3 Things Everyone Needs to Know About the Apple Antitrust Case
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3 Things Everyone Needs to Know About the Apple Antitrust Case

by Don Watkins and Yaron Brook | April 10, 2012 | Forbes.com

Just when Apple was introducing its latest iPad, the government announced that Apple was among six companies being investigated over ebook pricing. As that investigation appears to be nearing its conclusion, here are three things everyone needs to know about the case.

1. The government is targeting voluntary agreements

What is the offense these companies are accused of committing? Apple pioneered an agreement with five leading book publishers to change the way ebooks are priced.

The old pricing model allowed sellers such as Amazon and Apple to set ebook prices. Apple suggested that the publishers switch to a so-called agency-pricing model: the publishers would set the price and Apple’s ebook store would take a 30 percent share. The one condition that Apple put on the agreement was that the publishers could not sell their ebooks for less elsewhere. (In other words, the publishers had to convince companies such as Amazon to agree to the same deal.)

So what’s the problem? It’s true that these agreements limit the pricing options of companies such as Amazon. But all contracts involve limitations and restraints. The salient issue is that Apple couldn’t force the deal on the publishers, the publishers couldn’t force the deal on other ebook sellers, and no one could force customers to pay higher prices. We’re talking about free, voluntary contractual arrangements that the government has no business interfering with.

It’s also true that ebook prices have risen somewhat since the deal. Who cares? Traditional books may be made from trees but they don’t grow on trees — and ebooks and ebook readers such as the iPad definitely don’t grow on trees. These are amazing values created by publishers and by companies such as Apple. Those companies have a right to offer their products for sale at whatever prices and on whatever terms they choose. They cannot make us buy them. (If they could, why would they charge only $15? Why not $50? Why not $1,000?)

There is no mystically ordained “right” price for ebooks — the right price is the one voluntarily agreed to between sellers and buyers. Sure, some buyers may complain about ebook prices — but they are also buying an incredible number of ebooks.

What in the world entitles a bunch of bureaucrats who have created nothing to interfere with these voluntary transactions and declare that they get to decide how ebooks should be priced?

2. The government isn’t protecting competition — it’s punishing it

Competition, in the simplest terms, is business rivalry: it’s the actions businesses take to outdo each other in the production of wealth. It requires only one thing from government: the freedom to compete.

Under freedom of competition, companies engage in all sorts of competitive actions in order to maximize their profits: they strive to innovate, to improve customer service, to lower production costs, to engage in strategic alliances with other producers, to experiment with pricing strategies.

Take the agreement that’s under fire in this case. When the companies agreed on certain pricing arrangements, this was not a limitation on competition but a form of competition. They judged that, all things considered, they could maximize profits by having publishers rather than booksellers set ebook prices.

At no point was anyone’s freedom of competition limited. No one is barred from competing by the ebook arrangement. Any publisher or distributor who chose not to sign the agreement is free to charge whatever it wants for ebooks, and any consumer is free not to buy from those who did sign.

No private action can interfere with this competitive process; the only thing that can is government force. It is only government that can stop us from engaging in free, voluntary trading relationships.

And this is precisely what antitrust laws do: they restrict freedom of competition. They stop companies from engaging in perfectly legitimate, perfectly voluntary competitive actions, such as the sorts of pricing agreements that have come under fire in the Apple case.

3. Antitrust laws punish great companies

Because antitrust laws are vague and contradictory, practically any successful business can be targeted for enforcement.

Just take the issue of pricing. Apple and the publishers are in trouble for “colluding” — setting prices in concert with each other. But antitrust also punishes setting prices “too low” — that’s “predatory pricing.” And it also punishes setting prices “too high” — that’s proof of “monopoly power.”

If the government tried to apply antitrust laws consistently, it would amount to the abolition of business. In practice, what it does is go after the most successful companies. That’s why the annals of antitrust read like a who’s who of great businesses: Standard Oil, Alcoa, GE, IBM, Microsoft, Intel, Google, Apple.

The effect of being put in the antitrust crosshairs should not be taken lightly. Throughout the eighties and nineties, Microsoft was one of the most innovative companies in the world. But over the last decade? Not so much. Joe Wilcox, managing editor of BetaNews, places the blame heavily on antitrust:

Windows innovation stagnated during the last decade, as Microsoft backed off the so-called middleware categories covered by the antitrust case and withheld integrating new technologies into the operating system that should have kept the platform vital and created more opportunities for third-party developers.

The mere prospect of an investigation is enough to rattle and discourage businessmen, even if the government never takes the case to court.

In a September 2010 interview, Whole Foods CEO John Mackey was asked about his company’s merger with the Wild Oats grocery chain. “[I]t’s been great,” said Mackey. “Our Wild Oats same-store sales were up like 16 percent in the second quarter.” But when asked whether he would do the merger again, Mackey answered with an emphatic “No.”:

We’ll never do another merger that requires FTC approval. It was the worst experience of Whole Foods’ corporate life. All my e-mails were examined by the FTC. The thirty million dollars in legal fees. . . . For what? To prove we weren’t a monopoly? Everyone knows we’re not.

Treating productive businessmen this way is a profound injustice, and the price paid — by them and us — is incalculable. Innovators such as Apple deserve thanks and they deserve freedom — not the shackles of antitrust.

About The Authors

Don Watkins

Former Fellow (2006-2017), Ayn Rand Institute

Yaron Brook

Chairman of the Board, Ayn Rand Institute