The European Commission has reached a settlement with most major publishers and Apple over eBooks. The upshot of it is that existing agency contracts with Apple will be removed and new ones written in their place. However, the new ones will not have in them the “Most Favoured Nation” (MFNs) clauses that prevented eBook retailers (such as Amazon) discounting eBooks that were also listed in the iBooks Store. Nothing else substantive would appear to be changing with Apple still able to delegate pricing to publishers (as I have written before, this seems to be a good thing) and still able to receive a 30 percent cut of revenues. But this is a cooling off provision. Publishers will have to wait 2 years before imposing restrictions on discounts and for Apple, it will have to wait 5 years before including MFNs again if it should want to. It is unclear whether Amazon and others are bound by these restrictions.

I’m not a fan of “contracts that refer to competitors” as MFNs and exclusivity arrangements tend to be. But I am more concerned about them for firms with market power than those without. My belief was that in this case, Apple did not have the requisite degree of market power in eBook distribution/retailing to warrant intervention but then again, there is always a residual concern that they may have that degree in the future so this was, in some sense, a preemptive strike.

But I would be remiss if I did not mention some research that suggests that there may be some important, dynamic consequences that flow from this new restriction. My own research has suggested that MFNs may be a way of promoting a platform and allowing business models that allow monetisation of devices (as Apple does) rather than content (as Amazon does). Justin Johnson has a paper that suggests that agency models (broadly construed) can lead to short-run price increases but long-run price falls.

As it turns out, I gave a talk in Brussels just last week related to all of this. Here is my 7 minute take.

What will be interesting to see is what the impact of all this on book prices is. If the US DOJ drags its feet a little, we should have a nice experiment for some PhD student to study.

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