EC launches eBook collusion investigation

By Joshua Gans

Posted on December 6, 2011

The European Commission has launched an investigation into possible anti-competitive practices in eBook publishing.

The European Commission has opened formal antitrust proceedings to investigate whether international publishers Hachette Livre (Lagardère Publishing, France), Harper Collins (News Corp., USA), Simon & Schuster (CBS Corp., USA), Penguin (Pearson Group, United Kingdom) and Verlagsgruppe Georg von Holzbrinck (owner of inter alia Macmillan, Germany) have, possibly with the help of Apple, engaged in anti-competitive practices affecting the sale of e-books in the European Economic Area (EEA)1, in breach of EU antitrust rules. The opening of proceedings means that the Commission will treat the case as a matter of priority. It does not prejudge the outcome of the investigation.
The Commission will in particular investigate whether these publishing groups and Apple have engaged in illegal agreements or practices that would have the object or the effect of restricting competition in the EU or in the EEA. The Commission is also examining the character and terms of the agency agreements entered into by the above named five publishers and retailers for the sale of e-books. The Commission has concerns, that these practices may breach EU antitrust rules that prohibit cartels and restrictive business practices (Article 101 of the Treaty on the Functioning of the European Union – TFEU).

The press release is short on details but it seems that the EC is worried about the notion that the retailer — in this case, Apple — does not set prices to final consumers. Instead, these prices are set directly by publishers with Apple taking a cut for distribution.
This is an interesting development but I must admit that the theory of the case is hard to construct. Let’s suppose for the moment that there is a market for eBooks. One then has to wonder why Amazon isn’t a part of the investigation. But I guess the idea is that the Apple’s policy somehow facilitates collusion amongst publishers over eBook prices. Now what appears to be the case is that Amazon — when it did not use the agency model — really pushed for a sub $10 book price. Apple didn’t similarly do that and instead let publishers choose their own prices with the knowledge that, at the time, Amazon’s pricing would have to be taken into account. Of course, the publishers liked the Apple model and pressured Amazon to change; which it did.
Now the prices for eBooks may have converged across different distributors. This is a little hard to tell as Amazon also offer lending and other services with different pricing structures. But Apple and Amazon both have rules limiting the ability of publishers to offer discounts on other platforms that are not available on their platform. So again, this might be a source of the EC’s concern. That said, I should note that in this situation one has to consider that Apple (partly) and Amazon (in particular) are selling devices as well and that the content pricing decisions interact with device pricing decisions. My own research suggests that some of these seemingly restrictive practices may make sense as part of a broader pricing strategy. (Here is some more discussion of that).
That said, compared with their US counterparts, the EC has often taken an approach that allows it to forecast possible future equilibrium outcomes and to take action today to ensure that bad outcomes do not arise. One suspects that such prospective analysis is going to play a big role here. Of course, I must note that the same practices underpin the app and magazine subscription markets too. Are they next?
The preceding is re-published on TAP with permission by its author, Joshua Gans, Chair of Technical Innovation and Entrepreneurship and Professor of Strategic Management, Rotman School of Management. EC launches eBook collusion investigation was originally published December 6, 2011 on Digitopoly.