Apple was investigated, as well as several publishing companies for conspiring to keep e-book prices high. Amazon is the biggest retailer of e-books, and the publishing business has been thrown into chaos by the popularity of e-books. Publishing companies used the old publishing model of selling e-books like print books where the publisher sells the book to the retailer, like Amazon or Apple, at about half the price of the cover price and the retailer can sell the book at whatever price it chooses. (Chen & Bosman, 2013)
Apple entered into contracts with publishers that use an “agency model” to price e-books. This meant that publishers would set the price of e-books, and the retailer would get 30% of the sale price as profit. Apple also stipulated that publishers could not set a price lower than the price in Apple’s e-book store. (Chen & Bosman, 2013)
This action by Apple was investigated because the primary purpose of these contracts was to keep the e-book prices higher, and to reduce competition between booksellers. Amazon, the giant in the market, would not be able to compete on price, and e-books would cost consumers more.
Identify some of the costs (pecuniary and nonpecuniary) associated with the antitrust behavior (firms having power in the market). Additionally, note the specific antitrust act (Sherman Act, Clayton Act, etc.) under which the violation was investigated.
The pecuniary cost of the actions of Apple is that consumers will pay more money for books, and Apple, as well as other book sellers, will not have to compete on price with Amazon who dominates the market. This will cost Amazon, and booksellers and publishers may make more money at the expense of consumers. The non-pecuniary cost will be that books will not be as available at low prices to consumers who want them, but cannot afford the price.
Price fixing is a violation of section 2 of the Clayton Act of 1914. This act prohibits price discrimination that is not based on cost differences that reduces competition. (McConnell, Brue, & Flynn, 2012)
Given your research and findings, are monopolies and oligopolies (firms demonstrating power) always bad for society? Be sure to provide real world examples of where this may be the case to strengthen your position. Provide at least one example of a case where having a monopoly or oligopoly may actually benefit the society.
According to my research in this case, Amazon’s demonstration of oligopoly power is good for society because e-book prices are lower when Amazon tries to block other competitors from entering the e-book market, and more e-books are then available to the public. This is a good real-world example of the positive influence that an oligopoly can have for society, and an example of how regulation is needed, and anti-trust laws, when oligopolies use collusion to compete instead of letting the free-market operate. References
Chen, B. X., & Bosman, J. (2013, June 2). E-book antitrust trial of Apple to begin. The New York Times. Retrieved from http://www.nytimes.com/ McConnell, C. R., Brue, S. L., & Flynn, S. M. (2012). Economics (19th ed.). Retrieved from http://devry.vitalsource.com/#/books/0077587766/pages/50192724