June 2, 2014

Amazon Can't Win When It Comes to Antitrust

Jerry Brito

Former Senior Research Fellow
Summary

Some people wonder why libertarians are skeptical of antitrust. For a hint, you have to look no further than the recent battle between book-selling giant Amazon and the publisher Hachette.

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Some people wonder why libertarians are skeptical of antitrust. For a hint, you have to look no further than the recent battle between book-selling giant Amazon and the publisher Hachette.

Amazon and Hachette are engaged in a pricing dispute. Although the details are unclear, it's beenreported that Amazon wants better terms on ebooks as it renegotiates its contract with Hachette. Hachette is holding the line, and Amazon has exercised its "nuclear option" by pulling Hachette's print books off its virtual shelves.

Customers who go to Amazon looking for Hachette-published bestsellers from the likes of J.D. Salinger, or new releases from J.K. Rowling or Stephen Colbert, will find that they are not available. The situation is not very different from a blackout when a cable company like Time Warner can't come to terms with a network like CBS.

"I'm mad at Amazon and apparently I'm not the only one. Everyone seems to be a little upset," said Leo Laporte last week on his popular This Week in Tech program, reflecting a common sentiment. "We all thought that Amazon was going to change shopping, going to change the experience of book buying. Yeah, they were great until they got a monopoly and now they are just screwing with everybody."

And there it is. The "M" word.

This is no ordinary pricing dispute, the story goes, because Amazon has significant market power. It accounts for 41 percent of all new books sold, and 67 percent of all ebook sales. But what makes it a monopoly? Can't you just go to any of a hundred other bookstores online and off to get your Hachette books?

The answer is that no, Amazon is not a monopoly, but some argue that customers of its Kindle ebook platform are locked in.

"While we don't have numbers, it would appear that Kindle sales likely reflect a dominant chunk of ebook sales and, moreover, most of those customers don't really want to buy books on other eReading platforms—either they don't have the device or they don't want to switch apps on the iPad," writes Joshua Gans, a noted management professor at the University of Toronto.

For many people, once they get a Kindle e-reader and buy into the ecosystem, Gans says, if Amazon doesn't make a book available for Kindle, it might as well not exist. And Amazon established its dominant position in ebooks by selling them at a loss. Now that it has developed retail power, the theory goes, it's bullying its suppliers.

The Author's Guild, never shy to use every legal weapon to protect authors, is ready to pull out the antitrust guns to deal with the situation. Jan Constantine, the Guild's general counsel, told the New York Times last week, "Amazon clearly has substantial market power and is abusing that market power to maintain and increase its dominance, which likely violates Section 2 of the Sherman Antitrust Act."

So it is interesting to note that the dispute is happening now because Hachette agreed to renegotiate its contract with Amazon as part of an antitrust settlement with the Department of Justice. That's right. Hachette and four other big publishers were sued along with Apple in 2012 for antitrust violations.

Seeing Amazon's growing dominance of the ebook market, the big five publishers had teamed up to help Apple launch its competing iBooks platform in 2009. Apple let them set their own prices for their ebooks and just took a 30 percent cut, but Apple insisted on a "most-favored nation" clause, which meant books couldn't be cheaper anywhere else than the iBooks Store–including Amazon.

That was collusion to fix prices, the DOJ argued, and it sued. The publishers settled and Apple lost in court. iBooks has since foundered, the publishers have been scared to back any new market entrant, and Amazon's position has solidified.

So, having vanquished Apple and the publishers for trying to charge too much for books, the antitrust laws may yet be turned on Amazon for charging too little. It's eerily reminiscent of an old economists' joke related in a journal article about the Microsoft antitrust case:

Three prisoners were sitting in a U.S. jail, found guilty of "economic crimes" and were comparing stories. The first one said, "I charged higher prices than my competitors, and I was found guilty of profiteering, monopolizing and exploiting consumers." The second one said, "I charged lower prices than my competitors, and I was found guilty of predatory pricing, cutthroat competing and under-charging." The third prisoner said, "I charged the same prices as my competitors, and I was found guilty of collusion, price leadership and cartelization."

It's sad because it's true.