Too Good To Be True

The core of the antitrust case in United States v. Apple was simple. Apple convinced five major publishers to shift to the agency model, under which the publisher rather than the retailer controls the price of ebooks. Since Apple insisted on a 30% agency commission instead of Amazon’s razor-thin markups, publishers received a smaller cut of the price for each ebook sold. The publishers used the agency model to raise the retail prices paid by consumers. Unsurprisingly, readers bought fewer ebooks as a result.

In other words, Apple talked publishers into selling fewer ebooks and making less money on each one, while paying Apple for the privilege. It sounds too good to be true.

Publishers went along with this money-losing scheme so they could collectively raise ebook prices. They didn’t want readers to become accustomed to $9.99 ebooks, and they didn’t want Amazon undercutting other retailers. Publishers couldn’t do it alone; they had to act all at once. Enter Apple, which offered publishers the agency model they wanted, as part of a course of negotiations which ensured that each publisher knew the others were on board.

In other words, Apple knew that the reason its deal was attractive to publishers was that it provided the framework for an illegal cartel to fix prices. It sounds too good to be true because it was.

The preceding is re-published on TAP with permission by its author, Professor James Grimmelmann. “Too Good To Be True” was originally published July 11, 2013 on The Laboratorium. The Laboratorium publishes under the Creative Commons License.