David R. Henderson  

Apple's E-Books are Pro-Competitive

NSA Surveillance: A Cost/Benef... Mankiw's Misleading Treatment ...

The Wall Street Journal had an excellent editorial today (print) and yesterday (electronic) on the absurd antitrust suit against Apple. It's titled "Throwing the Book at Apple."

Two paragraphs:

At the time, prior to the existence of the tablet device market that Jobs created with the iPad, Apple did not sell e-books. Amazon sold nine of every 10. Justice claims Jobs then forced Amazon and every other e-book distributor to adopt a new e-book pricing model that harmed consumers.

Yet the average retail price for "trade" e-books has since dropped to $7.34 from $7.97, and Amazon's Kindle is still the industry leader with Apple trailing in third. Over the same period readers bought 447% more e-books, and they can choose from dozens of tablets for titles and other media content.

If you want to read more about this case, see the July 2012 Econlib Feature Article, "In Defense of Apple," by Richard B. McKenzie. McKenzie lays out the economics more extensively. Here are two paragraphs from McKenzie's article that cover some of the same ground:
Fourth, seen from the perspective of a world in which goods and their markets are not given, but must be created, firms need solid incentives to develop them, which means they also need market pricing power. The resulting "monopoly profits" can be welfare-enhancing. Even collusion (or collaboration) on price among competitors or among suppliers and resellers (e-book publishers and Apple, for example) can also be welfare-enhancing because the collaboration can expand the array and quantity of the goods sold. Monopoly pricing power and the resulting monopoly profits can cause producers to bring more goods than otherwise into existence. Seen from this perspective, consumers don't lose the inefficiency, or "Harberger," triangle from underproduction (which, in conventional monopoly graphics is the area bounded by the marginal cost curve and the demand curve to the right of the monopoly price); they gain as consumer surplus the rarely mentioned "Dupuit" triangle (which is the area above the monopoly price and bounded by the demand curve and the vertical axis). In short, you can't consume what doesn't exist. The prospect of temporary monopoly profits is what entices producers to develop new products. Consumers might not get the "statically optimal" amount of the good (which, again, is grossly unrealistic and unachievable), but at least they get the good.

Interestingly, since 2010, when Apple and the publishers were supposedly conspiring against consumers, e-book sales have escalated by several hundred percent and as a percentage of all book sales, perhaps, in part, because of the so-called "anticompetitive conspiracy." That fact is prima facie evidence that the "conspiracy" is pro-competitive.

One criticism of the Wall Street Journal editorial. After the two paragraphs I quoted from the Journal editorial, the editors write:
Lower prices, more sellers and better products don't sound like a return to the days of Standard Oil . . . .

Actually, with the exception of "more sellers," that's exactly what it sounds like. Here's what I wrote in the March Econlib Feature Article, "The Robber Barons: Neither Robbers Nor Barons:"
He did so [Rockefeller of Standard Oil, New Jersey increased market share] by cutting prices and almost quadrupling sales. University of Chicago economics professor Lester Telser, in his 1987 book, A Theory of Efficient Cooperation and Competition, points out that between 1880 and 1890, the output of petroleum products rose 393 percent, while the price fell 61 percent. Telser writes: "The oil trust did not charge high prices because it had 90 percent of the market. It got 90 percent of the refined oil market by charging low prices." Some monopoly!

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CATEGORIES: Business Economics

COMMENTS (1 to date)
Thomas Sewell writes:
the average retail price for "trade" e-books has since dropped to $7.34 from $7.97

It's not clear when their e-book price averages are from, so it's hard to engage in a meaningful conversation about them. Anyone have a data set?

It would be more persuasive if they had presented what happened to the pricing of the e-books from just the publishers involved in the price fixing, rather than an industry average that includes all the e-books sold.

It would have been especially more persuasive if they had included those prices from just before the "agency" agreement with Apple to just afterwards, the added another data point for when the agency agreement broke down.

As I'm pretty sure those more appropriate numbers would reflect much worse on the collusion, this smells like cherry-picking to support a predetermined point.

Besides the legal threats, one of the other reasons the agency model collusion broke down was because authors and consumers were complaining of the unreasonably high pricing being presented and the minor publishers who weren't involved in the agreement were cleaning their clocks in Amazon e-book sales because of the price differences.

To attribute the increase in e-book sales to the agency agreement is completely ridiculous. E-book sales have grown because of the growing availability of e-book readers in people's hands and of e-books to read. It's followed a pretty standard new technology model.

Amazon thought it could grow e-book sales faster with lower pricing. The publishers were more interested in protecting paper sales instead. They used the Apple agreement to undercut Amazon's efforts to grow the market. The traditional publishers have an ongoing love/hate agreement with Amazon because of the size and changes embodied in it. Just because they didn't manage to kill e-book growth completely doesn't mean that's not what they were attempting to do.

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