this case.

Essentially all suppliers (publishers) agreed to set a price on their goods, that's a cartel.

We like to think of books such as Harry Potter when considering publishing, but Harry Potter is a unique item because it has more or less unparalleled popularity. Other fiction books aren't really in competition with Harry Potter, people don't normally say "I am going to either purchase Harry Potter or Hunger Games". They generally purchase both if interested.

Now consider something that is much more of a commodity: Cookbooks. It's quite easy to find a couple of cookbooks from competing publishers, and if one new type of cookbook proves popular (Gluten-free Cooking!), most other publishers will come out with a competing cookbook. Great you say, sounds like competition! Except they have agreed to sell all their cookbooks at $10, so we, the consumers, now have a plethora of books to choose from, but only at one price. That is very, very illegal.

If the different companies had independently decided to change how they charge for books, ok, but their meetings and apparent coordination not just of the agency model, but the actual price makes this a cartel.

The anti-competitive piece is more about Apple making sure Amazon could not undercut the price for competition. Apple wanted 30% profits, no matter the price, and couldn't do that with Amazon in the mix. Apple could have just signed an exclusivity deal for certain books or something, but instead it wanted all books this way, which made it get involved with the publisher's coordinating. Conspiring with the publishers to specifically target a single player (Amazon) is apparently illegal, although I don't know much about that part so much.

If you usually filled up your car at the local station and suddenly an App Station opened across the street and all gas everywhere was suddenly 30% more expensive, the anti-competitive nature would be readily apparent.

I don't think it's true that they agreed on a set price. eBooks are sold at various prices. What they agreed to was the ability to set end-user prices. Do you have any insight into the legality of that?

Any publisher could set the end-user price for any of their books (speaking of cookbooks, I recently bought a copy of Mastering the Art of French Cooking in paper...$40, but I would not likely pay $40 for another french cookbook I'm not so familiar with, that's price power due to the popularity of that singular book, not a cartel agreement). The problem is the collusion to raise prices in lock-step with other publishers.

The fact it was 9.99 or 14.99 or .99 isn't the problem, it's the fact the publishers colluded together to artificially raise prices. If the price of ebooks was $1000 for some non-collusive(right word?) reason, the government would likely do little, but if the price of ebooks was $.05 by fiat, the government would step in.

It's a weird little world we live in, where the law recognizes multiple players in a market agreeing to artificial price fixing is bad for markets (and people, the actual reason for the law, the constitution doesn't care about markets), but at the same time grants strict monopoly rights to individual players in markets via patents and copyrights.

They also talked quite a bit about specific price points ($12.99 and $14.99 instead of $9.99 according to the complaint). That's more than the ability to set end user prices.

Sure, but $9.99 and even lower are still options which do in fact get used. Apple didn't set prices, they provided publishers with a range of options that included the old price point.

It's not about competition between products, it's about competition between distributors of the same product.

To use your app store example, you would need to imagine an alternate universe where there are two competing iOS App Stores: one run by, say, Apple and another by Amazon. You're Macmillr, one of the hottest startups in the valley, and you have a bunch of apps you want to get on the market.

In this world, you sell your apps "wholesale" to Apple and Amazon. Apple comes to you and says "I'll buy your apps for $0.50 per copy", and you forge a similar deal with Amazon. Then they compete with each other to on-sell them to the public. Obviously, that's pretty difficult for the two 'A's. How do they compete with someone selling an equally-priced product?

First they'd reduce their own margins as much as possible. Then maybe they do some clever discounting tricks, loss-leaders and promos and the like. Maybe they add some intangibles like a nice recommendation system or a pretty shop UI. Eventually, though, you just know one of them is going to come back to you and say "Forget your $0.50. I want it for $0.45."

So now you're in a tough spot, because Apple controls 90% of the app market. If they say "$0.45 or we walk", there's not much you can do about it. Bad times. As you see this happening, you realise something: Apple must have reached this dominant position by price gouging you and your fellow developers. At this rate, it'll only get more popular and more powerful, which means your future profits look pretty bleak.

But then Amazon comes to you and says "Hey, buddy, we're new in this App Store game, but we play to win, and we have a proposal for you. These Apple assholes are squeezing us dry because they set prices we can't compete with at our market share, and they're driving your wholesale price down to meet their ridiculous margins. But that's the key. We've got this new system where you set the price and they just take a fixed percentage. If you stop letting them set the retail price, the pressure will let up on you and us both."

"Alright", you say, "but if I start dictating prices, won't Apple and their 90% monopoly just drop my sorry apps like a hot potato?"

"Well", says Amazon, with a wink, "you might not be the only meeting we have lined up today in the valley."

Two weeks later, you tell Apple it's $1 and they get 30%. They say no. You say yes. They drop all your apps. You take out a full page ad in Techcrunch. You hear word that 37Schusters and Harpr.Coll.ns are preparing to do the same. Apple gives up. Agency pricing is the new standard for iOS apps. You win! ...until the DoJ comes asking about those meetings.

As to whether the agency model in general keeps prices high, I don't know. Smarter people than I [1] with prettier graphs [2] say no, but my own experience suggests that, at least at the moment, ebooks are way too expensive. I can't help but think that they'd be lower with Amazon calling the shots, but without any data to back me up I'm left with just a vague sense of unease.

[1] http://www.teleread.com/paul-biba/does-agency-pricing-lead-t... [2] http://www.digitopoly.org/2012/03/31/are-prices-higher-under...

"my own experience suggests that, at least at the moment, ebooks are way too expensive"

Why would you think that? People that buy ebooks are generally more affluent (they have kindles and ipads) and we'd expect ebook price to follow the road of profit maximization.

The typical reason people see ebooks as being too expensive is that, post-agency, they often cost more than the hardcover edition of the same title. Since it is fairly obvious that the cost of producing and distributing the ebook is substantially less than the cost of producing and distributing the hardcover book many people feel there's something fishy going on there.

I'd add that if you're right and it is more profitable for ebook publishers to charge more because ebook buyers are typically more affluent that, by itself, suggests that there are issues with ebook competition. In an appropriately competitive market we'd expect prices to be more related to the supplier's costs (and the costs of alternatives like getting a book from a different publisher or getting the hardcover) than they would be to the customers ability-to-pay.

"In an appropriately competitive market we'd expect prices to be more related to the supplier's costs (and the costs of alternatives like getting a book from a different publisher or getting the hardcover) than they would be to the customers ability-to-pay."

This might be true absent IP laws but people who want to read Harry Potter can only get that from one legal source and if the profit maximizing price for Harry Potter was $100 that's what it would cost.

A cotton shirt with a designer logo stiched in at a supply cost of 20 cents can still sell for 50 or 100 times what a near identical shirt without it can. Price does not follow supply cost for these items.

I don't think it matters if it is right or wrong.

The part the government is interested in is if Apple allowed or even encouraged Agencies to set similar prices. It is like running a red light. We can all agree it is illegal. But is it illegal in the middle of the night when there is no traffic? Of course it is. Just because someone went through the red light and didn't violate anyone else's safety doesn't make what they did any less criminal. The law was written without prejudices, so their is no need to look for "mens rea". Sure, it got things going for the driver and helped commerce by allowing the driver to reach the destination faster, but it is still an illegal act.

If Apple got the Agencies to agree on a similar price just to get things going and then let the market decide, it doesn't mean that it is any less criminal of an activity to do the former.

Remember, the government is pursuing this matter to get fines from all accused parties after the fact and they are doing it on your behalf, if you are an American citizen, that is.

Laws are made by man. What happens if the traffic lights are out of order and permanently shows a red light? Do you obey and patiently wait at the junction until it gets fixed? Of course not. In a civilized country with a working legal system you would be allowed to cross while taking reasonable care to do so.

And that's the trouble with this case too. According to what I've read so far Apple recommended setting an upper limit on price, but the lower bound is free (gratis). Technically it is "price-fixing" but I'm not sure whether an upper-bound above what Amazon charged is illegal.

Presumably getting the publishers to yank content from Amazon due to their contractual agreements with Apple is a matter of contractual law, not anti-trust or anti-competition.

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