Ebooks and Resale Price Maintenance
Last week the European Commission announced the opening of formal proceedings to investigate whether international publishers may have engaged in anti-competitive agency agreements regarding the sale of ebooks (see Press Release). Dawn-raids in connection with this case were carried out last March.
Today´s edition of the Financial Times (edited by Pearson -a publisher affected by the investigation-) features a most interesting piece on a very related topic under the title Don´t make Amazon a monopoly.
Its author -John Gapper- argues that competition authorities in the US and the EU should not challenge the arrangements under which publishers set minimum prices for ebooks and preclude companies such as Amazon, Apple or Barnes&Noble from offering discounted prices. It explains that this is a textbook example of the situation that the US Supreme Court had in mind when it overturned Dr. Miles in its Opinion in Leegin, and submits that it would be paradoxical for competition rules to enable free riding-based discounting on the part of Amazon, thus enhancing its alleged “monopoly”.
This situation and the legal controvery surrounding it raises very interesting questions that go beyond the situation at issue and which have the potential to affect online distribution in general.
Does anyone have any strong views on this?
Chillin'Competition 
I agree with you that it is a really interesting case that could affect how competition law views online distyribution, but in this case an awful lot will depend on what evidence the Commission has unearthed as to the arrangements between the publishers and between them and Apple. The chronology of the switch to the agency model, the entry of Apple and Amazon’s reluctant agreement to be an agent does suggest s degree of collectivity (if that is a word!).
Sam Szlezinger
16 December 2011 at 10:48 am
I have strong views on this! 😉
In my opinion, Competition Authorities, specially on this side of the Atlantic, are so worried about “intrabrand” competition and so attached to the old “certitudes” built in the pre-internet era, that they are analysing economic reality with the wrong tools. Let me explain myself.
The starting point for Competition authorities in Europe is that the only rule they apply in their analysis is “the cheaper the better”, without exceptions, and they have very negative preconceived ideas about RPM (for them, “this is as bad for competition and consumers as a hardcore cartel”). Thus, their point of view is that it is more efficient that a competitor sets the prices of the products (the situation with DOBs), or that a robot does the job (this is what happens in internet for several products, as just explained by the OFT in Amazon/The Book Depository), than a RPM policy by the manufacturer, irrespectively of the circumstances of the market (don’t try to demonstrate a procompetitive RPM policy!). This is sacrificing inter-brand competition to contribute to a potential gain (not real most of the times) in intra-brand competition, and demonstrates an absolute inability to understand that “price” is not the only competitive factor in most markets, and that the effects analysis of pricing arrangements should be made thinking in the long term, not only in short term effects.
And I’m not commenting in the Competition authorities’ lack consideration of other factors in their analysis than orthodox (Competition authority) economic theory (a special economic thinking school)!
I think that Competition authorities should seriously consider whether the foundations of their presumptions as regards price-competition and RPM are still valid in the world of Internet, with full transparency, very wide availability of alternative sources of supply, etc.
I do not know if this makes a lot of sense or not… but I’m writing an article with all these disorganised ideas. 😉
RBZ
16 December 2011 at 12:09 pm
Well … irrespectively what authorities on here do: Would you not agree that the basic economic competition models that you seem to allude to are severely flawed? (at least with regard to real world application) The internet does not change this. F.e. maybe there is more transparency in theory, but especially because of licensing agreements etc. that are necessary for ebook sales, they are not, because as I have understood it it would be impossible for a 3rd party (irrespective of the fact whether they in principle have the money/reach to compete) to get permission to sell ebooks in the way apple/amazon have, especially it would not allowed to be sold cheaper. So what good is transparency if no competitor can make use of it? So, your argument can only be valid if there is in fact transparency + alternative sources of supply, which there is not. Also you did not even say why exactly you think that RPM would be beneficial, in fact f.e. Amamzon got where it is even with RPM on books, so apparently it did not work!
step21
17 December 2011 at 12:27 am
On Internet you have not only transparency but also alternative sources of supply. With the agency model, you have homogeneous prices (although it should be room for a certain limited degree of price competition if agents share their compensation with clients) and it is the editor who decides the reference price for each book (in the future and as regards ebooks, it may be the author who sets such price). In this way, it may set the prices at a level that guarantees that b&m stores survive.
In the alternative scenario, without RPM, due to transparency and robots setting the prices to immediately respond to any price reduction by competitors, there is no incentive for price competition between Internet retailers willing to challenge Amazon’s leadership position in the market, and this should end in homogeneous prices too (as with RPM). The difference is that internet retailers decide the level of prices and, therefore, they will do it at a lower level (short term benefit for consumers). In this scenario, we know what happens (we can have a look at the situation in the US): b&m bookstores unable to compete (even the larger chains) and closing one after the other. The effects of this situation can be analysed from an economic perspective but, in my opinion, not only from such perspective. We should also consider the situation from a cultural perspective .
So, why I think that RPM may be beneficial? Because it may help to protect b&m stores, that provide very valuable services to consumers and that are key for pluralism and culture (although I cannot develop this in detail here!).
I final thought, should we consider applying the logic of selective distribution to physical books in the future? It is justified?
RBZ
19 December 2011 at 1:25 am
As a consumer, I like low prices for books and ebooks. I really don’t want someone to tell me that I should pay higher prices in order to protect ‘competition’. As a lawyer, I fail to be convinced by Gapper’s argument that Amazon will be able to foreclose competition by its discounting practices. And the argument that RPM is necessary to protect ‘high-service’ retailers seems particularly weak in respect of ebooks. Should we then not also protect brick-and-mortar software retailers from the unfair competition from online downloads?
Madrid Lawyer
16 December 2011 at 1:16 pm
Well, I do think that if the requirement for maintaining brick and mortar stores, where I can see (and touch, even smell!) and chose the books I want (and those I didn’t know that I wanted until I saw them there) is (a bit) higher prices in the short term, RPM has not a net negative effect on my welfare in the medium and long term. And this is without considering other values such as the protection of culture and plurality (Competition Law and prices is not everything in live!).
I also buy ebooks, and I agree that they should be cheaper than physical books for a number of reasons (one, not very often mentioned, is environmental cost). And I also think that there is room for certain price competition within the agency model (agents can discount, directly or indirectly, against their own margin). However, in the world of Internet, with full transparency and no transport cost (at least for ebooks), the huge addition of demand a global company with a very strong brand, such as Amazon, can undertake is so definitive, that the long term effect of a banned RPM may be a world without brick and mortar stores (or with an extremely limited number of them, very specialised). Then we will realise how important barriers to entry are in the Internet markets and how negative is unconstrained market power!
In any event, this is a very complex and deep debate… We may be talking about this forever!
RBZ
16 December 2011 at 1:42 pm
I can not agree more with the comment
JESUS ALFARO
16 December 2011 at 1:16 pm
As a matter of principle, I share RBZ’s comments; mainly because he/she gives a certain pro-competitive value to interests worth of protection other than the inmediate consumers benefit (very lower price). But be careful 😉 because the speech look to sounds much the same as the ‘old-fashioned’ ECJ finding about abuse of dominance: protection of the competitive struture of the market, elimination of competition as a proxy of abuse, special responsibility, etc.
It would be puzzling that analysis of competition in the most advanced sectors may refresh traditional theories.
antominho
1 February 2012 at 10:03 pm