The DOJ, publishers, Apple and eBook pricing

It looks like the DOJ is moving to follow in the EC’s footsteps and investigate possible anticompetitive practices in eBook pricing. From the WSJ:

The case centers on Apple’s move to change the way that publishers charged for e-books as it prepared to introduce its first iPad in early 2010. Traditionally, publishers sold books to retailers for roughly half of the recommended cover price. Under that “wholesale model,” booksellers were then free to offer those books to customers for less than the cover price if they wished. Most physical books are sold using this model.

To build its early lead in e-books, Amazon Inc. sold many new best sellers at $9.99 to encourage consumers to buy its Kindle electronic readers. But publishers deeply disliked the strategy, fearing consumers would grow accustomed to inexpensive e-books and limit publishers’ ability to sell pricier titles.

This is something I have written about before and, indeed, have conducted research about (published and ungated). But let me recap:

• The agency model is stock standard Apple stuff. It takes a 30% cut of content but allows publishers to set prices to consumers. It does this for apps, magazines and, of course, books. Why? Because Apple is not a book retailer. It doesn’t want to work out the price of books to consumers. It thinks publishers can do that. Now Amazon and other book retailers are, of course, in a different position. They might have information they can use there. And Apple certainly had a view on song pricing. But for them, it was never viable to have a wholesale pricing model for books. A percentage or ad valorem model was simple. So it is hard to see an issue with that.
• The most favored customer clause is potentially another matter. Apple — but Amazon do this too — says that publishers cannot offer digital books at a lower price on another platform. They are most worried here about a web-based reading app being offered with a discount to bypass the eBook stores around the place. In these markets, this is a common practice and, as my research indicates, in situations where those markets are being built up may be a useful thing. That said, in the long run, we have to worry about restrictions in contracts by firms with market power that bind the behavior of rivals and prevent specific discounts. We worried about this with credit cards and I’d worry about it in any mature industry where innovation appears to be slow. That doesn’t sound like the eBook market right now but perhaps the DOJ are worried for the future.
• Naked collusion, of course, would be a real concern. If the DOJ have evidence that publishers met in some smoke filled room to raise prices — specifically, to get Amazon to raise prices — with or without Apple in the room, then there is a real competitive concern. But from the reports we don’t know if that has occurred or not so we will have to wait and see.

Now even here it is really unclear whether there has been an increase in eBook pricing. For instance, Paul Krugman’s new book is $16.71 on the Nook, $11.77 on iBooks and $9.99 on the Kindle. [HT: Tyler Cowen] So Apple isn’t the high priced one and, if there is some pricing restriction, it hasn’t stopped Amazon discounting. Why that is the case, I don’t know.

We have a long history in information technology of market power sneaking up and locking itself in before competition authorities can react. It does not concern me that they are being vigilant at times like this but I suspect that this evolving market is one where careful analysis will work out which practices are favorable and which might be harmful.