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How Would Hachette Frame an Antitrust Suit Against Amazon?

Amazon and the publisher Hachette are engaged in a fierce dispute over the pricing of e-books sold by Amazon.  At issue is how the profits from the sale of e-books should be divided between Amazon and the publisher and who should bear the impact of Amazon’s discounting of e-books.  Hachette is the fourth largest publisher in the U.S., and its imprints include Little Brown.  Its publications are weighted towards works of fiction, which generally sell more in e-book form than in print.  In order to apply pressure on Hachette, Amazon has taken steps that affect the availability of Hachette print books: delaying shipments of Hachette print books, not stocking as many Hachette print books, and not making Hachette print books available for pre-order.  Amazon has also proposed giving all e-book revenues to Hachette’s authors as Amazon and Hachette negotiate.  Many have described Amazon’s tactics as “bullying.”  This is the latest round in longstanding disputes between the Big Five book publishers and Amazon since Amazon’s inception.  Long unhappy with Amazon’s practice of discounting books, the publishers signed contracts with Apple in January 2010 that would ensure a switch to an agency model.  Under the agency model, the publishers—and not Amazon—would control book pricing.  Unfortunately for the publishers and Apple, the Department of Justice’s Antitrust Division brought an antitrust suit; the publishers all settled, and Apple was found liable for a price-fixing conspiracy.

Stakeholders in the current dispute have called Amazon a “monopoly” or in violation of Section 2 of the Sherman Act (even Stephen Colbert has provided his take).  Section 2 of the Sherman Act makes it unlawful for a firm to “monopolize . . . any part of the trade or commerce among the several states . . .”  As the courts interpret Section 2, mere monopoly power is not enough.  The firm must 1) have monopoly power in the relevant market; and 2) acquire or maintain that monopoly through exclusionary or anticompetitive behavior.

Some sense of Amazon’s dominance as a buyer can be inferred from its position as a seller.  Amazon has an estimated 41% share of new book sales in the U.S. and a 65% share of new books sold online.

In an antitrust suit based on Section 2, Hachette would have to prove that Amazon is the dominant buyer of Hachette’s books and has obtained or maintained that power through anticompetitive behavior.  While the analysis is similar to that of a typical monopolist (a dominant seller), Hachette would actually be accusing Amazon of acting as the twin of a monopolist—a monopsonist (a dominant buyer).

In such a suit, Hachette would first have to show that Amazon has dominant buying power in the relevant market.  A key question would be how the “relevant market” is defined.  For example, the relevant market might be defined as (1) all buyers of Hachette books; (2) all buyers of Hachette e-books; (3) all online sellers of Hachette books; or (4) some other market definition.  Importantly, a firm’s current market share is only one facet of determining market power.  Antitrust agencies and courts also consider how sustainable that market power is.  If suppliers like Hachette can easily switch in response to prices set by Amazon, Amazon might not in fact have market power.  In a potential suit, a court would consider whether Hachette can choose to sell its books to other retailers.  In fact, Walmart and Books-A-Million have both discounted Hachette titles and have encouraged consumers to purchase Hachette print books from their websites instead of Amazon’s.  On the other hand, switching costs would be non-zero for consumers who like the convenience and savings of purchasing a wide variety of items (books and other items) from Amazon.

Second, even if Amazon is a dominant buyer in the relevant market, has it engaged in exclusionary or anticompetitive conduct?  Monopolists and monopsonists are only liable if they obtained or maintained their power by anticompetitive means.  Amazon appears to be refusing to deal with Hachette.  But the “refusal to deal” theory of liability has been confined to a monopolist’s refusal to continue its prior profitable dealings with a direct competitor.  The narrowness of the theory as applied to monopolists has recently been underscored by the Second Circuit.

The dispute between Amazon and Hachette is not a unique event in the business world.  Similar disputes between cable operators (often monopsonists in certain geographic markets) and content providers are often newsworthy events.  A pricing dispute between the Yankees’ YES Network and Cablevision led to an antitrust suit in 2002.  The action settled before a decision.  This past August, during a pricing dispute, Time Warner blacked out CBS for millions of its customers for a month.  Amazon’s behavior is not even unique within the book industry.  Just last year, Barnes & Noble cut its orders from Simon & Schuster as a negotiating tactic.  Currently, Amazon is employing similar tactics against Warner Brothers, removing the pre-order option from many Warner Brothers movies.  On June 24, the German Publishers and Booksellers Association filed a complaint with the German antitrust authorities alleging Amazon’s activity to be in violation of German laws.  It remains to be seen whether Hachette or another Amazon supplier will bring an antitrust action against Amazon in the United States.  There are indications that, instead of fighting Amazon in court, publishers are combating Amazon by acquiring other publishers and consolidating in order to present a stronger negotiating position.