Apple Responds to the DOJ e-Books Complaint

Josh Wright —  28 May 2012

Apple has filed its response to the DOJ Complaint in the e-books case.  Here is the first paragraph of the Answer:

The Government’s Complaint against Apple is fundamentally flawed as a matter of fact and law. Apple has not “conspired” with anyone, was not aware of any alleged “conspiracy” by others, and never “fixed prices.” Apple individually negotiated bilateral agreements with book publishers that allowed it to enter and compete in a new market segment – eBooks. The iBookstore offered its customers a new outstanding, innovative eBook reading experience, an expansion of categories and titles of eBooks, and competitive prices.

And the last paragraph of the Answer’s introduction:

The Supreme Court has made clear that the antitrust laws are not a vehicle for Government intervention in the economy to impose its view of the “best” competitive outcome, or the “optimal” means of competition, but rather to address anticompetitive conduct. Apple’s entry into eBook distribution is classic procompetitive conduct, and for Apple to be subject to hindsight legal attack for a business strategy well-recognized as perfectly proper sends the wrong message to the market, and will discourage competitive entry and innovation and harm consumers.

A theme that runs throughout the Answer is that the “pre-Apple” world of e-books was characterized by little or no competition and that the agency agreements were necessary for its entry, which in turn has resulted in a dramatic increase in output.  The Answer is available here.  While commentary has focused primarily upon the important question of the competitive effects of the move to the agency model, including Geoff’s post here, my hunch is that if the case is litigated its legacy will be as an “agreement” case rather than what it contributes to rule of reason analysis.  In other words, if Apple gets to the rule of reason, the DOJ (like most plaintiffs in rule of reason cases) are likely to lose — especially in light of at least preliminary evidence of dramatic increases in output.  The critical question — I suspect — will be about proof of an actual naked price fixing agreement among publishers and Apple, and as a legal matter, what evidence is sufficient to establish that agreement for the purposes of Section 1 of the Sherman Act.  The Complaint sets forth the evidence the DOJ purports to have on this score.  But my hunch — and it is no more than that — is that this portion of the case will prove more important than any battle between economic experts on the relevant competitive effects.

6 responses to Apple Responds to the DOJ e-Books Complaint

  1. 

    It’s been a while since I’ve taken Antitrust, but from what I recall, it seems that you have two options: S. 1 horizontal agreements in restraint of trade (conspiracies) and S. 2 monopolization (monopoly). Also, the rule of reason/per se distinction applies to both, right? Also, the trend is that most every kind of “alleged” anti-competitive conduct should be analyzed under a rule of reason, right?

    Okay, so now the question is: Do we bring the claim under a horizontal price fixing charge or a monopolization charge? Which is easier to show?

    It seems to me that you will NEVER be able to show a horizontal price fixing agreement, because the test is “conscious parallel conduct,” and I doubt conspiring business ever behave in exactly the same way. So, how do you ever INFER conspiracies in restraint of trade? I asked this question to my professor (a blogger here), and he didn’t really have an answer.

    Now, the monopolization question is a bit trickier, because you have to define the market before you can determine whether the defendant is guilty of monopolization. My impression is that Antitrust law doesn’t really have a sophisticated model for determining what is the relevant market — I remember that even Hovenkamp’s treatise faltered a bit on this point — does the relevant market include firms that could enter but have not yet? And does it include firms that are not even in existence yet? IF these two answers are yes, then it seems to me that there is really no way you can ever determine what is “the relevant market.” I remember asking the same Professor, if a firm prices above cost, and is thus guilty of monopolization, then the number of potential firms could be infinite, right? He didn’t really know how to respond.

    So, all of this talk about rule of reason analysis sounds nice, but when it comes down to it, it seems to me, Antitrust Law has no real way to (1) prove price fixing ; or (2) define the relevant market.

    • 

      MGM, it may surprise you to learn that the federal reporters and antitrust casebooks (not to mention settlements of criminal cases) are chocked full of examples in which an agreement has been demonstrated (hint: the test is not consciously parallel conduct — that’s really a distraction here anyway because the DOJ is alleging an actual agreement among publishers and Apple). Also, a firm is not guilty of monopolization because it prices above cost (see Trinko; Independent Ink) — so it is possible your professor’s confusion at the question may have been a function of the faulty premise it was based upon. If you are really interested in reading about modern market definition methods, there are a lot of sources out there — but reading the 2010 HMGs might be a good place to start.

      • 

        Oh, I understand that the theory, with respect to monopolization, is that the firm will first underprice (price below marginal cost) in order to drive out competitors so that it can later reap the gains. That premise by itself is a little untenable, but I understand that to be the theory. But, that just gets to liability — i.e., how do we determine liability. A preliminary, threshold question is: Just how do we go about defining the relevant market? These are two separate questions. My recollection is that Anitrust Law has all kinds of answers to the theory of liability, but doesn’t really know how to address the threshold question of how to define the relevant market. After all, how could you accurately define the relevant market if you are open to including (1) firms that are not yet *in* the market ; or (2) firms that don’t even exist yet, but might if the prices are right? So that seems all a mess to me.

        And as to agreements and price fixing — Sure, liability is very easy to prove if (1) the defendant concedes that he did conspire with competitors ; or (2) the plaintiff has uncovered evidence showing unmistakably that agreements were made in restraint of trade. But I imagine that most of the time these agreements and conspiracies will have to be inferred — meaning that there is no hard evidence.
        Isn’t at that point where the “conscious parallel conduct” test comes in? And if so, how, exactly, do you use that test? Show me two firms that behave in exactly the same (parallel) way???

        And, as I said to my Professor, I think Antitrust itself (as a body of law) is built on a faulty premise. The very theory of Antitrust suggests that these firms are masters of their fate — that they can price how they want and/or behave as competitively or anti-competitive as they want. Believe me, that is not how things work in the real world. No firm EVER prices according to cost, although I am sure that they would like to. God, that would make things much easier. But no. Firms have to incur costs — which, admittedly, are certain — OVER LONG PERIODS OF TIME involving periods of production before the final products will be available for purchase. Who knows what their products will be worth in the future? To suggest that the value of these finished goods are somehow dependent upon the costs the firms incurred in producing them is just plain silly. Business in the real world is just one dark hole, and every move is a gamble.

  2. 
    Dom Armentano 29 May 2012 at 3:31 pm

    I agree that as a rule of reason case, Apple likely prevails. I’m not sure I understand, however, how this fits the “naked price fixing” model, where the only serious concern would be whether there was an “agreement” or not. My assumption is that naked price fixing agreement cases involve competitors or potential competitors, i.e., some sort of a horizontal agreement. Now that might well apply to alleged cooperation among the publishers but how does it apply to the publishers and Apple? Is the argument that Apple’s agency model facilitated a price agreement among the publishers and that, therefore, Apple is, indeed, a party to a horizontal agreement? That would seem to me to be a stretch for any per se approach and condemnation. But, alas, I could be wrong.

    • 

      Dom, think hub-and-spoke conspiracy a la Interstate Circuit (1939), or more recently, the Toys R Us decision. It is not a stretch under existing cases to include in a Section conspiracy a firm or firms that are not competitors. Indeed, one might desire a firm either upstream or downstream to the cartel to help enforce its terms. I’m not saying that is what happened here; but that is how the alleged agreement could fall under the per se approach (combined, of course, with evidence that efficiencies are sufficiently lacking, etc.).

  3. 

    Yes it will prove more important. The price agreements are an important consideration for the future of ebooks.