Jan 31 2010
Please note: I am not an expert in antitrust law. I’m giving my own interpretation of the law. There are a myriad of legal issues implicated by this situation, not the least of which is Amazon’s own publishing ambitions and possible anti competitive behavior.
Macmillan announced yesterday that it would be selling all of its ebooks at a minimum retail price that would disallow any discounting by a retailer. Macmillan would set the price and the retailer gets a cut (30%). Retail price maintenance is often used for luxury goods such as Allan Edmonds, Coach, and the like. Nine West had engaged in RPM and was slapped by the FTC until the Leegin decision came down in 2007.
For 97 years, the Supreme Court had deemed RPM as per se illegal. This meant that if a supplier was engaged in it, they were in violation of the antitrust law. But in a 5-4 decision with heated dissents, Leegin made RPM legal, under some circumstances. (For lawyers out there, vertical price restraints were changed from per se illegal to being judged under the rule of reason).
The argument made in the Leegin decision by the manufacturer (or supplier) was that RPM was necessary to protect a manufacturer from “free riding”. Free riding is where a consumer would go to a high end store and learn all about the product from trained and specialized customer support individuals and then go to a discounter and buy the product. The discounter would not have invested in the specialized customer support that the high end retailer had.
As an example of this, Nine West proffered the instance:
For example, in one instance an independent retailer with minimal floor space who provided little customer service offered Nine West styles at rock-bottom prices, taking advantage of a nearby retailer’s superior customer service, displays and advertising.
Or from the Leegin decision:
If the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would otherwise prefer. Minimum resale price maintenance alleviates the problem because it prevents the discounter from undercutting the service provider.
In Amazon’s case, however, it provides more service than most retailers. It is not in the position of the deep discounter who benefits from the training and service of the high end retailer. The danger of free riding isn’t necessarily there. Often people use Amazon’s database to provide information about upcoming books, covers, and consumer reviews without actually purchasing from Amazon. Books are not a product that require expertise to purchase.
The majority of the Justices in Leegin, led by Justice Kennedy, felt the RPM could increase interbrand competition. Interbrand is the competition among manufacturers selling different brands of the same type of product. Interbrand competition is, generally, what the antitrust laws target.
Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between.
In terms of the book market, this would mean that Amazon, and others, would promote the low-price brands like Samhain, self published authors, authors using Amazon’s publishing service, independent publishers, and the like. The high-price products would be those of Macmillan and other publishers who would seek a price floor.
Of course, books are a unique product in that each book is its own tiny monopoly. No one else can produce and publish a Stephen King book. There are other mystery books and other horror books but there is no other Stephen King. So is Macmillan attempting to use RPM to gain monopoly profits improperly?
The Supreme Court gave little guidance as to what would be deemed improper. It said that the following factors are relevant:
- Number of manufacturers that are engaging in RPM
- Source of the restraint (i.e., if it came from the retailer versus the manufacturer)
- Manufacturer’s market power
The agency model and the RPM is good for new entrants who don’t have the market power of Amazon. Mike Tamblyn of Kobo Books and Bob Livosi of Books on Board have both said that $9.99 price point isn’t sustainable for them, as retailers, presumably because they couldn’t afford to suffer the loss that Amazon could. In fact, one retailer of ebooks informed us that they purchased ebooks at Amazon so that Amazon would take the loss instead of their company. New entrants into the market is a pro competitive aspect even if price increases are anticompetitive (antitrust is supposedly all about protecting the consumer).
Amazon itself could be engaged in anticompetitive behavior by refusing to allow access to 90% of the ebook market by tying the print sales to the ebook prices.
Justice Stevens noted the dangers of RPM in the dissent:
In doing so, they can prevent dealers from offering customers the lower prices that many cus-tomers prefer; they can prevent dealers from responding tochanges in demand, say falling demand, by cutting prices; they can encourage dealers to substitute service, for price,competition, thereby threatening wastefully to attract too many resources into that portion of the industry; they caninhibit expansion by more efficient dealers whose lower prices might otherwise attract more customers, stifling the development of new, more efficient modes of retailing; and so forth.
RPM has served to increase prices for consumers. Comparing the States who had allowed for RPM versus the States that had not, the Department of Justice argued that minimum resale price maintenance had raised prices by 19% to 27%. There are several other sources that note that RPM results in higher prices:
The Federal Trade Commission (FTC) staff, after studying numerousprice surveys, wrote that collectively the surveys "indicate[d] that [resale price maintenance] in most cases increased the prices of products sold with [resale price maintenance]." Bureau of Economics Staff Report to the FTC, T. Overstreet, Resale Price Maintenance: Economic Theories and Empirical Evidence, 160 (1983) (hereinafter Overstreet). Most economists today agree that, in the words of a prominent antitrust treatise, "resale pricemaintenance tends to produce higher consumer pricesthan would otherwise be the case." 8 Areeda & Hovenk-amp ¶1604b, at 40 (finding "[t]he evidence . . . persuasive on this point"). See also Brief for William S. Comanor and Frederic M. Scherer as Amici Curiae 4 ("It is uniformly acknowledged that [resale price maintenance] and other vertical restraints lead to higher consumer prices").
"[A] contract, combination, or conspiracy that establishes a minimum price below which a retailer, wholesaler, or distributor may not sell a commodity or service is an unreasonable restraint of trade or commerce.
The question of whether State laws can override federal antitrust interpretations is still up in the air (this is called preemption).
To further complicate matters, the Fourth Circuit found that if there was a true agency relationship, this defeated any claims of improper price fixing after Leegin. In true agency relationship, the manufacturer (publisher) holds the ownership of the book and sells it to the consumer directly. The bookseller, like Amazon, only assists in the sale. Amazon would not be a reseller in this circumstance. Instead the sale is made from the publisher to the consumer. An example of this would be real estate agents. These agents facilitate the sale between the owner of a house and the buyer of the house. The real estate agent doesn’t buy the house and then resell it.
In a true agency relationship, one wonders whether Macmillan would have to source the digital file and provide the DRM as well because Macmillan must be in control of the book, must remain the “owner” of the digital file until the ownership transfers to the reader.