Gans on Apple and Antitrust

Josh Wright —  3 March 2011

Joshua Gans has an interesting post examining potential antitrust issues involving Apple, an issue we’ve discussed here and here.  Gans focuses in on the two most relevant issues:

There are two aspects that might raise antitrust concern: (i) Apple’s exclusivity-like requirement that no external payment links be permitted in apps and (ii) Apple’s most-favored customer clause preventing discounting on other platforms. Let’s examine each in turn.

In my earlier post, I emphasized that a potential plaintiff would have a difficult time demonstrating that Apple has monopoly power in any relevant market for the purposes of antitrust analysis.  Both exclusivity arrangements and most-favored customer clauses can generate efficiencies and improve consumer outcomes; they pose little threat to competition and consumers in the absence of durable monopoly power.  I suggested that this was the largest obstacle to any antitrust analysis involving Apple’s subscription model:

The most often discussed bar to an antitrust action against Apple is the one many regulators simply assume into existence: Apple must have market power in an antitrust-relevant market.  While Apple’s share of the smartphone market is only 16% or so, its share of the tablet computing market is much larger.  The WSJ, for example, reports that Apple accounts for about three-fourths of tablet computer sales.  I’ve noted before in the smartphone context that this requirement should not be consider a bar to FTC suit, given the availability of Section 5; however, as the WSJ explains, market definition must be a critical issue in any Apple investigation or lawsuit:

Publishers, for example, might claim that Apple dominates the market for consumer tablet computers and that it has allegedly used that commanding position to restrict competition. Apple, in turn, might define the market to include all digital and print media, and counter that any publisher not happy with Apple’s terms is free to still reach its customers through many other print and digital outlets.

One must conduct a proper, empirically-grounded analysis of the relevant data to speak with confidence; however, it suffices to say that I am skeptical that tablet sales would constitute a relevant market.

Gans agrees, also suggesting that lack of monopoly power undercuts any potential antitrust case against Apple.

Exclusivity can be an issue as it might harm other platforms that might want to sell digital subscriptions. If Apple’s exclusivity means that those platforms cannot generate sales, then a monopoly platform may arise or be sustained. But that is the issue here: where is Apple’s monopoly? It is arguable that Apple has a monopoly over tablet devices and has had that monopoly now for almost 11 months since it first released its iPad. But if a publisher decided not to sell subscriptions for iPad users, it would have other options: particularly the options it had prior to April 2010; web based subscriptions and eReader subscriptions, not to mention physical subscriptions that fall outside of Apple’s terms. It would have to be demonstrated that the iPad was one of the few or the only way to access a particular customer class to believe that publishers were excluded by Apple’s terms. In any case, those terms are not strictly exclusionary as they do not prevent other digital subscription sales – even for iPad access. Instead, they at worst, raise the costs of those other sales. To be sure, raising costs can sometimes be an antitrust violation but the degree of market power a firm would have to possess to make that the case has to be proportionate. Right now, that case appears weak.

Most-favored customer clauses arise when the terms of one supply contract impose conditions on other contracts a party might enter into. Apple is effectively preventing discounting elsewhere. If it did not do this, then that discounting would occur and Apple may be unable to generate as much in sales. Worse than that, Apple may do the hard work of signing consumers up for initial subscriptions only to have those same consumers contacted outside of those arrangements with discounts.

But such clauses can have the effect of raising prices in the market and this is what might concern antitrust authorities. For this to be likely to occur here, Apple must have a requisite degree of power (so that publishers are forced to accept those terms) and it must be the case that prices actually rise. It is too early to tell but if Apple is right and iPad consumers really do purchase more, then it is possible that the price elasticity of demand from iPad consumers is relatively high; that is, charge $10 to an iPad consumer and you generate many more sales than $10 charged for other types of consumers. In this environment, it is not obvious that the iPad will lead to higher digital subscription prices.

My only quibble with Gans’ post is that he appears to describe the “monopoly power” requirement as a problem for antitrust, rather than a sensible requirement that protects consumers from overdeterrence.  For example, Gans writes that “antitrust law, as it currently stands, has difficulty in dealing with industries whereby the path is towards monopoly and how to act prospectively about it.”   Gans does not suggest that the antitrust authorities should bring a case against Apple on these grounds.   But he does seem to imply that antitrust would be more effective if it were more willing to reach business conduct that is not harming consumers, may well be providing significant efficiencies currently, but might generate future harm.   I’m not sure this is what he means or if I’m misinterpreting.  If I’m right, I would have characterized things quite differently, perhaps along the lines of “antitrust law is not willing to sacrifice current gains to consumers for the sake of prohibiting practices that are not currently harming competition and the basis for predicting future harm is speculative, at best.”

Potential minor quibble aside, its a very good post and well worth reading.

2 responses to Gans on Apple and Antitrust

  1. 

    A related issue that has long struck me as lingering around Apple is whether their content licensing (for itunes and the like) might be treated as an antitrust problem of the copyright misuse variety.

    Here’s a link to a short piece on the topic — http://www.innovation.hoover.org/media/file/Kieff%20oped%20in%20IP%20Law%20and%20Business%20re%20copyright%20preemption%20and%20iTunes.pdf

    I’m curious what others think.

  2. 

    You know Josh as I wrote that post, your potential response was wringing in my head. You’re like a virtual critiquer now.