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Collusion to Control a Powerful Customer: Amazon, E-Books, and Antitrust Policy

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Collusion to Control a Powerful Customer: Amazon, E-Books, and Antitrust Policy Seattle University School of Law Digital Commons Faculty Scholarship 1-1-2014 Collusion to Control a Powerful Customer: Amazon, E-Books, and Antitrust Policy John B. Kirkwood Follow this and additional works at: https://digitalcommons.law.seattleu.edu/faculty Part of the Antitrust and Trade Regulation Commons Recommended Citation John B. Kirkwood, Collusion to Control a Powerful Customer: Amazon, E-Books, and Antitrust Policy, 69 U. MIAMI L. REV. 1 (2014). https://digitalcommons.law.seattleu.edu/faculty/507 This Article is brought to you for free and open access by Seattle University School of Law Digital Commons. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Seattle University School of Law Digital Commons. For more information, please contact [email protected]. University of Miami Law Review VOLUME 69 FALL 2014 NUMBER 1 ARTICLES Collusion to Control a Powerful Customer: Amazon, E-Books, and Antitrust Policy JOHN B. KIRKWOOD* A federal judge recently held that Apple violated antitrust laws by conspiring with leading publishers to raise e-book prices. While the Justice Department characterizedthe case as routine, many commen- tators argued it should not have been brought. In their view, the real villain was Amazon, whose power and aggressive behavior threatened to create a monopoly, reduce consumer choice, and diminish the vitality of book publishing. In the face of such a power- ful customer, the publishers should have been allowed to collude. This article addresses that issue, in the e-books case and in general. In the e-books case, collusion was almost certainly unwarranted. Amazon appearedto be engaged in loss leading, not predatory pric- ing, and fears of an eventual Amazon monopoly were largely unfounded. Amazon's buyer power, moreover, was not monopsony power, which is frequently harmful, but countervailingpower, which can lead to lower consumer prices. There was no evidence it had caused a reduction in the variety of new books. In some circumstances,however, collusion to control a powerful cus- tomer would be justified. This article identifies the most important situations and develops a defense to the per se rule to protect them. While the defense would rarely be satisfied, when it is, it would pro- vide a remedy for anticompetitive buyer power that would otherwise persist. * Professor of Law, Seattle University School of Law, and Senior Fellow, American Antitrust Institute. I want to thank Roger Blair, Tom Campbell, Peter Carstensen, Margaret Chon, Diane Dick, Albert Foer, Charlotte Garden, Christopher Sagers, Andrew Siegel, Maurice Stucke, Nicholas Timchalk, and Heather Kirkwood for thoughtful comments and Kelly Kunsch for excellent research assistance. 2 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 69:1 I. INTRODUCTION ...... ..................................................... 2 II. THE E-BooKS CONSPIRACY ............................................ 8 A. The $9.99 Problem ............................................... 8 B. Apple's Entry and Proposed Terms ................................. 10 C. The Publishers' Move Against Amazon .............................. 11 1. NEED FOR JOINT ACTION ....................................... 11 2. MACMILLAN FOLLOWED BY THE OTHER FOUR .......................... 12 D. Impact on Prices and Amazon's Market Share ........................ 13 E. Random House's Position and Its Implications ....................... 15 III. BUYER POWER AS A JUSTIFICATION FOR COLLUSION ....................... 18 A . Case Law ....................................................... 20 B . Scholarship ..................................................... 23 C. Goals of the Antitrust Laws ........................................ 29 1. COMPETITIVE PROCESS ......................................... 31 2. CONSUMER WELFARE, SUPPLIER WELFARE, AND TOTAL WELFARE .... 33 3. PROTECTING CONSUMERS FROM ANTICOMPETITIVE CONDUCT ......... 33 IV. THE ASSERTED NEED TO CONTROL AMAZON ................................ 34 A. M onopsony Power ............................................... 34 B. Predatory Pricing ................................................ 36 1. UNSUPPORTED BY THE EVIDENCE ................................ 37 i. Dangerous Probability of Monopolization ..................... 37 ii. Below-Cost Pricing .......................................... 38 iii. Recoupm ent .... ............................................ 39 2. INCORRECT AS A POLICY MArTTER ............................... 43 C. Countervailing Power ............................................ 45 1. EXISTENCE AND POTENTIAL ADVERSE EFFECTS ......................... 45 2. INADEQUATE JUSTIFICATION .................................... 49 V. LIMITED DEFENSE FOR COLLUSION TO CONTROL BUYER POWER .............. 51 A . Buyer Power .................................................... 52 1. EXISTENCE OF BUYER POWER ................................... 52 i. M onopsony Power ........................................ 52 ii. Countervailing Power ..................................... 53 2. CHARACTERISTICS ............................................. 53 i. Legally Acquired ............................................ 53 ii. Substantial .................................................. 54 iii. Persistent ................................................ 55 iv. Durable .... ................................................ 56 B. Likely Procompetitive Effects ...................................... 56 1. M ONOPSONY POWER ............................................. 57 2. COUNTERVAILING POWER ......................................... 57 C. No Downstream Market Power ..................................... 60 V I. CONCLUSION .... ....................................................... 63 I. INTRODUCTION Few recent antitrust cases have generated as much interest-and controversy-as "the e-books case." It involved five leading publishers, two of America's best known high-tech firms (Apple and Amazon), and a secret conspiracy, fueled by Steve Jobs himself, to force Amazon to charge higher prices.' According to the Justice Department, the publish- 1. Amazon's growth, ambitions as a publisher, and deep discounting of e-books concerned the publishers so much that, according to Brad Stone, they "believed their necks were being fitted for the noose." BRAD STONE, THE EVERYTHING STORE: JEFF BEzos AND THE AGE OF AMAZON 280 2014] COLLUSION TO CONTROL A POWERFUL CUSTOMER 3 ers-encouraged and assisted by Apple-agreed to impose a new pric- ing model on Amazon, which sharply increased the prices of new and bestselling e-books. In the Justice Department's telling, it was a routine case: "Stripped of the glitz surrounding e-books and Apple, this is an unremarkable and obvious price-fixing case appropriate for per se condemnation."3 But it was hardly routine in the eyes of many inside and outside the industry. To the contrary, the response to the Justice Department's first round of proposed settlements, which allowed Amazon to resume its price cutting on e-books, was intense and highly critical. The settlements generated 868 public comments, and they were "overwhelmingly nega- tive."4 To be sure, many of them were submitted by Amazon's competi- tors, who may have been cloaking self-serving objections5 in public interest terms.6 Other comments, however, could not be so easily swept aside. For example, the Authors Guild, which represented individuals who were not participants in the conspiracy and who would normally (2013). Their response was "a sprawling, dramatic, multiyear imbroglio that would be laid bare in ...thousands of pages of legal documents and weeks of courtroom testimony ... ." Id. 2. See infra Part II (summarizing the case). 3. Plaintiffs Pretrial Memorandum of Law at 4, United States v. Apple, Inc., 952 F. Supp. 2d 638 (S.D.N.Y. 2013) (No. 12-cv-2826). 4. Opinion & Order at 19, United States v. Apple, Inc., 952 F. Supp. 2d 638 (S.D.N.Y. 2013) (No. 12-cv-2826); see also id. ("More than 90 percent ... opposed entry of the proposed Final Judgment."). 5. See Response of Plaintiff United States to Public Comments on the Proposed Final Judgment at v, United States v. Apple, Inc., 952 F. Supp. 2d 638 (S.D.N.Y. 2013) (No. 12-cv- 2826) ("Critical comments generally were submitted by those who have an interest in seeing consumers pay more for e-books, and hobbling retailers that might want to sell e-books at lower prices."). 6. Amazon's competitors argued that the "agency model" of pricing, which the publishers imposed on Amazon, benefited consumers because it encouraged other retailers to enter or invest in the industry. See, e.g., Comments of Barnes & Noble, Inc. on the Proposed Final Judgment at 19, United States v. Apple, Inc., 952 F. Supp. 2d 638 (S.D.N.Y. 2013) (No. 12-cv-2826) ("This result [releasing Amazon from the agency model] can only hurt e-book consumers. Improved profitability has enabled distributors to invest substantially in the industry."); American Booksellers Association Comments on the Proposed Consent Decree at 2, United States v. Apple, Inc., 952 F. Supp. 2d 638 (S.D.N.Y. 2013) (No. 12-cv-2826) ("Indie bookstores' entrance into the e-book market in late 2010 occurred only because the market was commercially viable as a consequence of adoption by various publishers of the Agency Model in April 2010."); Apple Inc.'s Tunney Act Comment at 4, United States v. Apple, Inc., 952 F. Supp. 2d 638 (S.D.N.Y. 2013) (No. 12-cv-2826) ("[T]he Proposed Judgment... will harm emerging eBook competitors such as Apple, Barnes & Noble, and other
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