Pick Your Monopoly

Apple and five leading book publishers are trying to break up Amazon’s e-book monopoly.  Currently, most e-books are sold through Amazon.com, which utilizes a “wholesale” model in which they are sold to the retailer who then sets the retail price. They would like to move to an “agency model” where publishers set the price and retailers get a fixed commission. Amazon employs the “wholesale” model and this leads to cheaper prices than the “agency model.” The government is supporting lower prices and the Justice Department’s antitrust division has threatened to take Apple and these publishers to court.  Apple’s contract would prohibit publishers from entering into “wholesale” arrangements with any other major distributor and that no other distributor could sell books for less than Apple. The antitrust division claims that there was collusion between Apple and the publishing companies and an attempt at price-fixing.

            On the other hand, Amazon’s monopoly with e-books at $9.99 has been and is continuing to drive local bookstores and even Barnes & Noble out of business. Andy Gavil, antitrust expert at Howard University, says the only safe mechanism for price setting is open competition. Furthermore, Amazon sold e-books at a price that was lower than what they were actually paying the publishers for that book. Many industry competitors see this as predatory pricing in order to create that monopoly that in all reality they have today.  What makes this different than other types of monopolies and such is that this is taking place in the technology sector, which is naturally accustomed to winner-take-all competitions. The best examples being Google and Facebook that each holds a monopoly on the search engine and social media markets.

            This relates to our class because it deals with a near-monopoly and the forming of a potential oligopoly. Amazon is a near-monopoly because although other places sell e-books, Amazon undersells them all and controls that market. This underselling also works as a barrier to entry that stops other competitors from truly competing with them. An e-book that iTunes will sell for $12.99, Amazon will have it on their site, the same item, for $9.99. Apple and the publishing companies are trying to create a differentiated oligopoly. The antitrust division believes that all these groups colluded with Apple so that they could make more money by setting prices themselves. Collusion helps ensure that each firm involved will make the most profit by having all firms use the same pricing strategy. Apple will stand there to prevent any incentive to cheat since it is the retailer handling the transactions. This article shows how open competition would be the best system and avoid all these pricing wars and strategies but technology will always be a market where they can only be one company who stands on top.

The full article can be found at: http://www.washingtonpost.com/pick-your-monopoly-apple-or-amazon/2012/03/05/gIQA0kBB4R_story.html