Antitrust Case Against Apple

Antitrust Laws: Apple's Case

Competition is a vital element of any vibrant marketplace. Thanks to competition, both businesses and individuals get to benefit from lower prices, increased product variety, higher-quality commodities, and greater innovation. Antitrust laws are meant to ensure that consumers are protected from unfair business practices and anticompetitive mergers, and that consequently, effective levels of competition are created and sustained in the economy.

Antitrust laws differ from country to country and, at times, from jurisdiction to jurisdiction. In the U.S., antitrust laws include the Sherman Act of 1890 and the Federal Trade Commission and Clayton Acts, both of 1914 (FTC, 2014). The Sherman Act, whose violation is punishable by criminal law, outlaws any attempts to monopolize a market or restrain trade through rig bids, divide markets, or price fixation (FTC, 2014). The Federal Trade Commission Act, on the other hand, illegalizes any '"unfair methods of competition' and 'unfair or deceptive acts or practices,'" such that any act that violates the Sherman act also violates the Federal Trade Commission Act (FTC, 2014). The Clayton Act incorporates the elements of the Sherman Act, but prohibits, in addition, the formation of mergers that could have the effect of reducing competition to insufficient levels (FTC, 2014).

The above antitrust laws have been applied to changing markets since the age of buggies and horses to the present digital era, but have always had the same overriding goal; to sustain vigorous "competition for the benefit of consumers, making sure there are strong incentives for businesses to operate efficiently, keep prices down, and keep quality up" (FTC, 2014). In the U.S., antitrust laws are enforced by the antitrust division of the Department of Justice. Big names, including Microsoft, Google, and Kodak have, in the past, found themselves at loggerheads with the DOJ for antitrust violation and have, at the very least, had to part with huge sums of money for lobbying and litigation purposes. Kodak was, however, not so lucky and was forced to delegate some of its activities to smaller companies within the industry.

Apple is a more recent victim of the antitrust scare. The company, and five of the nation's renowned publishers -- Simon & Schuster, Penguin, Macmillan, Harper-Collins, and Hachette -- were, in 2002, sued, under the Sherman Act, for colluding to fix e-book prices and alter sales models "in a case that could radically reorder the fast-growing business" (Catan, Trachtenberg & Bray, 2012).

The DOJ claimed that the publishing companies' CEOs held regular closed-door meetings in upscale hotels in Manhattan to deliberate on how they would respond to Amazon's practice of discounting their e-books (Carmody, 2012). This series of private meetings followed the failed attempts by the publishing industry to pressure Amazon out of the discounting system, which the industry feared would cause permanency in consumer price expectations, and make price hikes almost impossible in the future (Catan, Trachtenberg & Bray, 2012). The divulgence came about because publishers felt that the $9.99 (referred to as "the wretched $9.99 price point" by the disgruntled CEOs), at which Amazon priced its newly-introduced e-books was too low, and would give the company too much clout in the market especially because the industry was experiencing a paradigm shift from physical to digital books (Carmody, 2012)

Apple is accused of having held negotiations with the disgruntled publishers in early 2010 to have them offer their books in the iBookstore of the newly-launched iPad computer, at a price higher than Amazon's $9.99, alleging that "matching Amazon's prices would have involved taking a loss on many titles" (Voris, 2012). The publishers in turn were to impose this new agency pricing arrangement (where e-book prices are set by the publisher) on Amazon, and all other e-book retailers (Voris, 2012).

The suit claims that negotiations between Apple and the five accused publishers gave rise to some sort of understanding that raised "the price of best-selling e-books to $12.99 or $14.99" (Voris, 2012). As per the suit, the secret meetings held by the five CEOs sought to establish ways of imposing the new model on Amazon, and other e-book retailers (Catan, Trachtenberg & Bray, 2012). It has been said that following this conspiracy, "consumers paid millions of dollars more for some of the most popular titles" (Catan, Trachtenberg & Bray, 2012).

When details of the conspiracy came to light in mid-2012, the accused publishers moved to settle the same out-of-court with the DOJ (Carmody, 2012), agreeing "to terminate their agreements with Apple and refrain from limiting any retailer's ability to set e-book prices for two years" (Catan, Trachtenberg & Bray, 2012). Apple refrained from any settlements and opted to fight the DOJ in court, maintaining that it had done nothing wrong and that it only sought to prevent Amazon from gaining full control of the market (Carmody, 2012). The DOJ, however, expressed that the companies were well aware that they were engaging in an illegal practice, which is why they kept their engagements secret (Catan, Trachtenberg & Bray, 2012).