Apple’s ebook ruling and the absurdity of antitrust law

Ryan Young Fellow, Competitive Enterprise Institute
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Under American anti-trust laws, there are three things no business should ever do. They are as follows: Charge higher prices than your competitors, charge lower prices than your competitors, and charge the same price as your competitors.

Higher prices mean that you have market power, and you are abusing it. Lower prices mean that you are trying to unfairly undercut your competition. And if you charge the same price as your competitors, that means you are colluding with them (although in economics, it can also be evidence of near-perfect competition).

Apple committed offense number one when it raised its e-book prices at publishers’ behest in 2010. The Justice Department sued, to the delight of Apple’s competitors. This Wednesday, Judge Denise Cote of the Southern District of New York ruledin the Justice Department’s favor (here’s the decision). The argument goes that Apple colluded with publishers to raise e-book prices, which took away the pressure on competitors like Amazon and Barnes & Noble to keep their prices down.

Even if true, the Justice Department’s argument is weak, because it relies on the Relevant Market Fallacy — the idea that e-book sellers are just competing with each other. They aren’t. They are competing with everything else that is clamoring for people’s leisure time. This includes printed books, magazines, newspapers, blogs, and websites such as this one.

E-books are also competing with movies and television, video games, and other tablet and smart phone applications. The relevant market is bigger than just e-books or other reading material.

This market discipline puts an upper bound on what consumers will pay for an e-book before turning to other entertainment options. Consumers cannot be said to have been harmed if they are willing to pay higher e-book prices. Given the e-book market’s continued rapid growth since the price increases, people are clearly still willing to pay. They are willingly buying something that gives them more value than what they give up to buy it.

This consumer, along with most others, would prefer lower e-book prices. Of course, authors would also prefer higher royalties. Where these two opposing forces will meet is best decided by individual buyers and sellers, not antitrust lawyers.

Antitrust laws are intended to protect consumers from monopolies. In practice, companies usually use them to convince government to kneecap their competitors on their behalf.

When Sirius and XM decided to merge a few years ago, the National Association of Broadcasters’ lobbyists pointed out that there would be a monopoly in satellite radio, and tried to block the merger. They declined to note that a merged Sirius/XM would still compete directly with the NAB’s members. The proposed Whole Foods/Wild Oats merger was shot down on similarly shaky grounds — that they would dominate the market for high-end groceries, even though they would still be competing against all other supermarkets.

The Apple e-book case is even more absurd. In this case, the Justice Department argued that a third-place competitor with 20 percent market share enjoys unfair market power. Amazon’s market share for the Kindle is at least 50 percent, and Barnes & Noble’s share for the Nook is around 25 percent.

As to the true extent of Apple’s market power, note that consumers can use their Apple iPads, iPhones, and Macs to read and buy books using arch-competitor Amazon’s Kindle application, which is available gratis through Apple’s App Store. This is because Apple knows that its products would be much less popular if it didn’t offer access to Amazon’s e-books.

Apple will likely appeal the decision for this and other reasons. This would send the case to the Second Circuit, which is unlikely to overturn Judge Cote’s decision. That would be unfortunate, but this state of affairs will persist until the President and Congress bring antitrust laws in line with market realities.

As noted, it is technically illegal to sell any product at any price under current antitrust laws. Clearly, they cannot consistently be enforced, or the economy would collapse. That means the decision of when to enforce antitrust laws is completely arbitrary. Yes, antitrust policy really is that vague and uncertain. The Justice Department will likely win the next stage of the case, but that’s not so much a sign of Apple’s perfidy. Rather, it shows how poorly suited antitrust policy is to maintaining a free and open competitive marketplace.

Ryan Young is Fellow in Regulatory Studies at the Competitive Enterprise Institute.