TY - JOUR
AU - Klein,, Benjamin
AB - Abstract Apple's economic role in the Publisher conspiracy to increase Amazon's below cost pricing of e-books is examined in a hub-and-spoke conspiracy framework. The five major e-book publisher defendants (“the Publishers”) conspired because of their concern that Amazon's low prices would adversely affect physical book demand and prices and also create an Amazon retail monopoly under which Amazon would negotiate substantially lower wholesale e-book prices. The Publisher conspiracy successfully moved Amazon to an agency relationship and gained control over e-book retail pricing. The Publishers accomplished this by jointly threatening Amazon with windowing (delaying the release of new e-book titles), which imposed a significant potential cost on Amazon in the face of Apple's scheduled entry without windowing. Apple therefore economically facilitated the Publisher conspiracy solely through its entry, not through any of its iBookstore contract terms. Contrary to the court, the most favored nation (MFN) and maximum price terms in the Apple contracts had no effect in facilitating the Publisher conspiracy. In fact, if Apple had entered without these contract terms, e-book prices would have been substantially higher. Consequently, Apple's contracts should not have been evaluated under a per se standard. I. INTRODUCTION The Apple e-books case highlights the intersection between long-established per se precedents with regard to hub-and-spoke conspiracies and the now firmly recognized rule of reason analysis of vertical contractual relationships. The Second Circuit in a split decision that affirmed the district court's findings held Apple per se liable because its vertical contracts “orchestrated a horizontal conspiracy among the Publisher Defendants to raise e-book prices.”1 The dissent disagreed, relying on the statement in Leegin that “a vertical agreement designed to facilitate a horizontal cartel ‘would need to be held unlawful under the rule of reason.’”2 The appeals court reasoned in response that, although the distinction between vertical and horizontal agreements “is sharp in theory, determining the orientation of an agreement can be difficult as a matter of fact and turns on more than simply identifying whether the participants are at the same level of the market structure.”3 According to the court, while Apple's relationship with the Publishers was vertical, Apple's contracts “had the effect of raising prices because it created an incentive for the Publisher Defendants to demand that Amazon adopt an agency model and to seize control over consumer-facing e-book prices industry-wide.”4 Therefore, consistent with established Supreme Court precedent, “the type of restraint Apple agreed to impose” implies that a per se standard of condemnation is appropriate.5 As succinctly summarized by the district court, per se antitrust law with regard to hub-and-spoke conspiracies requires plaintiffs to “demonstrate both that a horizontal conspiracy existed, and that the vertical player was a knowing participant in that agreement and facilitated the scheme.”6 The first requirement, commonly stated in terms of the presence of a horizontal agreement or “rim” that connects the spokes, is the primary basis by which hub-and-spoke claims are now most commonly adjudicated. If evidence of a horizontal agreement does not exist or cannot be inferred, the per se rule does not apply.7 This article assumes that a horizontal agreement exists among the spokes in all of the particular hub-and-spoke cases discussed and focuses solely on the second legal requirement for per se analysis of whether the hub should be considered a participant in the horizontal conspiracy. In Apple, the existence of a horizontal agreement among the five major e-book publisher defendants (“the Publishers”) to collusively force Amazon to an agency relationship was not challenged. The Publishers settled before trial and the question at issue at trial was whether, as ultimately concluded by the court, Apple's vertical contracts and conduct “created an incentive for the Publisher Defendants to demand that Amazon adopt an agency model” and therefore amounted to per se illegal hub participation in a hub-and-spoke conspiracy.8 Part II economically describes how a hub buyer may anticompetitively create and stabilize a horizontal conspiracy among suppliers. The essential per se illegal function served by a hub is shown to involve the setting of collusive contract terms under which the spoke suppliers are required to deal with rivals of the hub. The hub also may coordinate joint agreement among suppliers to accept these collusive contract terms as well as enforce supplier compliance with the collusively set contract terms. This economic framework is shown to be consistent with how vertical hub contracts have operated in previous hub-and-spoke conspiracies, illustrated by two prominent hub-and-spoke conspiracy cases relied upon in Apple, Interstate Circuit, and Toys“R”Us.9 Part III then provides a detailed description of the facts of the Apple e-books case. It is shown that the Publishers successfully moved Amazon to agency and thereby obtained control of Amazon's below cost pricing by making joint demands upon Amazon to accept agency or face windowing (the delay) of release of new titles. Amazon had no economic choice but to accept the Publishers’ collusive demands for agency because Apple was scheduled to enter e-book retailing with access to all new release e-book titles without delay. Apple recognized the value its entry provided to the colluding Publishers and took advantage of it to negotiate favorable iBookstore contract terms that were in its narrow business interests, including agency and MFN contract terms that protected Apple against the possibility that Amazon would continue below cost pricing and maximum retail price terms that protected Apple against collusive Publisher retail pricing. Part IV then turns to an antitrust analysis of Apple's contracts and conduct. The Leegin rule of reason requirement is shown not to apply to all vertical hub contracts, and specifically not to fit Apple's contracts. However, Apple's iBookstore contracts with the Publishers also did not involve “the type” of vertical contract that must be evaluated under a per se standard. In contrast to other hub-and-spoke conspiracies, Apple did not contractually set the contract terms under which the Publishers were required to deal with Amazon. Specifically, the Apple contracts did not require the Publishers to move Amazon to an agency relationship with regard to the sale of e-books and did not require the Publishers to threaten Amazon with windowing if it did not accept agency. The Publisher conspiracy was facilitated solely by Apple's entry. Apple's contract terms had no effect on the success of the Publisher conspiracy. In fact, if Apple had entered without any of its contract terms, e-book prices would have been substantially higher. The court reached the contrary conclusion that Apple's contracts should be evaluated under a per se standard on the basis that the MFN term in Apple's contracts set a de facto contract requirement that the Publishers move Amazon to agency. However, the MFN was adopted by Apple in its independent economic interest and did not create incentives that forced the Publishers to demand that Amazon move to agency. The windowing programs that economically forced Amazon to accept agency in the face of Apple's entry were adopted by the Publishers before Apple began to negotiate its iBookstore contracts and the magnitude of the Apple MFN was trivial relative to the fundamental economic forces associated with windowing. When Apple's contracts are evaluated under a rule of reason standard, they are shown to be part of the normal competitive process. II. USE OF A VERTICAL CONTRACT TO CREATE AND STABILIZE A HORIZONTAL CONSPIRACY Economists and policymakers have long understood the economic factors that lead to cartel instability. While firms have a joint profit incentive to collude to raise prices and restrict industry sales, each firm has an individual profit incentive to take advantage of such a conspiracy to shave collusive prices in order to expand its sales, thereby undermining the likelihood the conspiracy will survive. Following George Stigler, these offsetting economic incentives imply two problems in establishing a stable conspiracy.10 The colluding firms must: (1) agree on the terms of the collusion, a task that may be difficult when firms are not selling identical products and when market demand and supply conditions change over time; and (2) monitor individual firm behavior to detect deviations from agreed upon collusive prices, which also may be difficult in the face of changing market conditions. According to Stigler, once a firm's deviation from the collusive agreement, or “cheating,” is detected, the other firms will match the price discounts of the cheating firm and expand output, leading to the breakdown of the conspiracy. Therefore, the stability of a conspiracy will depend upon the underlying industry conditions that influence the speed at which cheating is detected. Faster detection reduces the short-run profit expected by a firm that decides to cheat on the collusive agreement and, by reducing the incentive to cheat, leads to a more stable conspiracy.11 This cartel stability analysis focuses on the difficulties firms face in jointly reaching a collusive agreement, and then detecting cheating on the collusive agreement. Once cheating is detected, enforcement of the agreement is assumed to involve solely similarly price cutting by the other firms, which the potential cheater recognizes would lead to the breakdown of the cartel and therefore deters the initial incentive to cheat. However, a potential cheater also recognizes that if it does not cheat, and thereby earns additional short-run profit until detection occurs, other firms may cheat first. The anticompetitive innovation of a hub-and-spoke conspiracy is in facilitating solutions to these cartel creation problems of reaching a collusive agreement, detecting cheating, and, most importantly, providing a more efficient cartel enforcement mechanism. A. The Economic Framework of a Hub-and-Spoke Conspiracy A hub-and-spoke conspiracy involves the use of vertical contracts a buying firm, or hub, has with suppliers, or spokes, to establish and stabilize a horizontal agreement among the spokes by specifying the collusive terms under which the suppliers must deal with buyers. This often is more successful than the suppliers reaching a horizontal agreement among themselves without the assistance of the hub, especially when there are many suppliers that have different costs and face different individual demand conditions. In addition to a buyer facilitating the negotiation of mutually acceptable collusive terms, legal antitrust constraints make direct communications among the suppliers more difficult than a series of vertical agreements. A firm with a purchasing relationship also may serve as an efficient cartel policer of the collusively specified terms in the vertical contract because it can impose a sanction on a supplier that cheats by shifting its purchases to other suppliers. In this way the cheater, once detected, is punished because its price reduction does not result in an expansion of its sales; it merely sells its output at lower prices. The non-cheating firms therefore need not bear the significant costs of responding to the cheater's lower prices with a similar price reduction that would lead to the breakdown of the cartel.12 Most of the hub-and-spoke cases discussed in this article, including two canonical hub-and-spoke cases relied upon in Apple, Interstate Circuit, and Toys“R”Us,13 involve a hub buyer that is a large retailer purchasing from alternative suppliers. A hub-and-spoke conspiracy, however, may also involve a product supplier that serves as a hub, with its retailers or distributors the spokes of the arrangement. The retailer/distributor spokes should then be considered colluding suppliers of distribution services with the product supplier hub a buyer of distribution services. In such hub-and-spoke cases the vertical contract entered by the product supplier hub with the retailer/distributor spokes is then claimed to create a collusive agreement among the distributors.14 An obvious question is why a buyer would want to serve as a cartel facilitating agent for suppliers. To answer this question, it is essential in all hub-and-spoke cases to distinguish between the cartel creating and stabilizing hub buyer and all other buyers who are rivals to the hub and also purchasing from the colluding spokes. The horizontal agreement that is established among the colluding suppliers through their joint acceptance of the vertical contract terms set by the hub buyer may fix the collusive terms by which the suppliers must deal with all buyers, including the hub. In that case, the hub buyer must then be separately compensated for its conspiracy facilitating services with a side payment representing a share of the suppliers’ collusive profits. For example, the Standard Oil refining monopoly established in the 1870s initially involved a hub-and-spoke railroad conspiracy established by Standard Oil, who enforced collusively agreed upon rail rates by “evening” its shipments across railroads to stabilize also collusively agreed upon individual railroad market shares. In return, the railroads shared their collusive profits with Standard Oil in the form of “drawbacks,” or a per barrel payment to Standard on the rail shipments by the other refiners.15 Much more commonly, the hub buyer only sets the collusive terms by which the spoke suppliers are required to deal with rival buyers. This results in an increase in supplier profits, but it also creates a market advantage for the hub buyer that implies receipt of a share of the increased profits which substitutes wholly or partially for side payments. This is what occurred, for example, in the Interstate Circuit and Toys“R”Us hub-and-spoke cases. This general economic framework of a hub-and-spoke conspiracy, where a hub buyer specifies in its vertical contracts with a group of colluding suppliers how the suppliers must deal with rival buyers that results in an increase in total joint hub and colluding supplier profits is illustrated by Figure 1. Figure 1. Open in new tabDownload slide A hub-and-spoke conspiracy Figure 1. Open in new tabDownload slide A hub-and-spoke conspiracy B. Hub-and-Spoke Cases The economic forces underlying the general economic framework of a hub-and-spoke conspiracy described in Figure 1, where a hub buyer increases joint profits of the hub and colluding spokes by contractually specifying how the product supplier spokes must deal with rival buyers is described in more detail in what follows by first reviewing Interstate Circuit and Toys“R”Us and then turning to a detailed examination of Apple. This framework fits all but one of the hub-and-spoke cases cited in Apple.16 1. Interstate Circuit Interstate Circuit is the first U.S. Supreme Court decision now described as a hub-and-spoke conspiracy. It involved the vertical agreements Interstate Circuit, the dominant first-run film exhibitor in six Texas cities, entered with each of the eight major film distributors that fixed the terms the film distributors were required to set in their contracts with later-run theaters located in these Texas cities where Interstate Circuit operated.17 The Interstate Circuit contracts required each film distributor when contracting with later-run theaters located in Interstate Circuit cities to set the minimum adult evening admission price on “A” films of 25 cents.18 Interstate Circuit therefore created a horizontal conspiracy among the major film supplier distributors, the spokes of the conspiracy, with regard to later-run theaters, the rivals of Interstate Circuit. Interstate Circuit then enforced this film distributor conspiracy with the threat that any film distributor that did not comply with these terms would not obtain first-run exhibition in Interstate Circuit cities.19 It is important to recognize that distributor-set minimum later-run admission prices were a common feature in competitive film distribution contracts during the 1930s. It was part of a system by which individual film distributors maximized revenue on each of their films by instituting a series of separate exhibition “runs” over time at declining admission prices. Each theater was designated by a film distributor as part of a particular run within a geographical zone, with contractually specified minimum admission prices and clearance periods between each run.20 First-run theaters, which handled the initial exhibition after release, generally supplied a single feature in elaborate surroundings for a variable period of time, often a few weeks, and accounted for the largest share of a film's revenues. Successive later runs then occurred over time at lower priced neighborhood theaters.21 Organizing film exhibition in a series of runs with declining admission prices was a way for individual film distributors to maximize the return on their films by moving down the demand curve for each of their films over time. In effect, each individual film distributor price discriminated across consumers on the basis of consumer intensity of demand for each film, with consumers less willing to delay viewing a film assumed to have the greatest demand for the film.22 Variable pricing of films over time is a practice that continues in the current market environment, where film distributors maximize the total revenue for each of their films by separating exhibition into distinct, declining price, exhibition “windows” consisting of, first, theatrical exhibition, and then moving on, for example, to video on demand pay per-view and subscription streaming services, premium cable, basic cable, and ultimately broadcast TV exhibition. Such differential pricing over time does not require the film distributor to possess any market power, but merely that it face a negatively sloped demand for each of its films.23 Under the film exhibition arrangements that existed in the 1930s it was economically essential for individual film distributors to set minimum admission prices for a film's later-run exhibition in order to enforce this competitive discriminatory pricing scheme designed to maximize each individual film's revenue. Later-run exhibitors had an incentive to arbitrage the discrimination by reducing their admission prices and thereby induce some consumers on the margin to decide not to attend the more expensive first-run viewing of the film and instead wait to view the movie at a later-run theater at the lower price. While this would increase later-run attendance and profit, it would disturb the film distributor's profit-maximizing discriminatory pricing scheme and reduce the total revenue earned by the film distributor on the film. To avoid this “cannibalization” of the more profitable first-run, the common competitive contractual arrangements individual film distributors made with later-run exhibitors therefore included minimum later-run admission prices. This control of intra-film competition between later-run and first-run exhibition preserved individual distributor profit-maximizing pricing between runs over time.24 Minimum admission prices set by individual film distributors in later-run exhibition contracts were commonly 10 or 15 cents.25 Therefore, the Interstate Circuit requirement that film distributors set the minimum later-run admission price at 25 cents involved approximately a doubling of the contractually specified minimum later-run price. It is obvious that Interstate Circuit would find it in its economic interests if its later-run rivals were required to increase admission prices because this would increase the demand at its first-run theaters. However, no individual film distributor would independently decide to increase its contractually specified later-run minimum admission prices above the 10 to 15-cents level that each distributor had determined maximized its profit. An individual film distributor's decision to raise later-run minimum admission prices for its films would increase first-run revenue, but would lower the film distributor's total profit because it would be more than offset by lower later-run revenue as later-run consumers switched to the lower priced films of distributors that did not increase later-run prices. However, it was in the film distributors’ joint interests to set the higher 25-cents minimum later-run admission price. Such a later-run price increase would increase first-run demand and therefore obviously benefit Interstate Circuit, but it would benefit also the film distributors as a group because there would be no substitution by later-run consumers to lower-priced films. The result of the film distributor conspiracy created and enforced by Interstate Circuit's vertical contracts therefore was a significant increase in the first-run demand for all the distributors’ films on which admission prices and the distributor share of revenues was higher. Consequently, the total profits earned by film distributors and by Interstate Circuit increased, while a cost was imposed on later-run exhibitors.26 2. Toys“R”Us The alleged hub-and-spoke conspiracy at issue in Toys“R”Us involved the vertical agreements Toys“R”Us entered with major toy manufacturers regarding how the manufacturers were required to deal with warehouse club retailing rivals of Toys“R”Us, such as Costco.27 Rather than Toys“R”Us requiring toy manufacturers to increase the price its rivals had to charge, as in Interstate Circuit, the Toys“R”Us agreements involved a modified form of exclusive dealing that required toy manufacturers not to supply the same products to warehouse club stores that they supplied to Toys“R”Us. In particular, the Toys“R”Us contracts specified that if similar products were sold to warehouse club stores, the products had to be provided in different packaged combinations.28 There was no procompetitive motivation for toy manufacturers to individually decide to restrict the products supplied to club stores. Internal documents of the manufacturers indicate that each toy manufacturer was, in fact, interested in expanding its sales to the new, fast-growing channel of club distribution.29 However, the toy manufacturers informed Toys“R”Us that “they were only selling to the clubs because their competition was selling to the clubs, and they would get out of the clubs if their competition got out.”30 The toy manufacturers likely found it in their joint interests to restrict distribution to the club stores because they were able to sell their products at higher prices and earn higher profit margins on sales to toy retailers. It was therefore in the interests of the toy manufacturers as a group, as well as in the interests of Toys“R”Us, to enter the Toys“R”Us contracts that restricted the products supplied to warehouse clubs. In contrast to Interstate Circuit, Toys“R”Us did not have the ability to unilaterally enforce its warehouse club contract restrictions. While Interstate Circuit purchases accounted for 100 percent of the film distributors’ first-run film rentals in the relevant geographical market in which Interstate Circuit operated, Toys“R”Us accounted for only about 30 percent of the sales of the major toy manufacturers involved in the conspiracy.31 Therefore, while Toys“R”Us could impose a significant sanction on a toy manufacturer that did not comply with its restricted warehouse club supply contract terms, reducing its purchases and allocating poor shelf space to the products of such a manufacturer, the sanction appears to have been insufficient by itself to obtain individual manufacturer compliance with the club store supply contract restrictions. Consequently, Toys“R”Us had to engage in extensive negotiations with the toy manufacturers “for over a year and a half” before it was able to reach an understanding on the restricted club supply contract terms the toy manufacturers would jointly accept.32 How Toys“R”Us ultimately obtained joint toy manufacturer agreement to accept the final club store contract restrictions illustrates a primary economic function of a hub in a hub-and-spoke conspiracy. Toys“R”Us “engaged in extended negotiations with companies that were reluctant to adopt the restraint, and worked out agreed-upon compromise solutions” that each of the manufacturers ultimately found acceptable and were convinced by Toys“R”Us that all the other manufacturers had agreed to follow.33 Each toy manufacturer therefore testified that it accepted the restrictions contingent “on the condition that their competitors would do the same.”34 In addition to specifying and coordinating joint toy manufacturer acceptance of the jointly agreed upon club store restricted supply contract conditions, Toys“R”Us facilitated “each toy company's compliance with its commitment” and served “as the central clearinghouse for complaints about breaches in the agreement.”35 Toys“R”Us clarified interpretation of the collusive agreement in meetings with toy manufacturers to “preview and clear products developed for the clubs to assure that they were sufficiently differentiated from its own,” and demanded that firms which were violating the agreement “cease club sales.”36 The economics of hub-and-spoke conspiracies, as well as the conduct of the hubs in these two classic hub-and-spoke conspiracy cases, indicate that there are three types of activities undertaken by a hub. To create and stabilize a collusive agreement among the spokes a hub will (1) set the collusive contract terms by which the spokes are required to deal with rivals of the hub, (2) coordinate joint spoke acceptance of the collusive contract terms, and (3) enforce individual spoke compliance with the collusive contract terms. Apple's contractual arrangements and conduct are examined in terms of these primary conspiracy facilitating activities. III. THE APPLE E-BOOKS CASE The claim in the Apple e-books case involved a hub-and-spoke conspiracy broadly analogous to the framework described in Interstate Circuit and Toys“R”Us. As illustrated in Table 1, the case involved a horizontal conspiracy among five defendant e-book Publishers, the spoke suppliers, to move Amazon to an agency relationship where Amazon would lose control of the pricing of e-books and therefore the Publishers could stop Amazon's below cost pricing of e-books, something the Publishers believed would increase their long-run profits. The issue at trial was whether Apple, through its vertical contracts and conduct acted as an intermediary hub buyer that facilitated this Publisher conspiracy. 37 Table 1. Hub-and-spoke cases . Spoke Suppliers . Hub Buyer . Hub Rivals . Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939) film suppliers Interstate Circuit first-run theater chain later-run theaters Toys“R”Us, Inc. v. Fed. Trade Comm’n, 221 F. 3d 928 (7th Cir. 2000) toy manufacturers Toys“R”Us retailer warehouse club retailers United States v. Apple, Inc., 791 F. 3d 290 (2d Cir. 2015) e-book Publishers Apple e-book retailer Amazon e-book retailer . Spoke Suppliers . Hub Buyer . Hub Rivals . Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939) film suppliers Interstate Circuit first-run theater chain later-run theaters Toys“R”Us, Inc. v. Fed. Trade Comm’n, 221 F. 3d 928 (7th Cir. 2000) toy manufacturers Toys“R”Us retailer warehouse club retailers United States v. Apple, Inc., 791 F. 3d 290 (2d Cir. 2015) e-book Publishers Apple e-book retailer Amazon e-book retailer Table 1. Hub-and-spoke cases . Spoke Suppliers . Hub Buyer . Hub Rivals . Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939) film suppliers Interstate Circuit first-run theater chain later-run theaters Toys“R”Us, Inc. v. Fed. Trade Comm’n, 221 F. 3d 928 (7th Cir. 2000) toy manufacturers Toys“R”Us retailer warehouse club retailers United States v. Apple, Inc., 791 F. 3d 290 (2d Cir. 2015) e-book Publishers Apple e-book retailer Amazon e-book retailer . Spoke Suppliers . Hub Buyer . Hub Rivals . Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939) film suppliers Interstate Circuit first-run theater chain later-run theaters Toys“R”Us, Inc. v. Fed. Trade Comm’n, 221 F. 3d 928 (7th Cir. 2000) toy manufacturers Toys“R”Us retailer warehouse club retailers United States v. Apple, Inc., 791 F. 3d 290 (2d Cir. 2015) e-book Publishers Apple e-book retailer Amazon e-book retailer The Apple behavior at issue involved the negotiations and ultimate contract terms reached with the Publishers for the supply of e-books to the Apple iBookstore, a retail e-books site created in connection with Apple's introduction in 2010 of its new product, the iPad. The Publisher negotiations began in mid-December 2009 and were completed six weeks later, shortly before Apple's public announcement of the iPad on January 27, 2010. To place these events in context and to economically understand the iBookstore contract terms agreed upon, it is necessary to first describe the underlying marketplace conditions that existed when these negotiations took place. A. Amazon's Below Cost $9.99 Pricing Amazon entered e-book retailing with the Kindle e-book reader in November 2007 and quickly achieved an approximate 90 percent share of e-book sales.38 As Figure 2 illustrates, this initially amounted to a small share of total book sales. E-book sales, however, began to grow rapidly and were near an inflection point at the time Apple was negotiating its contracts with the Publishers. From early 2010 through 2011, e-book sales as a share of total book sales tripled, from approximately 5 percent to 15 percent, and then further expanded in 2012 to more than 20 percent, where for three years it essentially stabilized before e-book sales began to decline in 2015. Figure 2. Open in new tabDownload slide E-book share of total sales Sources: Jim Milliot, Book Sales Fell 2.5% in 2011, PublishersWeekly.com, July 18, 2012; Jim Milliot, BEA 2013: The E-book Boom Years, PublishersWeekly.com, May 29, 2013; Jim Milliot, The Verdict on 2014: Sales Up 4.6%, PublishersWeekly.com, June 12, 2015; Press Release, Association of American Publishers, U.S. Publishing Industry's Annual Survey Reveals Nearly #28 Billion in Revenue in 2015 (July 11, 2016), http://newsroom.publishers.org/us-publishing-industrys-annual-survey-reveals-nearly-28-billion-in-revenue-in-2015. Figure 2. Open in new tabDownload slide E-book share of total sales Sources: Jim Milliot, Book Sales Fell 2.5% in 2011, PublishersWeekly.com, July 18, 2012; Jim Milliot, BEA 2013: The E-book Boom Years, PublishersWeekly.com, May 29, 2013; Jim Milliot, The Verdict on 2014: Sales Up 4.6%, PublishersWeekly.com, June 12, 2015; Press Release, Association of American Publishers, U.S. Publishing Industry's Annual Survey Reveals Nearly #28 Billion in Revenue in 2015 (July 11, 2016), http://newsroom.publishers.org/us-publishing-industrys-annual-survey-reveals-nearly-28-billion-in-revenue-in-2015. When Amazon entered the digital book business in 2007 it adopted a policy of pricing new release and New York Times Bestseller e-books at $9.99. This is illustrated in Table 2 for a hypothetical New York Times Bestseller with a physical book retail list price of $25.99. For purposes of comparison, Table 2 includes in the first column physical books prices. Industry practice commonly sets physical book wholesale prices at about 50 percent of the list retail price, or at $12.99 for the illustrative $25.99 title.39 There was no claim of a conspiracy among publishers in setting retail list prices of physical books, which varied across titles, or in generally setting wholesale prices at half of list retail prices. Table 2. Amazon pricing of New York Times Bestsellers ($25.99 physical book retail list price) . Physical Books . E-Books (2007 to 2008) . E-Books (2009 to 2010) . E-Books (2010 to 2012) . Retail Price $14.99 $9.99 $9.99 $12.99 Wholesale Price $12.99 $10.39 $12.99 $9.09 Retail Margin (as % sales) $2.00 (13%) –$0.40 (–4%) –$3.00 (–30%) $3.90 (30%) . Physical Books . E-Books (2007 to 2008) . E-Books (2009 to 2010) . E-Books (2010 to 2012) . Retail Price $14.99 $9.99 $9.99 $12.99 Wholesale Price $12.99 $10.39 $12.99 $9.09 Retail Margin (as % sales) $2.00 (13%) –$0.40 (–4%) –$3.00 (–30%) $3.90 (30%) Table 2. Amazon pricing of New York Times Bestsellers ($25.99 physical book retail list price) . Physical Books . E-Books (2007 to 2008) . E-Books (2009 to 2010) . E-Books (2010 to 2012) . Retail Price $14.99 $9.99 $9.99 $12.99 Wholesale Price $12.99 $10.39 $12.99 $9.09 Retail Margin (as % sales) $2.00 (13%) –$0.40 (–4%) –$3.00 (–30%) $3.90 (30%) . Physical Books . E-Books (2007 to 2008) . E-Books (2009 to 2010) . E-Books (2010 to 2012) . Retail Price $14.99 $9.99 $9.99 $12.99 Wholesale Price $12.99 $10.39 $12.99 $9.09 Retail Margin (as % sales) $2.00 (13%) –$0.40 (–4%) –$3.00 (–30%) $3.90 (30%) A publisher's wholesale prices are generally significantly above the publisher's marginal costs of printing and distributing the book. This does not imply publisher market power, but merely profit-maximizing pricing of a differentiated product with a negatively sloped demand. In long-run competitive equilibrium the gap between wholesale price and the publisher's marginal cost has to cover the publisher's non-variable costs associated with the creation and publication of the title, including the design, typesetting, copy editing, and marketing costs, in addition to the costs associated with the publisher's editorial staff, office space, and other overhead costs, as well as the author royalties and rents on other publisher assets associated with publication of the title. The $13.00 gap between the physical book list retail price and publisher wholesale prices is intended to cover the costs of retailing, including physical book retailing by many small independent book stores. Large bookstore chains, such as Barnes & Noble, generally had lower average costs of retailing physical books than small bookstores and as a promotional policy often sold New York Times Bestseller physical books at prices substantially lower than list retail prices. Amazon, which avoided the costs of retail sales staff and store rent, had even lower retailing costs of physical books than the large retail chains and also generally set retail prices of New York Times Bestsellers substantially below list prices. Table 2 realistically assumes for illustrative purposes that Amazon priced New York Times Bestseller physical books at a 40 percent discount off list price, or at $14.99. This provided a $2.00 or 13-percent gross margin over retail price. Physical book pricing by the large bookstore chains and by Amazon significantly contributed to the decline of independent bookstores.40 As illustrated in Table 2, initial publisher wholesale pricing of e-books during 2007 to 2008 was generally at 80 percent of the physical book wholesale price, or at $10.39. Because price was individually set by a number of publishers before they later conspired to jointly set e-book wholesale prices, we can assume that it is a measure at this time of the competitive e-book wholesale price.41 A 20-percent decrease in the wholesale price of e-books compared to physical books may seem counter-intuitively low because publisher marginal costs associated with e-book sales are substantially lower than publisher marginal costs associated with physical book sales. E-books essentially eliminate the publisher's marginal costs associated with the printing, storing and shipping of physical books, which amounted to savings on average of approximately $3.25 per book.42 The other major marginal cost faced by publishers consists of author royalties, which is about $3.90 for physical books and initially was set somewhat lower for e-books.43 The publisher marginal cost of producing and distributing an e-book title therefore may be perhaps about 50 percent of its physical book marginal costs.44 However, the marginal costs of retailing e-books compared to physical books also decreased substantially, likely more than 50 percent. E-book retailing does not require physical book handling and inventory costs, and eliminates most of the substantial retail costs associated with retail sales staff as well as store rent in connection with brick-and-mortar retailing. The reduction in the cost of this complementary factor, by itself, implies an increase in the publisher's profit-maximizing wholesale price given competitive retailing for any given level of consumer e-book demand. Once again, the publishers’ gap between its wholesale e-book price, assumed to be $10.39, and its lower marginal cost of supplying the e-books are the rents earned on the title to cover average costs of publication. Competitive e-book retailers will add their retailing costs and profit margin on to $10.39 in determining final e-book retail prices. However, Table 2 indicates that Amazon set e-book retail prices of New York Times Bestsellers at $9.99, below the publishers’ $10.39 wholesale e-book prices. B. Early Publisher Collusion to Increase Amazon Prices From 2008 to 2009, as e-book sales began to grow, the publishers became concerned about Amazon's $9.99 pricing and “were not shy about expressing their displeasure to Amazon.”45 However, given Amazon's 90-percent share of e-book sales the publishers “did not believe… that any one of them acting alone could convince Amazon to change its pricing policy. They also feared that if they did not act as a group, Amazon would use its ever-growing power in the book distribution business to retaliate against them.”46 The publishers therefore decided they would have to take joint actions to stop Amazon's below cost pricing of e-books and began to discuss ways to get Amazon to increase its e-book prices.47 At a superficial economic level, publisher opposition to Amazon's $9.99 pricing may appear contrary to their financial interests. When a retailer lowers its price and margin, the supplier sells more at whatever wholesale price it sets, thereby resulting in higher supplier profits. However, the publishers were concerned about two fundamental aspects of Amazon's below cost $9.99 pricing. First of all, Amazon's $9.99 pricing distorted the retail price of e-books relative to physical books and thereby “cannibalized” the sales of more expensive physical books.48 At the respective $12.99 and $10.39 wholesale prices of physical books and e-books, publishers actually made more on lower-priced e-books than on physical books.49 However, the publishers believed that $9.99 e-book prices, and the consequent shift in demand away from physical books, would substantially lower physical book prices and result in a decline in total profit.50 The publishers were further concerned that their $10.39 wholesale e-book price would not survive Amazon's below cost $9.99 pricing strategy. Amazon's pricing appears to have been designed to solidify its dominant position in e-book retailing by encouraging consumers to adopt the Kindle platform at this crucial time when e-book reading was expanding rapidly.51 In late 2009, immediately before contract negotiations began with Apple, the Barnes & Noble Nook, which had recently been introduced, was the only other potentially viable e-reader competition to the Kindle and it was not clear whether Barnes & Noble would be able to significantly challenge Amazon's 90-percent position or even survive in the face of Amazon's below cost pricing. Given the publishers extremely low marginal costs and an essentially perfectly elastic supply of e-books, their concern was not that Amazon would act as a monopsonist and take account of rising input prices to demand less than the optimal quantity of books. Instead, the publishers’ primary concern was that, once Amazon solidified its dominance of e-book retailing, Amazon would use its dominant position in e-book retailing to obtain a larger share of the rents associated with the sale of a publisher's titles through the negotiation of substantial wholesale price reductions.52 But the realistic publisher concern about Amazon's below cost pricing was not the usual predatory pricing concern that Amazon would increase e-book retail prices after it solidified its market power. Consistent with Amazon's use of its bargaining power in other markets, magnified in this case by and the extremely low marginal costs of the e-books, the concern was that Amazon would use its position to negotiate an increased share of the rents earned by publishers on their titles.53 Amazon could very likely, for example, keep e-book retail prices at $9.99 and demand a $7.00 wholesale price, a specific scenario later used by Steve Jobs to convince HarperCollins to accept Apple's contract terms.54 This would substantially reduce publisher revenue and profits on e-books, in addition to the physical book losses that would result from “cannibalization.” The two primary publisher concerns about Amazon's $9.99 e-book pricing, (1) the “cannibalization” and lower prices of physical book sales and (2) the lower e-book wholesale prices negotiated by Amazon as a result of its dominance of e-book retailing, led the Publishers to jointly take two specific actions in an attempt to get Amazon to increase its e-book prices.55 1. Collusive Setting of E-Book Wholesale Prices In late 2008 and early 2009, before contract negotiations began with Apple or Apple had even indicated any intention to enter e-book retailing, the publishers conspired to increase e-book wholesale prices. Specifically, all the major publishers collusively agreed to set their e-book wholesale prices at parity with their physical book wholesale price, or at $12.99 for the illustrative title in Table 2, column three, 2009 to 2010.56 The collusive increase in wholesale e-book prices, in addition to significantly increasing publisher profits on e-book sales, had the potential to solve the cannibalization of physical books problem because it incentivized Amazon to increase e-book retail prices, which would have reduced consumer substitution away from physical books. However, while each e-book sale was now substantially more costly for Amazon, Amazon continued to price new release and New York Times Bestseller e-books at $9.99. Consequently, while publisher profits on e-book sales increased significantly, the cannibalization problem was not solved. Meanwhile, the second publisher concern with Amazon's $9.99 pricing, that Amazon would permanently establish its dominance of e-book retailing was exacerbated because $9.99 was now below cost by an even greater amount. Why Amazon refused to increase e-book retail prices is not clear. Perhaps Amazon did not wish to alter its highly promoted $9.99 price point or perhaps Amazon believed that it would reasonably quickly be able to negotiate substantial wholesale price discounts from the publishers once it solidified its dominant position. However, Amazon was now pricing below costs by substantially more than it previously had considered desirable. However, whatever Amazon's reason for not increasing e-book prices, the result was that competitive effective entry into e-book retailing was now even less likely because Amazon was experiencing a $3.00 gross loss on each New York Times Bestseller e-book sale. The Publishers’ policy of e-book wholesale pricing parity with physical books therefore reinforced Amazon's strategy to solidify its dominance in e-book retailing. 2. Collusive Introduction of E-Book Windowing Programs In early 2009, once again before there was any discussion between the Publishers and Apple about Apple's possible plans to enter e-book retailing, “[t]he most significant attack that the publishers considered and then undertook… was to withhold new and bestselling books from Amazon until the hardcover version had spent several months in stores, a practice known as ‘windowing.’”57 This policy was designed to place pressure on Amazon to raise its e-book retail prices and thereby solve both major Publisher problems associated with Amazon's below cost $9.99 pricing, the underpricing of e-books relative to physical books and the insufficient e-book retail margin necessary to support competitive e-book retailers. Initially three Publishers (Simon & Schuster, HarperCollins and Hachette) adopted an experimental windowing program where each Publisher delayed the e-book release of one of their highly anticipated titles.58 However, all “of the Big Six both kept one another abreast of their plans to window, and actively pushed others toward the strategy.”59 In December 2009, Simon & Schuster, HarperCollins, and Hachette were joined by Macmillan in announcing a substantial expansion in their initial experimental windowing programs, which now covered a significant number of each Publisher's new releases and involved a delay in the e-book release of up to six months. These four essentially simultaneous Publisher windowing announcements, made shortly before Apple's initial Publisher meetings and therefore before Apple contract negotiations with the Publishers had begun, are summarized in Table 3. Given the timing, it is clear that the four Publishers jointly coordinated institution of their windowing programs. They also placed pressure on the two other major publishers, Random House and Penguin, to institute similar programs.60 Table 3. Publisher windowing programs Announcement Date . Publisher . Window . Titles Covered . Dec. 9, 2009 Hachette 3 to 4 months Large share of new releases Dec. 9, 2009 Simon & Schuster 4 months 35 “top” titles Dec. 10, 2009 HarperCollins 1 to 6 months 5 to 10 titles per month Dec. 15, 2009 Macmillan 90 days All anticipated bestsellers Announcement Date . Publisher . Window . Titles Covered . Dec. 9, 2009 Hachette 3 to 4 months Large share of new releases Dec. 9, 2009 Simon & Schuster 4 months 35 “top” titles Dec. 10, 2009 HarperCollins 1 to 6 months 5 to 10 titles per month Dec. 15, 2009 Macmillan 90 days All anticipated bestsellers Sources: U.S. v. Apple, 952 F. Supp. 2d 638, 652–53 (2013); Jeffrey A. Trachtenberg, Two Major Publishers to Hold Back E-books, Wall St. J., Dec. 9, 2009; Jeffery A. Trachtenberg, HarperCollins Joins Ranks of Those Delaying E-books, Wall St. J., Dec. 10, 2009; Jeffery A. Trachtenberg, Macmillan to Sell Enhanced E-books, Wall St. J., Dec. 16, 2009. Table 3. Publisher windowing programs Announcement Date . Publisher . Window . Titles Covered . Dec. 9, 2009 Hachette 3 to 4 months Large share of new releases Dec. 9, 2009 Simon & Schuster 4 months 35 “top” titles Dec. 10, 2009 HarperCollins 1 to 6 months 5 to 10 titles per month Dec. 15, 2009 Macmillan 90 days All anticipated bestsellers Announcement Date . Publisher . Window . Titles Covered . Dec. 9, 2009 Hachette 3 to 4 months Large share of new releases Dec. 9, 2009 Simon & Schuster 4 months 35 “top” titles Dec. 10, 2009 HarperCollins 1 to 6 months 5 to 10 titles per month Dec. 15, 2009 Macmillan 90 days All anticipated bestsellers Sources: U.S. v. Apple, 952 F. Supp. 2d 638, 652–53 (2013); Jeffrey A. Trachtenberg, Two Major Publishers to Hold Back E-books, Wall St. J., Dec. 9, 2009; Jeffery A. Trachtenberg, HarperCollins Joins Ranks of Those Delaying E-books, Wall St. J., Dec. 10, 2009; Jeffery A. Trachtenberg, Macmillan to Sell Enhanced E-books, Wall St. J., Dec. 16, 2009. As discussed with regard to film distributor pricing in Interstate Circuit, the usual economic motivation for windowing is to separate groups of consumers in terms of their intensity of demand by determining their willingness to delay consumption in order to charge higher initial prices to high intensity demand consumers and lower later prices to low intensity demand consumers. This is done in the book publishing industry with the delayed release of a lower-priced paperback version of a title generally one year after the hardcover release. In contrast, the Publishers’ windowing of e-books did not involve such differential pricing of a title across types of consumers on the basis of intensity of demand. There is no reason to believe that e-book consumers are more willing to wait to read a particular title compared to physical book consumers of the title. Moreover, even if that were the case, there would be no reason for the Publishers to have to coordinate with one another to introduce such inter-temporal pricing. There appears to be no independent business rationale for an individual publisher to institute e-book windowing, and the fact that such programs were not introduced until they were jointly announced by the four Publishers is consistent with the absence of an independent economic motivation. Given the concern about Amazon's $9.99 e-book pricing expressed by the Publishers in the context in which they discussed and introduced their windowing programs, it is obvious that windowing was designed to serve solely as a collusive mechanism to pressure Amazon to increase e-book prices. The absence of an independent business rationale for a publisher to adopt windowing is further confirmed by the fact that the Publishers recognized windowing at the time as a potentially extremely costly strategy. “Employees inside the publishing companies noted that windowing encouraged piracy, punished ebook consumers, and harmed long-term sales.”61 Empirical analysis of Penguin sales data when it windowed new release e-books to Amazon in the two-month April to May 2010 period indicates that an individual publisher's adoption of windowing “results in no increase in hardcover sales on either Amazon or other physical and online retailers. However, delaying the ebook release date does result in a large decrease in ebook sales and total profit to the publisher.”62 Specifically, windowing was estimated to decrease ultimate total e-book sales of windowed Penguin titles during this period by 43 percent.63 Furthermore, this large decrease in e-books sales was caused by a relatively short window. Penguin's windowing policy was in effect for only eight weeks before an agreement was reached with Amazon, so that the delay in the e-book release of Penguin new release titles varied between one and eight weeks, with an approximate average delay therefore of only about 4.5 weeks. This was a significantly shorter delay than announced in the Publishers’ initial windowing programs and a very substantially shorter delay than the seven month windowing demands later made by the Publishers to Amazon. It is therefore clear that the Publishers’ adoption of e-book windowing policies was extremely expensive and not motivated by individual Publisher profit-maximizing discriminatory pricing. Windowing was economically adopted solely as a joint negotiating tactic to get Amazon to increase its $9.99 pricing. The Publishers’ windowing announcements, however, initially had no effect on Amazon's willingness to bargain with the Publishers over increasing its $9.99 price. It was not until Amazon later learned that Apple had reached agreement with the Publishers to enter e-book retailing on terms that did not include windowing that the Publishers’ collusive windowing programs became a significant credible threat Amazon was forced to respond to. C. Apple's iBookstore Contract Negotiations with the Publishers In early December 2009, Apple was close to announcing the iPad. It had scheduled a Launch Event for January 27, 2010, and it planned to begin iPad sales in April 2010.64 Although Apple's early plans did not involve use of the iPad as an e-book reader, very late in the planning process, sometime in November 2009, Apple considered the possibility of adding an e-reading function as well as an e-book retail store to the iPad.65 Eddy Cue, Apple Senior Vice President in charge of digital content stores, sent an email to CEO Steve Jobs stating that because the publishers desired effective retailer competition to Amazon “[t]he book publishers would do almost anything for [Apple] to get into the e-book business.”66 Apple began contacting the Publishers on December 8, 2009 to set up separate meetings in New York the following week with the CEOs of the six major publishers to discuss “an ‘extremely confidential’ subject.”67 The publishers were aware “that Apple would be announcing the arrival of another revolutionary device,” and Apple's initial contacts “prompted a flurry of telephone calls” among the publishers, who “speculated about how they might turn Apple's entry into the e-book business to their advantage in their battle with Amazon.”68 After Apple's initial separate meetings with each of the six major book publishers in New York on December 15 to 16, 2009, negotiations on iBookstore contract terms began. In these negotiations Apple took advantage of the benefits its entry created for the publishers in providing an effective competitive e-book retailing alternative to Amazon to demand favorable iBookstore contract terms, including much lower effective wholesale prices than the publishers’ current $12.99 collusive wholesale price. This, however, created an incentive for each publisher not to accept the Apple terms and to free-ride on the other publishers’ acceptance of the terms. As long as Apple entered, all publishers obtained an increased ability to bargain with Amazon. But an individual publisher that did not agree to Apple's contract terms would not have to bear the costs of significantly lower Apple wholesale prices, with the possibility of having to meet such wholesale prices on its Amazon transactions. Apple attempted to avoid this publisher free-riding problem by informing the six major publishers that it would not enter unless a “critical mass” accepted its contract terms.69 During the negotiations with the publishers over iBookstore contract terms Apple actively promoted its contract proposal as the “best chance for publishers to challenge the $9.99 price point.”70 Apple coordinated joint Publisher acceptance of the iBookstore terms by informing each Publisher that they all would receive the same final terms, keeping “the Publisher Defendants apprised about who was in and how many were on board” and encouraging the Publishers to communicate and cajole one another to accept the contract, emphasizing that it would not otherwise enter.71 Between January 21 and January 26, 2010, less than six weeks after the initial New York meetings and immediately before the Apple iPad Launch Event on January 27, 2010, final iBookstore agreements were reached with the five Defendant Publishers.72 The final Apple contract terms accepted by the five Defendant Publishers for e-book sales at the iBookstore included four main elements. 1. Agency Aware of Amazon's $9.99 below cost pricing, Apple informed each Publisher during its very first initial New York meetings that it had no intention of entering e-book retailing to pursue a similar loss-leader strategy.73 A number of the Publishers proposed an agency relationship solution where retail prices were set by each Publisher.74 Apple proposed a 30-percent share of the revenue, which was similar to the agency contracts it commonly used in their agency contracts with suppliers of apps sold through the iPhone App Store.75 This provided Apple with a guaranteed significant positive margin on iBookstore sales even if Amazon continued to price below cost at $9.99. In both cases the 30-percent revenue share may be considered a payment for access to consumers that are using the Apple platform. 2. MFN An agency relationship, however, was not a full solution to Apple's concern about entering into e-book retailing in the face of Amazon's below cost pricing. If Amazon continued to price e-books at $9.99, the Publishers under agency could decide to price e-books at the iBookstore significantly above Amazon prices. In that case Apple would still earn 30 percent on each e-book sale at the iBookstore, but Apple's e-book sales would be severely limited. Furthermore, Apple would experience a loss of reputation when consumers observed the same e-book title priced at the iBookstore at a significantly higher price than at Amazon. Apple therefore required contractual assurance from the Publishers that their pricing of e-books under the agency relationship would be competitive with other e-book retailers. To handle this potential problem, Apple initially proposed in an email to each of the Publishers that they would be required to move all their retailers to an agency relationship.76 Such a contract requirement would likely have presented significant antitrust problems for Apple. Contractually specifying how the Publishers were required to deal with rival retailers would have made the Apple contract with Publishers a standard hub-and-spoke arrangement as described in Figure 1. However, the first draft contract Apple distributed to the Publishers shortly after these initial emails, as well as all subsequent contract drafts, did not include an “all retailers on agency” term. Apple proposed instead a most favored nation (MFN) term that required the Publishers not to set prices at the iBookstore higher than the retail prices currently set for the same title at other e-book retailers.77 The court described the MFN as a contract term that accomplished the same result because it created an economic incentive for the Publishers to move Amazon to agency.78 However, from Apple's perspective, an MFN contract term provided a better business solution to the potential problem of Publishers pricing e-books at the iBookstore higher than prices set by rival e-book retailers than a contract requirement that Publishers move all retailers to agency. Although it may have been reasonably clear to Apple that the Publishers intended to demand of Amazon that it also accept an agency relationship, the MFN provided greater protection to Apple because it meant that the Publishers had to set retail prices at the iBookstore competitive with other e-book retailers whether or not the Publishers were successful in controlling Amazon's $9.99 pricing by moving Amazon to agency. Apple thereby achieved its independent business objectives with an MFN without the need to specify in its iBookstore contracts how Publishers were required to deal with other retailers. 3. Maximum Price Schedule Although Apple was assured a 30-percent margin on its sales and was fully protected against Amazon's below cost pricing by agency and MFN contract terms, the arrangement created a different problem for Apple. If the Publishers were successful in moving Amazon to agency or obtained control over Amazon's prices in any other way, the Publishers would then likely use their retail pricing authority to set higher e-book prices than Apple desired. In contrast to the Publishers, Apple did not sell physical books and consequently was unconcerned about any “cannibalizing” effect of low e-book prices on reducing physical book prices and sales. Apple therefore desired lower e-book prices than the Publishers. Furthermore, Apple likely was concerned, given the Publishers’ joint increase in e-book wholesale prices to parity with physical book wholesale prices, that if the Publishers moved Amazon to agency they could set collusively high e-book retail prices. There is nothing anticompetitive about an individual Publisher taking account of the demand effects on physical books in setting e-book prices, as the film distributors individually did in setting minimum later-run admission prices in Interstate Circuit. But if the Publishers jointly set higher e-book prices, as the film distributors collusively did with the assistance of Interstate Circuit, that would be anticompetitive and Apple would want to prevent it because the Publisher collusive profit gain would be reflected in greater physical book sales. To solve these problems associated with the fact that Apple's e-book pricing incentives did not coincide with Publisher e-book pricing incentives Apple proposed a schedule of maximum e-book retail prices the Publishers could set on iBookstore sales under the Apple agency relationship. The maximum price of each e-book title was contractually set based upon the retail list price of the title in physical book format. This was a reasonable contract formulation because there was no indication or claim of Publisher collusion with regard to the setting of physical book list retail prices, and e-book prices would generally be expected to vary systematically across titles with the physical book list price. For pricing simplicity, maximum e-book retail prices of New York Times Bestsellers were set at either $12.99 or $14.99 depending on whether the physical book list retail price was less than or greater than $30. Therefore the retail e-book price for the illustrative title in Table 2 that had a physical book list retail price of $25.99 was set at $12.99, or 50 percent of the physical book list price.79 The maximum e-book retail price schedule was the primary point of disagreement between Apple and the Publishers. The Publishers considered the implied wholesale prices they would receive for e-books as a consequence of Apple's maximum retail prices to be much too low. The $12.99 maximum e-book retail price for the illustrative New York Times Bestseller title described in Table 2 was equal to the Publishers’ current, albeit collusively set, wholesale price they were receiving on e-book sales; and the implied “wholesale price,” or the 70-percent net amount the Publishers would receive on iBookstore sales under the Apple agency agreement (the last column of Table 2) would be only $9.09. This was significantly below even the pre-collusively set wholesale price of $10.39, which involved a 20 percent rather than 30 percent retail margin.80 It is therefore not surprising that obtaining Publisher agreement on maximum price contract terms was the major hurdle in iBookstore contract negotiations. Apple, aware of the benefits its entry conferred on the Publishers in preventing an Amazon e-book retailing monopoly under which Amazon would likely negotiate substantially lower than $9.09 e-book wholesale prices, used its prospective entry to insist upon this maximum e-book price schedule. Therefore, although the Publishers were reluctant, they ultimately agreed to accept this maximum retail price schedule for iBookstore transactions.81 4. Day-and-Date Release Finally, because Apple was aware of the Publishers’ previously publicly announced windowing plans, Apple contractually required the Publishers to release e-book titles to the iBookstore at the same time the Publisher released the physical book title.82 The Publishers readily accepted this prohibition on windowing at the iBookstore because, as described in what follows, Apple's availability of all new release titles permitted the Publishers to more effectively threaten Amazon with their windowing programs. D. Amazon Accepts Agency As the Publishers were nearing final agreements with Apple, immediately before the iPad Launch Event on January 27, 2010, they began negotiations with Amazon with the stated goal of moving Amazon to an agency relationship and thereby terminating Amazon's $9.99 pricing of new release and New York Times Bestseller e-books. Between January 20 and January 22, four of the five Defendant Publishers (HarperCollins, Macmillan, Simon & Schuster, and Hachette, but not Penguin) each held meetings with Amazon and individually informed Amazon of their intent to move all retailers to agency.83 However, according to the court, the Publishers’ “move against Amazon began in earnest on January 28, the day after the iPad launch.”84 Macmillan made the first post-iPad Launch demand of Amazon when the CEO flew to Seattle and on January 28 formally demanded that Amazon adopt agency or face a seven month window of new release titles under a wholesale model.85 The other Publishers presented essentially identical demands to Amazon that it accept agency or face windowing of all new e-book releases, and in the negotiations that followed the Publishers communicated extensively with one another regarding the progress they each were making with Amazon.86 Over the previous two years Amazon had ignored or summarily rejected all attempts by the Publishers to obtain control over retail pricing or to otherwise increase Amazon's $9.99 pricing and Amazon's initial reaction to the first Macmillan demand was consistent with its past behavior. Amazon removed the “buy buttons” from all Macmillan titles on the Amazon site, thereby preventing Amazon customers from purchasing any Macmillan books, physical books as well as e-books.87 The Macmillan buy buttons, however, remained off the Amazon site for only three days before Amazon quickly relented and began negotiating an agency relationship. Amazon later stated that it agreed to agency because it recognized “that its battle was not just with Macmillan but with five of the Big Six.”88 It is true that the Publishers were jointly making demands on Amazon that it accept agency or face windowing, but this was not a new phenomenon; four of the Publishers had previously jointly announced and begun less extensive windowing programs that Amazon had refused to react to. And in normal circumstances it would have been expected, at least initially, for Amazon to attempt to break the Publishers’ common front by playing individual Publishers off against one another with offers to individual Publishers of substantial incremental sales in return for the cessation of windowing.89 What now got Amazon's attention and precluded adoption of a strategy to attempt to break the Publisher conspiracy was the fact that Amazon knew, as a result of the announcement at the iPad Launch Event, that the Publishers had reached retailing agreements with Apple. Amazon therefore knew that in two months when iPad sales would begin, Apple would be retailing all e-book titles at the iBookstore at the same time as the title's physical book release. Amazon therefore recognized that, unless it accepted the Publisher demands and signed agency agreements, its wait of up to seven months before receipt of new release e-book titles under windowing created a substantial threat to its e-book business. Apple had an established e-retailing reputation and industry reports indicated that the Apple iPad sales were expected to be extremely large.90 Moreover, entry of the iPad was occurring at the exact point in time when e-book purchases, as reflected in Figure 2, were rapidly accelerating. An increasing number of consumers were now deciding to read in a digital format and were choosing the platform on which they would purchase their e-books. Amazon therefore quickly recognized that the joint windowing threats by the Publishers meant it had no economic choice but to accept the Publisher demands for agency. As reported in the New York Times, Amazon “realized it could not compete with Apple if it wasn't offering the same range of content.”91 According to one publishing industry consultant, “Amazon figured out pretty quickly that this was a battle they could not win.”92 Consequently, Amazon quickly began substantive Publisher negotiations, which led to its acceptance of an agency agreement with Macmillan on February 5, followed by agency agreements reached with Hachette, HarperCollins and Simon & Schuster in March and April 2010, before the entry of the Apple iBookstore.93 By the time Apple's iPad sales began and the iBookstore opened, on April 3, 2010, Amazon e-book retail prices were contractually set by these four Publishers under agency agreements according to the same maximum price formula in relation to physical book list prices as in the iBookstore contracts. Therefore, in April 2010, as a result of Amazon's acceptance of joint Publisher demands for agency and Apple's entry, e-book retail prices of new releases and New York Times Bestsellers increased substantially, with Amazon's $9.99 price for the illustrative $25.99 physical book retail list price New York Times Bestseller in Table 2 increasing to $12.99.94 Furthermore, consistent with Publishers’ desire to create e-book retail competition, Amazon's market share almost immediately began to fall, so that by the start of 2011 Amazon's share of e-book sales was less than 60 percent.95 The higher e-book prices persisted until 2012, when the Department of Justice (DOJ) filed suit against the Publishers and Apple. Under the settlements agreed to shortly thereafter by each of the Publishers, the Publishers were required to terminate their contract agreements with Amazon, Apple, and all other e-book retailers, and were prohibited for two years from entering into a new agreement that constrained an e-book retailer's ability to offer discounts or any other promotions to consumers or that contained a price MFN.96 The result of the court imposed settlement agreements was a dramatic decline in e-book prices, with average Amazon prices falling 18 percent within the first year.97 IV. ANTITRUST ANALYSIS OF APPLE's CONDUCT The key antitrust issue in the Apple e-books case was whether Apple's vertical contracts with the Publishers should be subject to a per se liability standard or analyzed under a rule of reason. The dissent concluded that post-Leegin all vertical contracts, including vertical contracts that serve as a hub in a hub-and-spoke conspiracy, should be evaluated under a rule of reason standard. The dissent supported this with reference to the statement in Leegin that “a vertical agreement designed to facilitate a horizontal cartel ‘would need to be held unlawful under the rule of reason.’”98 The appeals court rejected this broad interpretation of Leegin, noting that it would overrule long-established antitrust law with regard to per se liability of vertical hub contracts that organize a hub-and-spoke conspiracy. “If the Supreme Court meant to overturn General Motors and Klor's—precedents that it has consistently reaffirmed—this cryptic sentence was certainly an odd way to accomplish that result.”99 According to the court, while the distinction between vertical and horizontal agreements “is sharp in theory, determining the orientation of an agreement can be difficult as a matter of fact and turns on more than simply identifying whether the participants are at the same level of the market structure.”100 In order to determine if the per se or the rule of reason is appropriate, the law therefore requires analysis of “the type of restraint Apple agreed to impose.”101 The court then goes on to conclude that because Apple's vertical contracts involved agreements “to orchestrate a horizontal price-fixing conspiracy,” the contracts should be evaluated under a per se standard.102 The court, however, does not provide a precise statement of exactly what criteria should be used to determine whether a vertical contract involves “the type of restraint” that “orchestrates” a hub-and-spoke conspiracy where per se analysis is appropriate. In addition, the court does not describe the type of vertical contracts that further a horizontal conspiracy Leegin was referring to as subject to rule of reason analysis. Both of these questions are clarified in what follows. A. Leegin The context in which the Leegin statement is made, that vertical contracts which facilitate a horizontal conspiracy should be evaluated under a rule of reason, involves a description of two specific cases where a manufacturer adopts a vertical resale price agreement with its retailers that may serve to facilitate either a retailer or manufacturer conspiracy. The more common case is where “[a] group of retailers might collude to fix prices to consumers and then compel a manufacturer to aid the unlawful arrangement with resale price maintenance.”103 The Court concludes that the “horizontal cartel among… competing retailers that decreases output or reduces competition in order to increase price is, and ought to be, per se unlawful.”104 The Court then states that “[t]o the extent a vertical agreement setting minimum resale prices is entered upon to facilitate… [this] type of cartel, it, too, would need to be held unlawful under the rule of reason.”105 The Court is clear that the vertical agreements which set minimum resale prices in such a case involve coercion by the retailer cartel of the manufacturer. The colluding retailers “compel a manufacturer to aid the unlawful arrangement with resale price maintenance.”106 Coercion is necessary because the contract involves a manufacturer hub in a purely intra-brand arrangement where the manufacturer is setting resale prices for sales of its products by its own retailers. In contrast to the standard per se hub-and-spoke conspiracy framework described in Figure 1, the alleged manufacturer hub is not setting the terms by which the colluding retailer spokes are required to contract with rival manufacturer buyers of retailing services. Consequently, there is no potential anticompetitive benefit the manufacturer hub can obtain from the vertical resale price maintenance contracts. The manufacturer must be forced by the retailer cartel to institute the contracts. It may be incorrectly claimed that the manufacturer has an incentive to voluntarily establish such a retailer conspiracy because it can then obtain a share of the collusive retailer profits. However, in contrast to a hub-and-spoke conspiracy, there is no increase in the joint collusive profits earned by the manufacturer and retailers together from the creation of the retailer conspiracy because, contrary to Figure 1, there are no rival manufacturer buyers of the retailing services that are disadvantaged relative to the manufacturer hub as a result of the conspiracy among the retailer spokes. The additional retailer collusive profits are earned at the expense of manufacturer profits and therefore retailer coercion of the manufacturer is necessary to get the manufacturer to institute resale price maintenance. In such a case where there is a retailer cartel and resale price maintenance involves a purely intra-brand contract, Leegin states that rule of reason analysis must be conducted with regard to the vertical contract as a check to see if retailer coercion exists. The absence of a procompetitive rationale supports the existence of retailer coercion; on the other hand, the presence of an efficiency rationale would be inconsistent with retailer coercion.107 Leegin therefore does not discard all previous hub-and-spoke conspiracy precedents that find per se liability for all participants in a horizontal conspiracy. The Court's statement in Leegin refers to required rule of reason analysis only in purely intra-brand resale price maintenance cases where the contract does not refer to a rival of the hub. This interpretation of Leegin is consistent with one of the two Supreme Court precedents cited by the court in Apple for continued per se analysis of hub behavior, General Motors.108General Motors involved the claim that Chevrolet dealers in the Los Angeles area had jointly taken actions in an attempt to stop some dealers from supplying automobiles to unauthorized “discount houses.” Chevrolet dealers were concerned because potential customers visited these unauthorized “discount houses” (also referred to as “book dealers”), where they could “examine the literature and price lists for automobiles produced by several manufacturers” and were promised substantial discounts, both from list prices as well as from the price they would likely receive if they instead purchased the automobile at an authorized dealer.109 In response, dealers through their trade associations put pressure on the dealers that were supplying automobiles to the unauthorized “discount houses” and then provided this information to General Motors (GM) along with their complaints.110 General Motors met with the particular dealers supplying automobiles to the “discount houses” and demanded that they terminate the practice,111 to which the particular dealers quickly agreed.112 The Court concluded that because General Motors facilitated the collusive dealer efforts, GM's vertical contracts with its dealers that prevented them from supplying cars to unauthorized discount houses were per se illegal.113 The implication of Leegin is that the joint dealer behavior to establish a horizontal agreement not to supply cars to unauthorized discounters remains per se illegal. However, because the General Motors contract was a purely intra-brand vertical contract, rule of reason analysis must be undertaken to determine if General Motors was coerced by the dealer cartel to enforce the per se illegal horizontal agreement. Given the size of General Motors and the superior bargaining position it possessed relative to its dealers, who could not easily shift the supply of their retailing services to another automobile manufacturer, it is highly unlikely that General Motors was coerced by its dealers to do something it would not otherwise want to do. Furthermore, there are now widely recognized and legally accepted procompetitive economic reasons for General Motors to adopt the policy demanded by its dealers. Unauthorized discount houses had the ability to free-ride on the showrooms, sales staff and extensive inventory provided by authorized dealers. Potential customers, for example, could examine, ask questions about and test drive a car at an authorized dealer before purchasing the car from an unauthorized discounter. Moreover, even if there were no free-riding, the prevention of transhipping of automobiles to unauthorized discount houses protected GM's efficient retail distribution network.114 Therefore, although General Motors took actions that supported the dealer conspiracy, under Leegin GM would not be subject to a per se standard for joining the conspiracy. In contrast, the Court in General Motors declared GM's conduct per se illegal, without even permitting General Motors to provide any possible evidence of procompetitive economic motivations for its actions.115 It is unlikely General Motors’ purely intra-brand vertical distribution restraints would currently be evaluated under a per se rather than a rule of reason standard.116 B. Per Se Analysis Apple's vertical contracts with the Publishers do not fit the purely intra-brand contracts referred to in Leegin as requiring rule of reason analysis. However, the fact that rule of reason analysis is not required under Leegin does not mean that Apple's contracts necessarily involved, as the court concluded, “the type of restraint” that should be subject to a per se treatment. The court concluded that Apple's contracts should be subject to a per se standard because they involved “the type of restraint” that “orchestrated a horizontal conspiracy among the Publisher Defendants to raise e-book prices.”117 In fact, Apple's contracts and conduct are shown in what follows not to have involved the type of hub activities used in previous hub-and-spoke conspiracy cases to create and stabilize a horizontal agreement among the spokes. Most importantly, Apple did not set the collusive contract terms under which the Publisher spokes were required to deal with Amazon. In addition, Apple did not coordinate joint agreement among the Publisher spokes to impose such collusive contract terms on Amazon or enforce individual Publisher compliance with their jointly agreed upon collusive contract terms with regard to Amazon. The Apple conduct that facilitated the Publisher Amazon conspiracy is shown to have involved solely its entry. 1. Apple's Contracts Did Not Contractually Specify How the Publishers Were Required to Deal with Amazon To understand Apple's alleged role in “orchestrating” the Publisher conspiracy to move Amazon to agency that resulted in higher e-book prices, it is essential to distinguish between Apple's role in two different Publisher conspiracies: (1) the conspiracy among Publishers to jointly agree to accept Apple's vertical contract terms with regard to iBookstore sales; and (2) the conspiracy among Publishers to jointly demand that Amazon adopt agency or face windowing of new release titles. The court recognized that it was not Apple's role in the first Publisher conspiracy but Apple's role in the second Publisher conspiracy that was the relevant conspiracy at issue in the case. “[T]he relevant ‘agreement in restraint of trade’ in this case is not Apple's vertical Contracts with the Publisher Defendants (which might well, if challenged, have to be evaluated under the rule of reason); it is the horizontal agreement that Apple organized among the Publisher Defendants to raise ebook prices.”118 The two distinct Publisher conspiracies are illustrated in Figures 3 and 4. Figure 3 represents the first conspiracy, the joint agreement among the Publishers to accept Apple's vertical contract terms, which set the terms of iBookstore sales. As described above, Apple coordinated joint Publisher acceptance of iBookstore contract terms, convincing the Publishers that its entry would permit them to bargain more effectively with Amazon and that it would not enter without joint Publisher acceptance of the terms. Figure 3. Open in new tabDownload slide The Apple-Publisher contracts Figure 3. Open in new tabDownload slide The Apple-Publisher contracts Figure 4. Open in new tabDownload slide Publishers move Amazon to agency Figure 4. Open in new tabDownload slide Publishers move Amazon to agency Figure 4 represents the second conspiracy among the Publishers to move Amazon to an agency relationship, which involved collusive joint Publisher contract demands that Amazon accept agency or face windowing of all new releases. The essential antitrust question is the connection between Figure 3 and Figure 4, that is, how the Apple iBookstore contracts may have orchestrated or created a rim agreement among the Publishers with regard to the collusive demands they made of Amazon that it adopt agency or face windowing. In contrast to the contract structure of a hub-and-spoke conspiracy represented in Figure 1, the Apple iBookstore contracts the Publishers jointly agreed to did not include any term that contractually specified how the Publishers were required to deal with Apple's rivals, specifically with Amazon. There was not any term in the Apple iBookstore contracts that required the Publishers to move Amazon to agency or to require the Publishers to make collusive windowing threats of Amazon. The connection between the Publishers’ collusive demands that Amazon accept agency in Figure 4 and the Publishers earlier joint agreement to accept the Apple iBookstore contracts illustrated in Figure 3 is that the Publishers’ windowing threats became credible with Apple's prospective entry with access to all new release e-book titles without delay. As described above, this is what economically forced Amazon to quickly accept the Publishers’ joint demand for agency. Although there was no requirement in the Apple iBookstore contracts regarding the Publisher windowing programs that induced Amazon to accept agency, the agency and price contract terms in the iBookstore contracts coincided with the agency and price terms in the Publishers’ Amazon contract. As described, the agency and MFN contract terms were included in the iBookstore contracts to protect Apple's entry against the possibility the Publishers would be unsuccessful in moving Amazon to agency. The MFN in such a case would require the Publishers to meet Amazon's $9.99 pricing on iBookstore sales with Apple assured a 30-percent margin under its agency contract. However, the Publishers were not contractually required as a consequence of these iBookstore contract terms to jointly threaten Amazon with windowing if Amazon did not accept a similar agency relationship. If the iBookstore contracts did not include an agency contract term, the Publishers still would have been successful in moving Amazon to agency with their joint windowing threats as long as Apple was scheduled to enter with a contractual commitment from the Publishers for access to all new releases without delay.119 This was widely recognized in the contemporaneous trade press as the economic reason for Amazon's quick acceptance of agency and the rapid success of the Publisher windowing conspiracy.120 It is therefore surprising that the appeals court does not recognize the significance of the Publishers’ joint windowing threats in convincing Amazon to accept agency.121 The success of the Publisher windowing conspiracy also was independent of the particular maximum price terms set in the Apple iBookstore contracts. As long as Apple was scheduled to enter e-book retailing with access to all new release e-book titles without delay, the Publisher windowing conspiracy would be successful in moving Amazon to agency even if Apple's iBookstore contracts did not include any prices whatsoever. However, once Apple entered and Amazon was forced to accept an agency relationship under the collusive Publisher threats of windowing, the price terms set by the Publishers in their Amazon contracts would be expected to be the same as the price terms in the Apple iBookstore contracts. Amazon was highly unlikely to accept higher prices than the Apple iBookstore maximum prices because Amazon would then be placed at a permanent competitive disadvantage to Apple. And the colluding Publishers certainly did not have an incentive to set lower Amazon prices than the maximum Apple iBookstore prices that the Publishers had accepted with substantial reluctance. However, although Apple's iBookstore contract prices had no effect in facilitating the Publisher windowing conspiracy that moved Amazon to agency, Apple's prices did have the economic effect of limiting Publisher pricing power once the Publisher conspiracy was successful because the Apple prices placed an effective economic constraint on the prices the colluding Publishers could set on titles at Amazon. Without Apple's iBookstore maximum prices, once the colluding Publishers moved Amazon to agency and obtained control of pricing they would have almost certainly set Amazon e-book prices substantially higher than Apple's contractually set maximum prices. For example, the Publishers could be expected to jointly set a retail e-book price a minimum of 20 percent above their current collusively set $12.99 wholesale price, or at more than $16.00. 2. The Apple MFN Was Not a De Facto Contractual Requirement that the Publishers Move Amazon to Agency The Plaintiffs recognized that, in contrast to other hub-and-spoke arrangements, there was a gap in their hub-and-spoke analysis because of the absence of a term in the Apple iBookstore contracts that created the necessary rim or agreement among the Publishers by contractually requiring the Publishers to demand that Amazon adopt agency. However, although an explicit contract requirement was not present, the Plaintiffs claimed that the MFN term in the Apple contracts iBookstore in effect contractually required each of the Publishers to move Amazon to agency. Therefore, a contract connection was created between the Apple iBookstore contracts in Figure 3 and the collusive Publisher demands made of Amazon in Figure 4. The MFN, it was argued, created this contract requirement that Publishers move Amazon to agency because it imposed a large cost on any Publisher that did not convince Amazon to accept agency. The MFN therefore substantially increased each Publisher's incentives to demand that Amazon adopt agency. The cost imposed by the MFN on a Publisher that was not successful in moving Amazon to agency, and therefore created this de facto contract requirement, is that the Publisher would then have to set retail prices on iBookstore sales of new releases at $9.99 to meet Amazon prices. The Publisher therefore would earn only $6.99 (70 percent of the $9.99 price) rather than $9.09 (70 percent of the Apple contractually set $12.99 maximum retail price) on iBookstore sales. Consequently, according to the court, if a Publisher failed to convert Amazon to agency “the result would be the worst of both worlds: lower short-term revenue and no control over pricing.”122 As a result, the Apple MFN made it “imperative, not merely desirable, that the publishers wrest control over pricing from ebook retailers.”123 The MFN therefore “‘stiffened the spines’ of the Publisher Defendants” when demanding that Amazon move to agency.124 “By the very act of signing a Contract with Apple containing an MFN Clause, then, each of the Publisher Defendants signaled a clear commitment to move against Amazon, thereby facilitating their collective action.”125 The court does not refer to any empirical estimate of this claimed effect of the MFN in increasing Publisher financial incentives to bargain more aggressively with Amazon to accept agency. The court relies for its conclusion that the MFN amounted to a de facto requirement in the Apple iBookstore contracts that Publishers move Amazon to agency solely on statements by some Publisher and Apple executives.126 However, the costs a Publisher bears in meeting the MFN requirement on iBookstore sales if it decides to give up the attempt to move Amazon to agency are extremely small compared to the costs a Publisher bears if, alternatively, it decides to continue to demand that Amazon accept agency. Specifically, the cost of the MFN to a Publisher that gives up the attempt to move Amazon to agency, and consequently earns only $6.99 rather than $9.09 on iBookstore sales, assumes that the unsuccessful Publisher withdraws its windowing policy with regard to new release titles. Only then will Amazon have the e-book new release title available and priced at $9.99 that the Publisher then has to meet in its iBookstore pricing. A Publisher that decides not to give up its demand that Amazon move to agency therefore must bear the continued cost of windowing. To estimate the general magnitudes of the alternative costs faced by a Publisher when deciding whether to continue to window and demand Amazon accept agency or to admit defeat and give up windowing and bear the costs of the MFN, assume that Apple e-book sales account for 10 percent of a Publisher's total e-book sales.127 In addition, assume that e-book sales of titles covered by the MFN, that is, sales of either New York Times Bestsellers or new release titles (defined as titles released in the first seven months after the physical book release) account for 60 percent of a Publisher's total e-book sales.128 This means that if a Publisher gives up its demand that Amazon move to agency and stops windowing, about 6 percent of a Publisher's total e-book sales would be affected by the MFN (60 percent of Apple's 10 percent of total Publisher e-book sales). The cost to the Publisher of giving up its demand for agency associated with the MFN therefore would be a 23 percent lower wholesale price of $6.99 rather than $9.09 on 6 percent of a its total e-book sales, or a 1.4-percent decrease in the Publisher's total e-book revenue. This effect of the MFN on reducing the Publisher's revenue from Apple iBookstore sales is significant, but trivial compared to the decrease in e-book revenue a Publisher bears if, instead, it continues to window and demand that Amazon move to agency. Windowing new release titles to Amazon means that sales of windowed new releases will be priced at the iBookstore at $12.99 because there is no comparable $9.99 Amazon price that the price of the new release title has to meet.129 However, although the Publisher saves the cost of not having to mark down its iBookstore price, the Publisher that continues to window now bears the very large cost associated with the inability to make sales of newly released titles through Amazon. A Publisher's decision to continue to window means that the Publisher ultimately will be unable to sell most of its New York Times Bestseller e-book titles through Amazon. Only about 10 percent of a Publisher's New York Times Bestseller titles are on the Bestseller list after the seven month window period expires.130 Therefore, once the full windowing period is effective, the Publisher will have only about 10 percent of New York Times Bestseller titles available to sell on Amazon. The inability of a Publisher to sell all of its new releases and 90 percent of its New York Times Bestseller e-book titles through Amazon if it continues to window is a huge cost that would amount to the loss of approximately half of the Publisher's total e-book revenue.131 This 50-percent loss of total e-book revenue from continuing to demand that Amazon accept agency and windowing new release titles to Amazon is dramatically less than the MFN cost of a 1.4-percent decrease in total e-book revenue the Publisher bears on new release iBookstore sales if it gives up the demand that Amazon accept agency and windowing of new release titles to Amazon. The Publisher's loss of e-book revenue from continuing to window new release titles to Amazon is 36 times the loss of revenue the Publisher bears if, instead, it gives up the attempt to move Amazon to agency, stops windowing and is forced under the MFN to reduce prices on iBookstore sales. This is not surprising because the Publisher faces a choice of a 23-percent price decrease on 6 percent of its sales compared to the loss of all revenue on about 50 percent of its sales if it continues to window and demand that Amazon move to agency. This calculation measures the relative costs faced by a Publisher that is assumed to continue to window for seven months. However, the Publisher costs of windowing new release titles to Amazon are large even if it does not continue to window for the full seven month period. For example, if the Publisher windows for only three months, more than 75 percent of New York Times Bestseller titles would not be available for purchase on Amazon.132 This would lower the estimated cost a Publisher faces in deciding to continue to window new release titles to Amazon relative to the cost of the MFN on Apple iBookstore sales from 36 to 30. The cost to a Publisher of lost Amazon sales as a result of continued windowing under any reasonable assumptions is overwhelmingly greater than the cost of lower iBookstore prices. It therefore does not make economic sense to describe the situation as one where the Apple MFN made it “imperative” for each of the Publishers to move Amazon to agency to avoid lower iBookstore prices.133 Amazon's rapid acceptance of agency therefore cannot reasonably be explained by the court's conclusion that the Apple MFN increased Publisher incentives to insist that Amazon accept its demand for agency. As described in III.D., Amazon's rapid acceptance is more realistically explained by the much greater change that occurred on the other side of the Publisher-Amazon negotiation, namely the very substantial increase in Amazon's incentives to accept the Publisher demands for agency in the face of Apple's imminent entry with access to all new release titles. Amazon's refusal to accept the Publishers’ demands for agency in the face of continued Publisher windowing would have resulted in a significant shift of e-book sales to Apple and Barnes & Noble and created a severe platform disadvantage for Amazon relative to these other e-book retailers. The immediate costs to Amazon in terms of the depreciations of the Kindle platform from the failure of consumers to be able to purchase desired new release titles, even for a short period, was likely much greater than a Publisher's loss of sales from windowing. Consistent with contemporaneous news reports, it is clear that this is what explains Amazon's acceptance of agency “in record-setting time and at the precise moment that Apple entered the e-book market.”134 3. Apple Did Not Coordinate the Publisher Windowing Conspiracy Although there was no Apple vertical contract term that set or incentivized the Publishers to enter a collusive rim agreement to move Amazon to agency through joint windowing threats, the court concluded that “Apple consciously played a key role in organizing” the Publisher conspiracy.135 The court bases this on the fact that Apple informed the Publishers it “would launch its iBookstore only if a sufficient number of them agreed to participate and that each publisher would receive identical terms,” that it kept “the publishers updated about how many of their peers signed Apple's Contracts,” and that “[w]hen time ran short, Apple coordinated phone calls between the publishers who had agreed and those who remained on the fence.”136 These actions refer to Apple's role in coordinating joint agreement among the Publishers to accept iBookstore contract terms. It is necessary, however, to distinguish between Apple's role in coordinating joint Publisher acceptance of the iBookstore contracts and Apple's coordinating role in the Publisher windowing conspiracy that forced Amazon to accept agency. Once the connection between the MFN and Publisher demands for agency is broken, there is no contract connection between the two Publisher conspiracies. A connection exists, however, in the sense that during Apple's negotiation with the Publishers over iBookstore contract terms Apple reminded the Publishers that “it was offering ‘the best chance for publishers to challenge the 9.99 price point’ before it became ‘cemented’ in ‘consumer expectations.’”137 Contrary to Apple's argument that it merely “unwittingly facilitated” the Publishers’ joint conduct with regard to Amazon, Apple recognized that its entry would increase the Publishers’ ability to collusively use windowing to jointly negotiate with Amazon accept agency and thereby stop its $9.99 pricing.138 Apple therefore used its entry as “a bargaining chip” to negotiate favorable iBookstore contract terms.139 “Apple understood that its proposed [iBookstore] Contracts were attractive to the Publisher Defendants only if they [the Publishers] collectively shifted their relationships with Amazon to an agency model—which Apple knew would result in higher consumer-facing e-books prices.”140 Apple was not only aware of the Publisher's desire and intent to move Amazon to agency but also that the Publishers were jointly using windowing in an attempt to accomplish this result.141 The key legal question is whether the fact that Apple was aware and took advantage of the Publisher conspiracy is sufficient to reach the conclusion that Apple took actions to join the Publisher conspiracy. As we have seen, it was Apple's entry without windowing that permitted the Publishers to economically force Amazon to accept agency. Although Apple took advantage of the value of its entry to the Publisher conspiracy to negotiate favorable iBookstore contract terms, the contract terms Apple negotiated served its independent business interests and controlled collusive Publisher e-book retail pricing. Apple's contracts and its negotiations, did not involve Apple taking actions that directly supported or coordinated the Publisher conspiracy in the sense of contractually requiring the Publishers to do something with respect to Amazon as a result of the Apple contracts that the Publishers would otherwise find contrary to their individual economic interests. The transaction between the Publishers and Apple therefore can usefully be thought of as joint Publisher compensation of Apple for its entry.142 The court describes Apple's ability to negotiate favorable iBookstore contract terms as something that “hinged on whether it could successfully help organize them [the Publishers] to force Amazon to an agency model and then use their newfound collective control to raise ebook prices.”143 However, the Publisher collective control was not “newfound.” The court labels the Publisher collective actions as “newfound” because of the mistaken claimed effect of the MFN. However, the Publishers were jointly coordinating their efforts to stop Amazon's $9.99 pricing before Apple entered. And Apple's coordination of a newfound Publisher windowing conspiracy is incredible on its face because the Publishers, in fact, had jointly announced initial windowing programs before they even held their first exploratory meetings with Apple. The court focuses on one aspect of Apple's communications with the Publishers that it concluded clearly indicates Apple's coordinated the Publisher conspiracy to move Amazon to agency, that “Apple's involvement in the conspiracy continued even past the signing of its [iBookstore] agency agreements.”144 Specifically, “Apple stayed abreast of the Publisher Defendants’ progress as they set coordinated deadlines with Amazon and shared information with one another during negotiations.”145 The Publishers therefore not only kept each other informed about how their negotiations were proceeding with Amazon, but also kept Apple informed.146 However, it was in Apple's legitimate narrow business interests to keep track of how the Publisher negotiations with Amazon were proceeding and to know if Amazon had agreed to adopt an agency arrangement with a Publisher because such information was crucial for the setting of iBookstore prices.147 Furthermore, a Publisher's failure to obtain Amazon's agreement to adopt an agency contract meant that Apple would receive the Publisher's New York Times Bestseller e-books at the time of the physical book release while Amazon would not. This is a development Apple certainly would want to advertise in terms of its platform competition with Amazon. However, it is important to emphasize that the limited Apple-Publisher communications after the negotiation of iBookstore contracts are quite distinct from hub coordination of joint spoke acceptance of collusive contract terms that occurs in a hub-and-spoke conspiracy, as occurred, for example, in Toys“R”Us. Apple did not play any role in coordinating the Publisher conspiracy to jointly threaten Amazon with windowing if it did not accept the agency relationship. Such a windowing conspiracy existed among the Publishers before Apple entered and the Publishers had absolutely no difficulty or hesitancy communicating among themselves with regard to how their Amazon negotiations were proceeding.148 It is clear that the Publishers did not require any assistance from Apple, other than its entry, to institute an effective conspiracy with regard to making joint demands on Amazon. C. Rule of Reason The Apple dissent states that, based on Leegin, the appropriate standard of evaluation of Apple's contracts should be a rule of reason. However, the Apple vertical contracts are not the purely intra-brand vertical contracts described in Leegin as requiring rule of reason analysis. This does not mean that Apple's contracts are necessarily the type of vertical contracts the Apple court describes as subject to per se analysis because they “orchestrate” a hub-and-spoke conspiracy.149 Once the claimed role of the MFN in connecting the Apple iBookstore contracts to the Publishers’ collusive windowing demands is rejected, Apple's contracts do not fit the standard per se role of hub contracts in a hub-and-spoke conspiracy. Although Apple used the value of its entry to the Publishers to negotiate favorable iBookstore contract terms, its entry and not the particular iBookstore contract terms is what facilitated the Publisher windowing conspiracy to move Amazon to agency. After Apple entered, the Publisher conspiracy would have been successful in moving Amazon to agency independent of the Apple contract terms, or even if Apple had entered without agency, MFN or maximum price contract protections. In contrast, the dissent accepted the court's view that the Apple MFN “‘effectively enforced’ each publisher that signed Apple's agency contract to move its other retailers onto agency model” and that Apple's maximum prices “had the effect of setting anchor prices across the e-book industry.”150 The dissent therefore accepted that Apple's iBookstore contracts created a contractual rim with regard to the Publisher conspiracy that moved Amazon to agency. In spite of this, the dissent concluded that because of Leegin, Apple's contracts and conduct should not be subject to a per se standard but required rule of reason analysis. The dissent then concludes that because Apple's contracts were necessary for its entry and that Apple's entry led to deconcentration of a highly concentrated e-books retailing industry, “the pro-competitive results of Apple's conduct makes its vertical dealing categorically reasonable.”151 Even if Apple's iBookstore contracts were a necessary condition for its entry, if the contracts did involve “orchestration” of a horizontal conspiracy, why would Apple's actions be inherently procompetitive. Although Apple's entry decreased retail concentration, competition is not defined in antitrust law in terms of structural measures of concentration. Even though increased consumer choice may be considered a procompetitive benefit, why would entry under these circumstances be “categorically” procompetitive? Presumably, some sort of trade-off calculation would have to be made between higher e-book prices and decreased retailer concentration. Judge Livingston, who authored the majority opinion, correctly rejects the dissent's analysis, noting that antitrust law does not permit Apple to create a Publisher conspiracy because doing so avoids what would otherwise be a retail monopoly, noting that “the Sherman Act does not authorize horizontal price conspiracies as a form of marketplace vigilantism to eliminate perceived ‘ruinous competition’ or other ‘competitive evils.’”152 If Amazon were underpricing e-books in an attempt to obtain a retail monopoly and then raise e-book prices to a monopoly level, Amazon's conduct could be handled by Section 2 predatory pricing complaint brought by either the Publishers or DOJ.153 Predatory pricing, however, is not a tactic Amazon has generally used in the past; Amazon commonly uses its bargaining power to negotiate low wholesale prices and then passes some of the gain on to consumers in low retail prices.154 This is actually what the Publishers were realistically concerned about. Given the extremely low marginal costs of e-books, there was a substantial risk that Amazon would be able to use its dominant position to negotiate substantially lower wholesale prices for e-books.155 If Apple's contracts are not subject to a per se standard, does this mean that rule of reason analysis should estimate the effects of lower wholesale prices on long-run consumer welfare through a decrease in the number and variety of books and then trade-off such effects with higher short-run e-book retail prices? No, the measurement of long-term effects on the supply of new products, that is, on innovation should not be required. Antitrust law does not involve this type micro-regulatory process where economists determine what maximizes the present discounted value of consumer welfare and where Judges become economic planners. However, this does not mean that competition should be measured entirely by price. Rather than thinking of antitrust rule of reason as the maximization of consumer welfare, or of total welfare, this case highlights that antitrust should involve preservation of the competitive process.156 Defining what is meant by the competitive process often may be difficult, but what should it specifically mean in this context may not be that difficult. First of all, it should be recognized that Apple's contract terms, negotiated with the Publishers as a condition for its entry, were all in its individual economic interests absent their facilitation of a Publisher conspiracy. Specifically, as described in detail above, the Apple-Publisher agency and MFN contract terms served to protect Apple against Amazon's continued below cost pricing and the maximum price schedule served to protect Apple against the Publisher's exercise of its continued collusive pricing. These contract terms, along with the guaranteed 30-percent margin, should be considered Publisher payment to Apple for its entry. The essential question for rule of reason analysis of the competitive process is what would you want Apple to be required to do consistent with antitrust law? It seems highly unlikely that Apple would be required under the law to enter e-book retailing without being able to negotiate contract terms that protected its narrow economic interests and permitted it to negotiate maximum prices in return for its entry. However, even if you assume, counterfactually, that the contract terms Apple negotiated in connection with its entry were not necessary for Apple to enter and that Apple entered without negotiating its contract protections and compensation, the only difference is that Apple's entry would have resulted in substantially higher e-book prices. Specifically, if the iBookstore contracts did not include maximum retail price terms (or any other contract terms, including the MFN), retail e-book prices would likely have been set by the Publishers to correspond with their then current $12.99 collusive wholesale price. Therefore, if the Publishers set e-book retail prices to provide retailers a 20 percent margin, the retail price would have been greater than $16.00. The only way e-book prices could have conceivably remained at $9.99 is if Apple did not enter and consequently the Publishers could not successfully collude. In addition to e-book prices remaining at $9.99, the result likely would have meant that Amazon would have negotiated significantly lower wholesale prices, for example, the $7.00 e-book wholesale prices mentioned by Jobs.157 Independent of any adverse long-run effects of lower wholesale prices, it makes no sense to claim that Apple not entering should be the relevant competitive benchmark. If DOJ had challenged only the Publisher conspiracy and not Apple in 2012 and reached the same Publisher settlements, Amazon would have resumed its price cutting. The court-imposed settlements prevented the Publishers from placing any limits on retailer discounting, so the Publishers could not have attempted to negotiate an agency relationship until the regulatory constraints on the competitive market process imposed by the court as part of the settlements expired in 2014.158 However, when the settlements expired individually negotiated publisher agreements resulted in agency agreements. The district court had staggered the expiration dates of the court-mandated settlement contracts in 2014 to insure non-collusive post-contract publisher negotiations. Hachette's contract was the first to expire in March 2014 and a publicly reported intense negotiation commenced between Amazon and Hachette regarding the supply of physical as well as e-books. Press reports indicate that the negotiations concerned “how big a discount Hachette will give the giant online retailer and how to set prices for e-books.”159 Consistent with the economic pressures present in 2010, Amazon did not wish to give up its ability to freely discount e-books and desired a larger share of rents. Hachette, on the other hand, wished to obtain control over the setting of e-book retail prices, once again to internalize the effects of e-book prices on sales of physical books to prevent “cannibalization” and also maximize the share of rents it received on book sales.160 After more than seven months of intensive negotiations, new Amazon-Hachette contract terms were reached in November 2014.161 Under these new e-book agreements, negotiated under conditions where there was no claim by Amazon or the antitrust authorities of publisher collusion, the publishers regained the power to set actual e-book transaction prices, returning the agreements back to agency relationships.162 The result therefore was a rapid increase in retail e-book prices in 2015.163 Individual publisher negotiation of e-book agency relationships were obviously important to the publishers, so that e-book prices would be set to internalize physical book “cannibalization” effects. This is fully analogous to the contracts individual film distributors used to set later-run minimum admission prices before Interstate Circuit created a hub-and-spoke conspiracy that substantially raised later-run prices. In return for accepting agency Amazon may have received relatively low wholesale prices, but certainly not the $7.00 wholesale prices the publishers had feared in 2010. Why Amazon ultimately agreed to accept the agency relationship desired by the Publishers in 2014 may be because Apple was now firmly established in the market and unlikely to exit, thereby increasing the bargaining power of each individual Publisher. Or perhaps Amazon was not as concerned about being able to price below cost because its dominant position was now clearly established and, as illustrated in Figure 2, by 2014, the e-book market had stopped growing and in fact had started to decline, perhaps because of the increase in e-book prices.164 Amazon therefore may have recognized that its position in the e-book retailing market was solidified and it no longer needed to rely on $9.99 below cost pricing to achieve and maintain dominance.165 Interestingly, agency e-book prices relative to physical book list prices individually negotiated by each of the publishers after the court-imposed settlement contract terms expired were set at the same level as the maximum e-book prices in Apple's 2010 iBookstore contract. Under the agency contracts the ratio of Amazon e-book prices to physical book list prices for New York Times Bestseller titles in 2017 was equal to 50.5 percent, almost identical to the maximum retail prices originally set in the Apple iBookstore contracts.166 This suggests that the maximum e-book prices Apple negotiated with Publishers in 2010 in return for its entry was equal to competitive, in the sense of non-collusive, prices. V. CONCLUSION This analysis of the Apple e-books case accepts the factual description of events established at trial. It disagrees with the per se condemnation of Apple based on the court's conclusion that the MFN term in the Apple iBookstore contracts forced the Publishers to jointly demand that Amazon accept agency. This is how the court contractually tied Apple's contracts to the horizontal Publisher conspiracy to move Amazon to agency. Instead, it was Apple's prospective entry in the face of the Publishers’ windowing programs, collusively introduced before Apple had even begun its Publisher negotiations, that created the economic motivation for Amazon to rapidly accept agency and hence the success of the Publisher conspiracy. Would the court have reached a different conclusion with regard to Apple if it had recognized these fundamental economic forces at work? Perhaps, but it is certainly not clear. The most obvious fact is that Apple's entry led to with Amazon's termination of below cost $9.99 pricing and the resultant significant increase in e-book prices. It may seem appropriate to attribute part of this apparent anticompetitive effect to Apple because Apple was aware of the Publisher conspiracy and took advantage of it to negotiate favorable contract terms and long-run competitive prices in return for its entry. But, once again, what should Apple have done differently? As we have seen, without the favorable contract terms, Apple was able to negotiate in return for its entry, e-book prices would have been substantially higher. Should Apple have just not entered in order to preserve Amazon's below cost pricing? Footnotes 1 " United States v. Apple, Inc., 791 F. 3d 290, 297 (2d Cir. 2015), aff’d, 952 F. Supp. 2d 638 (S.D. N.Y. 2013), cert. denied, No. 15-565, 2016 WL 854227 (S. Ct. Mar. 7, 2016). 2 " Apple, 791 F. 3d at 341 (Jacobs, J., dissenting), citing Leegin Creative Leather Prods. v. PSKS, 551 U.S. 877, 893 (2007) (emphasis added). 3 " Id. at 314. 4 " Id. at 316 (emphasis in original). 5 " Id. at 322. 6 " Apple, 952 F. Supp. 2d at 690–91, citing Interstate Circuit, Inc. v. United States, 306 U.S. 208, 225–29 (1939) and Toys“R”Us v. Fed. Trade Comm’n, 221 F. 3d 928, 936 (7th Cir. 2000). 7 " Recent examples of hub-and-spoke conspiracy claims that have been rejected because of absence of evidence of a horizontal agreement among the spokes include, for example, R.J. Reynolds Tobacco Co. v. Cigarettes Cheaper!, 462 F. 3d 690, 696–97 (7th Cir. 2006); Total Benefits Planning Agency, Inc. v. Anthem Blue Cross & Blue Shield, 552 F. 3d 430, 435-36 (6th Cir. 2008); In re Musical Instruments and Equipment Antitrust Litig. v. Guitar Center, 798 F. 3d 1186 (9th Cir. 2015). 8 " Apple, 791 F. 3d at 316 (emphasis in original). 9 " Apple, 952 F. Supp. 2d at 690–91, citing Interstate Circuit, Inc. v. United States, 306 U.S. 208, 225–29 (1939) and Toys“R”Us v. Fed. Trade Comm’n, 221 F. 3d 928, 936 (7th Cir. 2000). 10 " George J. Stigler, A Theory of Oligopoly, 72 J. Pol. Econ. 1 (1964). 11 " Subsequent theoretical work has modeled the information and more complex individual firm reaction function conditions that may lead to stable or unstable conspiracies. See, e.g., Masaki Aoyagi, Collusion Through Mediated Communication in Repeated Games with Imperfect Private Monitoring, 25 J. Econ. Theory 455 (2005); Margaret C. Levenstein & Valerie Y. Suslow, What Determines Cartel Success?, 44 J. Econ. Literature 43 (2006) (providing an extensive survey of the empirical evidence on cartel stability, highlighting the additional essential condition for cartel stability that entry or sales expansion by firms outside the cartel be limited). 12 " Hub-and-spoke conspiracies refer in this article solely to collusive arrangements created and stabilized by a hub firm that has a vertical purchasing relationship with the conspiring spoke firms as described. Other cartel stabilization mechanisms that do not include a vertical purchasing relationship, for example, when sellers establish an industry organization that sets collusive prices and facilitates the detection of non-compliance by collecting and publishing price information, are, consistent with antitrust law terminology, not considered “hub-and-spoke” conspiracies. 13 " Apple, 952 F. Supp. 2d 690–91 (2013), citing Interstate Circuit, Inc. v. United States, 306 U.S. 208, 225–29 (1939) and Toys“R”Us v. Fed. Trade Comm’n, 221 F. 3d 928, 936 (7th Cir. 2000). 14 " This is what was alleged, for example, in R.J. Reynolds Tobacco Co. v. Cigarettes Cheaper!, 462 F.3d 690 (7th Cir. 2006), where it was claimed that R.J. Reynolds served as a hub that facilitated a horizontal conspiracy among retailers—the suppliers of retail distribution services—to disadvantage a lower cost rival retailer. A per se illegal hub-and-spoke conspiracy was not found in this case because of the failure to meet the first hub-and-spoke requirement, namely the absence of evidence of a horizontal agreement among retailers. 15 " Standard Oil also received a separate “rebate” or discount on the collusive rail rates on its own shipments, which it then used to monopolize refining, ultimately challenged in Standard Oil Co. v. United States, 221 U.S. 1 (1911). Elizabeth Granitz & Benjamin Klein, Monopolization by “Raising Rivals’ Costs”: The Standard Oil Case, 39 J. L. & Econ. 1 (1996); Benjamin Klein, The “Hub-and-Spoke” Conspiracy that Created the Standard Oil Monopoly, 85 S. Cal. L. Rev. 459 (2012). 16 " The only hub-and-spoke case cited in Apple not described by Figure 1 is United States v. General Motors Corp, 384 U.S. 127 (1966), cited at United States v. Apple, Inc., 791 F. 3d 290, 322 (2d Cir. 2015). The case does not fit the Figure 1 framework because the GM contracts with its dealers do not refer in any way to rivals of the alleged General Motors hub. As discussed in Part IV.A., this is the type of case the Court in Leegin Creative Leather Products v. PSKS, 551 U.S. 877, 893 (2007) describes as requiring rule of reason analysis of the alleged hub behavior. 17 " Interstate Circuit had a complete monopoly of first-run theaters in five of the six Texas cities in which it operated; in the sixth Texas city there was only one non-Interstate Circuit first-run theater, which was operated by one of the major film distributors. Interstate Circuit v. United States, 306 U.S. 208, 215, 223 (1939). The eight major film distributors that Interstate Circuit contracted with accounted for “about 75 percent of all first-class feature films exhibited in the United States.” Id. at 214. 18 " Class “A” feature films were defined in terms of length and budget and by film nighttime admission prices in first-run theaters of 40 cents or more. Id. at 216–17. Id. at 217, n.4 (“Approximately fifty per cent of the pictures released by the distributor defendants in Texas cities in 1934–1935 were class “A” pictures.”). The contract also increased the effective later-run theater prices by specifying that the supplier's “A” films not be exhibited in a later-run theater as part of a “double feature.” Id. at 217. Consequently, double features in later-run theaters were contractually required to consist of two “B” films. 19 " Id. at 217 (“In the event that a distributor sees fit to sell his product to subsequent runs in violation of this request, it definitely means that we cannot negotiate for his product to be exhibited in our ‘A’ theaters at top admission prices.”). Benjamin Klein, Inferring Horizontal Agreement in a Hub-and-Spoke Conspiracy, unpublished paper, 2017, provides a detailed analysis of the basis for the Court's inference of a horizontal agreement among the film distributors. Barak Orbach, Interstate Circuit and (Other) Antitrust Myths (2017) (unpublished manuscript) (providing significant additional insights regarding the facts of the case). 20 " Film supplier rental terms were generally stated in terms of a percent of theater ticket revenue and declined with run, with each successive run accounting for a smaller fraction of a film's revenues. Howard Lewis, The Motion Picture Industry 191–200 (D. Van Norstand Co. 1933). The actual number of runs depended on the size of the city. Michael Conant, Antitrust in the Motion Picture Industry 69–70, 155 (Univ. of California Press 1960). 21 " Neighborhood theaters commonly offered a program of double bills, shorts, and newsreels that was changed frequently, often twice a week. The later-run neighborhood theaters that supplied a broad program of entertainment that changed over the week supplied a product closer to what was later replaced by television. 22 " Roy W. Kenney & Benjamin Klein, The Economics of Block Booking, 26 J. L. & Econ. 497, 517 (1983). 23 " The inference of antitrust market power from the presence of price discrimination was clearly rejected by the Supreme Court in Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28, 44–45 (2006) (noting that “it is generally recognized that it [price discrimination] also occurs in fully competitive markets.”). See William J. Baumol & Danial G. Swanson, The New Economy and Ubiquitous Competitive Price Discrimination: Identifying Defensible Criteria of Market Power, 70 Antitrust L.J. 661 (2005); Benjamin Klein, Price Discrimination and Market Power, in 2 Issues in Competition Law and Policy ch. 41, 977–96 (W. Collins ed., Amer. Bar Assoc. Sec. of Antitrust L. 2008). 24 " Although resale price maintenance was per se illegal at this time, the court determined that film distributors could legally set such minimum price licensing terms under its copyright. Interstate Circuit v. United States, 306 U.S. 208, 228 (1939). 25 " Interstate Circuit, 306 U.S. at 218. 26 " Id. at 231. David Butz and Andrew Kleit claim that the Interstate Circuit contracts were procompetitively motivated to internalize the positive effects of the advertising investments made by first-run theaters on the demand of later-run theaters. David A. Butz & Andrew N. Kleit, Are Vertical Restraints Pro- or Anticompetitive? Lessons from Interstate Circuit, 44 J. L. & Econ 131 (2001). However, although this factor would explain individual distributor set minimum later-run admission prices; it would not explain the necessity for the jointly imposed further substantial increase in minimum later-run prices undertaken by all the distributors with the assistance of Interstate Circuit's vertical contracts and why these further increases in later-run minimum admission prices occurred only in the Interstate Circuit Texas cities. 27 " Toys“R”Us v. Fed. Trade Comm’n, 221 F. 3d 928 (7th Cir. 2000), aff’d, Federal Trade Commission re Toys“R”Us, 126 F.T.C. 415 (1998) 28 " The FTC argued that this condition was demanded by Toys“R”Us so that consumers would be unable to make direct price comparisons of Toys“R”Us prices with lower warehouse club prices. Id. at 931–32. 29 " Toys“R”Us, 221 F. 3d at 932. 30 " Toys“R”Us, 126 F.T.C. at 555. 31 " Toys“R”Us sold approximately 20 percent of all toys in the United States, but had a market share as high as 49 percent of all toy sales. Toys“R”Us, 221 F. 3d at 930. 32 " Id. at 932. 33 " Toys“R”Us, 126 F.T.C. at 570; Toys“R”Us, 221 F. 3d at 932–33. 34 " Toys“R”Us, 221 F. 3d at 932, citing to toy manufacturer testimony in Toys“R”Us, 126 F.T.C. at 28. 35 " Id. at 932–33. 36 " Toys“R”Us, 126 F.T.C. at 570. 37 " The five defendant Publishers, who settled before trial, included HarperCollins, Macmillan, Hachette, Simon & Schuster, and Penguin. The sixth and largest major publisher, Random House, did not enter a contract with Apple until 2011 and was not charged. United States v. Apple Inc., 791 F. 3d 290, 309 n.12, 343 (2d Cir. 2015). The five defendant Publishers accounted at the time for about 50 percent of e-book retail sales in the United States (id. at 298, 310 n. 13), but accounted for a significantly greater share of New York Times Bestsellers that were the focus of the case. The six major publishers together accounted for 90 percent of New York Times Bestseller sales. Id. at 298. Sales figures throughout the article refer to trade book sales that include adult and juvenile fiction and non-fiction and religious titles, but not sales of educational, professional and scholarly books. 38 " Id. at 299. 39 " See Rich Motoko, Math of Publishers Meets the E-book, N.Y. Times, Feb. 28, 2010, http://www.nytimes.com/2010/03/01/business/media/01ebooks.html?pagewanted=all. United States v. Apple, Inc., 952 F. Supp. 2d 638, 650, 665 (S.D. N.Y. 2013). 40 " Richard J. Gilbert, E-books: A Tale of Digital Disruption, 29 J. Econ. Theory 165, 166–70 (2015) (documenting that the decline in independent bookstores began at least a decade before the introduction of e-books). 41 " Apple, 791 F. 3d at 299; Apple, 952 F. Supp. 2d at 649–50. 42 " Motoko, supra note 39. 43 " Authors generally received a standard royalty rate, credited against any author advance, on hardcover books of about 15 percent of the list retail price and on e-books about 25 percent of the net amount received by the publisher, or $2.60 at the initially set $10.39 wholesale price. E-Book Royalty Math: The House Always Wins, The Authors Guild, Feb. 3, 2011, http://www.authorsguild.org/authorship/e-book-royalty-math-the-house-always-wins-2/. 44 " There are additional relatively small fixed costs averaging about $0.50 in converting and editing the physical book text to a digital format to create an e-book. Motoko, supra note 39. 45 " Apple, 952 F. Supp. 2d at 650. 46 " Id. In contrast to its dominance in e-books, Amazon's 2009 share of physical book sales was significant, but only 12.5 percent, or about half of the 22.5 percent physical book sales share of the largest physical book retailer, Barnes & Noble. Jim Milliot, B&N Is #1 in Trade Books, PublishersWeekly.com, March 21, 2011, http://www.publishersweekly.com/pw/print/20110321/46532-b-n-is-1-in-trade-books.html. 47 " Apple, 952 F. Supp. 2d at 651 (“On a fairly regular basis, roughly once a quarter, the CEOs of the Publishers held dinners in private rooms of New York restaurants, without counsel or assistants present, in order to discuss the common challenges they faced, including most prominently Amazon's pricing policies.”). The Publisher CEOs testified that “they felt no hesitation in freely discussing Amazon's prices with each other and their strategies for raising prices” because they believed they “did not compete with each other on price” and were serious competitors “only over authors and agents.” Id. 48 " Apple, 791 F. 3d at 342. 49 " The lower wholesale price was more than made up for by merely taking account of the publishers savings of $3.25 per book in the printing, storing and shipping of physical books, Motoko, supra note 39. 50 " It is not necessarily the case that the shift down in the demand for physical books would lower the profit-maximizing physical book wholesale price. However, the publishers clearly were concerned that $9.99 e-book pricing would decrease the perceived value of physical books and physical book prices would decline. Apple, 791 F. 3d at 299–300. 51 " Compared to the much more common alternative metering strategy of underpricing the Kindle reader and earning profits on intensity of use, a $9.99 price more effectively advertised the obvious economic benefit to consumers of purchasing Amazon digital books rather than physical books and encouraged the most intensive e-book reading consumers to adopt the Kindle reader. No evidence was presented that Amazon earned a significant profit margin on its pricing of the Kindle reader. The idea that Amazon underpriced e-books to drive increased traffic to the Amazon.com website (Gilbert, supra note 40, at 178) would not appear to justify Amazon's decision to remain at $9.99 and substantially increase their losses when the publishers later collusively increased wholesale prices. Moreover, low pricing to merely increase traffic to Amazon.com in general would not explain the extreme publisher hostility to Amazon's low e-book pricing compared to supplier reaction to Amazon's low pricing of other products. 52 " For the purpose of illustrating the fundamental economic forces at work, we can assume that any double marginalization problem is solved with an appropriate contractual arrangement or understanding. 53 " Brad Stone, The Everything Store: Jeff Bezos and the Age of Amazon 278 (Little, Brown and Co. 2013) (“As suppliers had learned over the past decade, no matter the category, Amazon wielded its market power neither lightly nor gracefully, employing every bit of leverage to improve its own margins and pass along savings to its customers.”). 54 " See infra note 81. 55 " The most obvious action would appear to have been the establishment of a minimum resale price maintenance policy for e-books, something the publishers jointly considered but did not institute. United States v. Apple, 952 F. Supp. 2d 638, 650 n. 9 (2013). The Publishers later adopted agency agreements that involved the transfer of power to the Publisher to set price, which is analytically similar to the adoption of resale price maintenance. In addition, the Publishers also considered the possibility of creating a joint venture to compete with Amazon in e-book retailing, but did not do so, perhaps because they considered the entry of Apple, with its established brand name and platform, to be a significantly superior way to create effective e-book retailing competition to Amazon. Apple, 791 F. 3d at 300. 56 " Apple, 791 F. 3d at 300; Apple, 952 F. Supp. 2d at 649–50. 57 " Apple, 791 F. 3d at 300. 58 " Simon & Schuster announced a six-week e-book release delay for Stephen King's book “Under the Dome,” HarperCollins announced a five week e-book release delay for Sarah Palin's book “Going Rogue,” and Hachette announced an “indefinite” e-book release delay for Edward Kennedy's book, “True Compass: A Memoir.” Jeffrey A. Trachtenberg, Publisher Delays Stephen King E-Book, Wall St. J., Oct. 22, 2009, http://www.wsj.com/articles/SB10001424052748703816204574487604010965362; Jeffrey A. Trachtenberg, Stressing Hardcover Sales, Publisher Delays E-Book of Sarah Palin Memoir, Wall St. J., Sept. 30, 2009, http://www.wsj.com/articles/SB125427129354251281. 59 " Apple, 791 F. 3d at 300. 60 " Id. at 300–01 (“By December 2009, the Wall Street Journal and New York Times were reporting that four of the Big Six had announced plans to delay e-book releases until after the print release, and the two holdouts—Penguin and Random House—faced pressure from their peers.”). Hachette's CEO David Young said that he found the refusal of Penguin and Random House to adopt windowing policies at this time “deeply divisive and disappointing.” Apple, 952 F. Supp. 2d at 653. Random House never introduced a windowing program and was not a defendant in the litigation; Penguin ultimately windowed all of its new releases for the two-month period of April and May 2010 as part of its later negotiation with Amazon. Penguin's initial failure at this time to join the other four Publishers in announcing an e-book windowing program may explain the more aggressive bargaining position Amazon later took with Penguin and the delay before Amazon accepted an agency agreement with Penguin. See infra note 93. 61 " Apple, 791 F. 3d at 301. 62 " Hailiang Chen, Yu Jeffrey Hu & Michael D. Smith, The Impact of Ebook Distribution on Print Sales: Analysis of a Natural Experiment 3 (Feb. 2016) (unpublished manuscript) (emphasis in original), https://ssrn.com/abstract=1966115. The district court referred to an earlier version of this study, stating that the “Penguin study showed when a Publisher delayed the release of e-books, its sales never recovered.” Apple, 952 F. Supp. 2d at 653. 63 " Chen, Hu & Smith, supra note 62, at 14. This effect is measured by comparing Penguin e-book sales of titles released during April and May of 2010, when Penguin was windowing new releases to Amazon, with sales of Penguin titles released in March and June of 2010. Id. at 7. In both cases sales are measured in the first twenty weeks after each title's actual digital release, “the period where the majority of sales occur.” Id. at 9. The effect would be reduced somewhat if all major publishers, rather than only one publisher, were windowing because fewer major publisher new releases would be available as substitutes for the windowed titles. 64 " Apple, 952 F. Supp. 2d at 654–55. 65 " Apple, 791 F. 3d at 301. 66 " Id. 67 " Apple, 952 F. Supp. 2d at 655. 68 " Id. 69 " Apple, 791 F. 3d at 302. Apple originally demanded that all six major publishers agree to its terms. Apple, 952 F. Supp. 2d at 656. Later, when it became clear that Random House would not agree to the Apple terms, Apple stated it would “not move forward with the store [unless] 5 of the 6 [major publishers] signed the agreement.” Apple, 791 F. 3d at 306. 70 " Apple, 791 F. 3d at 306. 71 " Id. at 304, 306, 308. Carolyn Reidy, CEO of Simon & Schuster, described Apple's role in coordinating joint Publisher acceptance of its iBookstore contract terms in an email as “herding us cats.” Id. at 308. 72 " Id. at 305–08. 73 " Id. at 343. 74 " The possibility of an agency relationship was first suggested by Hachette and by HarperCollins at their initial separate meetings with Apple during December 15 to 17, 2009. Id. at 303 n.3. 75 " Id. at 303–04; Apple, 952 F. Supp. 2d 638, 658–59 (2013). 76 " Apple, 791 F. 3d at 303–04. 77 " Id. at 304. 78 " Id. at 304–05. 79 " Maximum e-book retail prices for new release titles that were not New York Times Bestsellers were contractually set based on a schedule that included a larger number of maximum price points, each of which referred to a narrower range of new release physical book list prices, that more closely specified a 50-percent relationship of the e-book price to the physical book list price. For example, the maximum price was set at $12.99 for physical book list prices between $25.01 and $27.50, at $14.99 for physical book list prices between $27.51 and $30.00, and at a series of corresponding e-book prices between $16.99 and $19.99 for various physical list prices greater than $30.00. Apple, 952 F. Supp. 2d at 669–70. 80 " Although there was a significant cost to the Publishers under the terms of the Apple contract when Amazon accepted agency, because the Publishers would receive $9.09 rather than the $12.99 collusive wholesale prices on Amazon e-book sales, the Publishers obviously considered this immediate loss of revenue on Amazon sales to be more than offset by the possibility of long-term gains if it leads to stopping Amazon's below cost $9.99 pricing, and therefore the control of cannibalization of physical book sales and of Amazon's future exercise of market power in the purchase of e-books. 81 " Apple, 791 F. 3d at 306–08. Near the end of the negotiations, shortly before the iPad Launch Event, a particularly significant impasse remained with regard to the acceptance by HarperCollins of the maximum retail price schedule/30-percent margin terms. To resolve this impasse Steve Jobs contacted James Murdoch at News Corp., HarperCollins’ parent company, and, in a series of emails, Jobs emphasized the benefits Apple was bringing to the market in terms of the Publisher's ability to bargain with Amazon. Jobs argued that HarperCollins should “[t]hrow in with Apple” rather than “keep going with Amazon at $9.99,” reasoning that with Amazon “you will make a bit more money in the short-term but in the medium term Amazon will tell you they will be paying you 70% of $9.99. They have shareholders too.” Id. at 307–08, citing Apple, 952 F. Supp. 2d at 677. 82 " Apple, 952 F. Supp. 2d at 664. 83 " Id. at 672–73. 84 " Apple, 791 F. 3d at 308. 85 " Id. This was a substantial increase in the 90-day windowing period Macmillan originally announced on December 15. See Table 3. 86 " Apple, 952 F. Supp. 2d at 681–82. 87 " Id. at 679. 88 " Id. at 680; Apple, 791 F. 3d at 309. 89 " In addition to the substantial additional sales a Publisher would gain by terminating its windowing program and selling new release e-books through Amazon, Amazon also could promise to provide significant promotional investments in connection with sale of the Publisher's titles. These Amazon benefits appear to have been received by Random House in the period immediately after the entry of the Apple iBookstore in return for its decision to remain outside the Publisher windowing conspiracy and not demanding that Amazon move to an agency relationship. One analyst report from the summer of 2010 pointed out that Random House “enjoys some benefits from its position on Amazon, where its books are marketed prominently and at more attractive pricing.” Susquehanna Financial Group, Amazon.com, June 28, 2010, at 3. Another analyst reported that Amazon's marketing support was a key factor in explaining why over one million e-books were sold of Stieg Larsson's Millennium trilogy series that was published by Random House. Amazon.comInc. eBooks Sharply Accelerating Amazon's Share Gains in US Books, GoldmanSachs.com, Aug. 3, 2010, at 1. 90 " Actual iPad sales, from the start of sales in April 2010 to the end of 2011, were approximately 55 million units. Apple, Inc., Form 10-K, at 30 (Oct. 26, 2011); Apple, Inc., Form 10-Q, at 25 (Jan. 25, 2012). To put this sales figure into perspective, in February 2010, before the iPad was released, it was projected that Amazon would sell 7.6 million Kindles over the somewhat longer period between 2010 and the end of 2011. Barclays Capital, Updating our Kindle Numbers, Feb. 4, 2010, p. 2. 91 " Motoko Rich & Brad Stone, Publisher Wins Fight with Amazon Over E-Books, N. Y. Times, Feb. 1, 2010, http://www.nytimes.com/2010/02/01/technology/companies/01amazonweb.html?_r=0. 92 " Id. 93 " Apple, 791 F. 3d at 309. An Amazon agency agreement was not reached with Penguin, the fifth Defendant Publisher, before entry of the iBookstore. Amazon likely resisted Penguin's identical demand for agency because Amazon may have reasonably believed that Penguin was less committed to its agency or windowing demand. In contrast to the other four Publishers, Penguin had not announced a windowing program jointly with the other Publishers in December (supra note 60) and had not met with and made initial agency demands of Amazon from January 20 to 22. Apple, 952 F. Supp. 2d at 672–73. In response to Amazon's refusal to accept agency, Penguin did not make any of its new release e-book titles available to Amazon for two months, until it ultimately reached an agency agreement with Amazon on June 2, 2010. Id. at 682. 94 " Between February 2010 and February 2011, prices of Defendant Publishers new release titles increased by 24.2 percent and Bestseller titles increased by 40.4 percent. Random House, which had not switched to an agency model, had virtually no change in the prices of its new releases or Bestsellers. Apple, 791 F. 3d at 310. 95 " Amazon's e-book sales market share was estimated at 58 percent, with Barnes & Noble's share at 27 percent, Apple's at 9 percent and Borders’ at 7 percent. Barnes & Noble, 2011 Annual Report 2 (2011); Matt Townsend, Barnes & Noble Sinks Most Since June After Halting Dividend, Bloomberg.com, Feb. 22, 2011, http://www.bloomberg.com/news/2011-02-22/barnes-noble-falls-after-dividend-halt-same-store-sales-rise.html. 96 " United States of America v. Apple, Inc., Final Judgement as to Defendants Hachette, Harper Collins and Simon & Schuster, Sept. 6, 2012. The Publishers also were prohibited for five years from “conspiring with or sharing competitively sensitive information with their competitors.” Press Release, U.S. Dep't of Justice, Justice Department Reaches Settlement with Three of the Largest Book Publishers and Continues to Litigate Against Apple Inc. and Two Other Publishers to Restore Price Competition and Reduce E-book Prices (April 11, 2012), http://www.justice.gov/opa/pr/justice-department-reaches-settlement-three-largest-book-publishers-and-continues-litigate. Under the settlement terms Publishers could and did enter agency agreements, but retailers could freely discount a Publisher's set prices as long as the retailer's sales over all titles remained above cost. Retail prices set by publishers therefore were equivalent to list prices and the agency contract arrangements entered by the publishers with e-book retailers were described in the industry as “agency lite.” Keith Gessen, The War of the Words, Vanity Fair, Dec. 2014, http://www.vanityfair.com/news/business/2014/12/amazon-hachette-ebook-publishing. 97 " Babur De los Santos & Matthijs R. Wildenbeest, E-book Pricing and Vertical Restraints, 15 Quantitative Marketing & Econ. 85 (2017). 98 " Apple, 791 F. 3d at 341 (Jacobs, J., dissenting), citing Leegin Creative Leather Products v. PSKS, 551 U.S. 877, 893 (2007) (emphasis added). 99 " Id. at 324 (referring to Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207 (1959) and United States v. General Motors Corp., 384 U.S. 127 (1966)). 100 " Id. at 314. 101 " Id. at 322. 102 " Id. 103 " Leegin, 551 U.S. at 893. 104 " Id. 105 " Id. The Court refers to “either type of cartel” in this context, including a second case where a group of manufacturers jointly agree to each enter a vertical resale price maintenance agreement with their retailers to stabilize a manufacturer cartel. Resale price maintenance may accomplish this by making it easier to detect manufacturer cheating and by reducing the incentive of a manufacturer to cheat because wholesale price decreases cannot then be passed on by its retailers in lower retail prices, thereby reducing the incremental sales a manufacturer can obtain from cheating. The Court states that the joint agreement among colluding manufacturers to agree to institute resale price maintenance is per se illegal. However, if there is no horizontal agreement among each of the manufacturer's retailers, each manufacturer is not a hub of a hub-and-spoke conspiracy and the vertical contracts themselves are subject to rule of reason analysis. 106 " Id. (emphasis added). 107 " With regard to the other case where a group of manufacturers jointly agree to each adopt vertical price maintenance agreements with their retailers, supra note 105, the Court states that resale price maintenance also must be evaluated under rule of reason as a check, not of whether retailer coercion is present, but whether a collusive agreement exists among the manufacturers. Institution of resale price maintenance by numerous manufacturers in an industry does not imply the presence of an agreement among the manufacturers, but more likely common efficiencies facing all manufacturers. The Leegin Court also discusses the two other cases of potentially anticompetitive resale price maintenance when the contract refers to rivals of the hub, the case where a powerful manufacturer uses resale price maintenance to prevent competition by a new manufacturer entrant (for example, to pay retailers for not selling the products of smaller rivals or new entrants) or when a dominant retailer uses RPM to prevent manufacturers from supplying lower-cost retailers. Leegin, 551 U.S. at 892–94. Both of these cases may fit the Figure 1 hub-and-spoke conspiracy framework and hub behavior subject to a per se standard if there is a horizontal agreement among the spokes. 108 " United States v. General Motors Corp., 384 U.S. 127 (1966), cited in United States v. Apple, Inc., 791 F. 3d 290, 322 (2d Cir. 2015). The other cited Supreme Court per se precedent referred to by the Apple court in this context is Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207 (1959), cited in Apple, 791 F. 3d at 322. This was clearly not a manufacturer hub/purely intra-brand case because Klor's was a rival to the Broadway-Hale hub. 109 " General Motors, 384 U.S. at 130. Id. at 132 (“Approximately a dozen of the 85 Chevrolet dealers in the Los Angeles area supplied cars to the discount houses.”). 110 " Id. at 133–37. 111 " Id. at 133–38. 112 " Id. at 135. 113 " Id. at 145. 114 " Benjamin Klein, The Evolving Law and Economics of Resale Price Maintenance, 57 J. Law & Econ. S161, S164–67 (Aug. 2014); Benjamin Klein, Competitive Resale Price Maintenance in the Absence of Free-Riding, 76 Antitrust L.J. 431 (2009). In general, a retailer may initiate the discussion of resale price maintenance with a manufacturer because the retailer may be more immediately aware of retail market conditions and the magnitude of its own lost sales and reduced profitability from price discounting. An individual retailer's communication of market realities to a manufacturer, and the likely changes the retailer intends to make if they are not corrected, is a normal part of the competitive process and need not imply coercion. 115 " General Motors, 384 U.S. at 140. The Court merely concluded that “[t]here can be no doubt that the effect of the combination… here was to restrain trade and commerce within the meaning of the Sherman Act” because “[e]limination, by joint collaborative actions, of discounters from access to the market is a per se violation of the Act.” Id. at 145. 116 " This is fully consistent with the standard of analysis adopted by the Third Circuit in Toledo Mack Sales, where the court found a per se illegal horizontal agreement among the Mack Truck dealers to prevent inter-dealer price competition yet held that the manufacturer's conduct was subject to a rule of reason standard. Toledo Mack Sales & Serv. v. Mack Trucks 530 F. 3d 204, 225 (3d Cir. 2008). It is also consistent with a recent Fifth Circuit decision, MM Steel LP v. JSW Steel (USA) Inc.; Nucor Corp., 806 F. 3d 835 (5th Cir. 2015). The case involved two alleged hub-and-spoke conspiracies with two separate steel manufacturer hubs, each of whom agreed in response to the demands made by colluding distributors not to deal with a new distributor entrant, MM Steel. Judgement against one of the steel manufacturers (Nucor) was reversed because the appeals court found that, although Nucor was aware of the distributor conspiracy, its decision not to supply steel to MM Steel was consistent with its established “‘incumbency practice,’ where Nucor remains loyal to established customers… in order to maintain its original supply chain, essentially a rule of reason analysis.” Id. at 846. The court therefore considered whether there was an efficiency rational for Nucor's alleged hub actions and, on that basis, concluded that it could not be inferred that Nucor was coerced by the colluding distributors to join the distribution conspiracy. 117 " United States v. Apple, Inc., 791 F. 3d 290, 297, 322 (2d Cir. 2015). 118 " Id. at 323. 119 " If Apple prices were not controlled by the Publishers under an agency agreement, Amazon likely would have demanded and the Publishers included some price protection in their agency contracts. 120 " Rich & Stone, supra note 91. 121 " The appeals court discusses windowing in connection with the initial coordinated Publisher announcements of windowing policies made in December 2009 (see Table 3) as an indication of Publisher collusion, before contract discussions had begun with Apple. Apple, 791 F. 3d at 300–04. In addition, the appeals court reports on a seven-month window being part of Macmillan's initial demand of agency to Amazon. See supra note 85. In contrast, the district court discussed the later Publisher windowing threats of Amazon more extensively, but minimized it as an influence on Amazon's decision to accept agency because it concluded the Publishers actually windowed only 37 e-book titles. United States v. Apple, Inc., 952 F. Supp. 2d 638, 702 (S.D. N.Y. 2013). This includes the initial three titles windowed by three Publishers on an experimental basis in early 2009 plus 34 titles windowed during the brief period before Amazon agreed to accept the four Publishers’ demands for agency and began negotiations over specific agency terms. See supra note 58. It does not include the 99 titles later windowed by Penguin during the period before Penguin reached an agency agreement with Amazon. Chen, Hu & Smith, supra note 62. The district court fails to acknowledge that Amazon's rapid acceptance of the Publishers’ demands for agency was caused by joint Publisher threats of continued windowing in the face of Apple's prospective entry, not by the number of titles actually windowed before Amazon agreed in principle to accept an agency relationship. 122 " Apple, 791 F. 3d at 305 (emphasis in original). 123 " Id. 124 " Id. at 317, citing Apple, 952 F. Supp. 2d at 665. 125 " Id. at 317. This claimed effect of the Apple MFN is distinct from the potential anticompetitive effect of an MFN entered between a seller and a large buyer of decreasing the seller's incentive to provide price discounts to small buyers or new entrants because the discount must then also be provided to the large buyer. Jonathan B. Baker & Judith A. Chevalier, The Competitive Consequences of Most-Favored Nation Provisions, 27 Antitrust 20, 22–24 (2013). 126 " Carolyn Reidy, CEO of Simon & Schuster, noted that as a consequence of the Apple MFN the company “would need to move all its other ebook retailers to agency ‘unless we wanted to make even less money.’” Apple, 791 F. 3d at 305, citing Apple, 952 F. Supp. 2d at 666. An Apple executive stated that “‘any decent MFN forces the model’ away from wholesale and to agency.” Id., citing 952 F. Supp. 2d at 663. 127 " Apple's estimated share of e-book sales at the end of 2010, six months after entry of the iBookstore, was 9 percent. Matt Townsend, Barnes & Noble Sinks Most Since June After Halting Dividend, Bloomberg.com, Feb. 22, 2011, http://www.bloomberg.com/news/2011-02-22/barnes-noble-falls-after-dividend-halt-same-store-sales-rise.html. If Apple's expected share of sales was assumed to be greater than 10 percent, this would increase the cost of the Apple MFN to the Publisher on iBookstore sales if it decided to stop windowing and mitigate the Publisher's costs associated with the substantial lost Amazon sales from continuing windowing. However, it would substantially increase the cost to Amazon of resisting the Publishers’ demand for agency. See infra note 134. 128 " The conclusion of the following analysis, that a Publisher's costs of continuing to window are substantially greater than the Publisher's costs of meeting the MFN on iBookstore sales if it stops windowing, does not depend upon this illustrative 60-percent assumption. 129 " The MFN will reduce Publisher prices on Bestseller titles sold at the iBookstore that are not new releases and therefore that Amazon continues to price at $9.99. However, this will be an extremely small additional cost of windowing associated with the MFN because relatively few titles remain as Bestsellers after the Publishers’ seven month new release window period. See infra note 130. 130 " Over the one year period between May 8, 2016 and May 7, 2017, 10.3 percent of titles on the New York Times Bestseller list were on the list for 30 or more weeks. The New York Times, New York Times Hardcover Fiction Bestseller List (May 8, 2016); The New York Times, The New York Times Hardcover Nonfiction Bestseller List (May 7, 2017). 131 " To determine the percent of sales covered by windowing it is necessary to subtract from the 60 percent of sales covered by the MFN that are either Bestsellers or new releases the Bestseller sales that are not new releases. If, for example, Bestsellers account for 40 of the 60 percent, the 10 percent of Bestseller titles that are not new releases would amount to about 4 percentage points of sales. Therefore, a Publisher that does not sell any new releases through Amazon will lose 90 percent (Amazon's share of sales) of 56 percent of total sales, or 50.4 percent of its total e-book revenue. 132 " Less than 25 percent of Bestseller titles are on the Bestseller list for more than 12 weeks (based on New York Times Bestseller data from May 8, 2016 to May 7, 2017). See supra note 130. As described above, the Chen, Hu and Smith empirical study on the effects of windowing found that even an average window of four and a half weeks leads to a 43-percent decrease in sales. See supra note 63. 133 " The statements by Publisher and Apple executives that the MFN economically forced the Publishers to demand that Amazon accept agency ignore the Publisher costs associated with continuing to window. This may be because windowing new release titles to Amazon initially, for example on the first day, would not imply significant lost total Publisher revenue, but the same can be said for the MFN effect on iBookstore sales. More importantly, the Publishers may have reasonably not expected windowing to continue for very long in response to their collusive demands because Amazon would very likely readily comply and accept agency in the face of Apple's entry with access to new release titles without delay. However, Amazon's likely response obviously was invariant to the presence of the MFN. 134 " United States v. Apple, Inc., 952 F. Supp. 2d 703 (S.D. N.Y. 2013). See supra notes 91 and 92. 135 " Apple, 791 F. 3d at 316. 136 " Id. at 318–19. 137 " Id. 138 " Id. at 318, citing United States v. Apple, Inc., No. 15-565, 2016 WL 854227 (S. Ct. Mar. 7, 2016). 139 " Id. at 317, 328, 334. Steve Jobs referred to Apple's leverage of “market conditions to its own advantage” as an “aikido move.” Id. at 317; Apple, 952 F. Supp 2d at 687. 140 " Apple, 791 F. 3d at 316. 141 " Steve Jobs stated to his biographer at the time of the iPad's launch that the Publishers were windowing (which had been publicly announced) so that Amazon would not get new e-books if it failed to accept agency. Apple, 952 F. Supp 2d at 679, 687. Jobs also responded to a reporter at the iPad Launch Event when asked why anyone would buy e-books at higher prices from Apple rather than at $9.99 currently charged by Amazon that “[t]he prices would be the same.” Id. at 679. This does not mean that Jobs knew the Publisher windowing conspiracy would necessarily be successful; Apple and Amazon prices would be the same even if the Publishers were not successful in moving Amazon to agency because of the MFN term in the iBookstore contracts. 142 " Apple did not have the ability to enforce the Publisher conspiracy to move Amazon to agency and therefore was not also compensated for said enforcement. However, the court rejected Apple's argument on appeal that it did not have sufficient market power to coordinate the Publishers with regard to the Amazon conspiracy in the sense of enforcing agreed upon collusive terms. Id. at 707 (“Courts have never found that the vertical actor must be a dominant purchaser or supplier in order to be considered a traditional ‘hub,’ only that this is ‘generally’ the case.”). 143 " Apple, 791 F. 3d at 317. 144 " Id. at 319. 145 " Id. 146 " For example, Macmillan, the first Publisher after the Apple iPad Launch Event that made a demand of Amazon to accept agency or face windowing, kept Apple fully informed on its Amazon negotiations. The Macmillan CEO informed Apple that he could not be at the Launch Event because he was traveling to Seattle that day to meet with Amazon the next day. Id. at 308; Apple, 952 F. Supp. 2d 638, 678 (2013). On his return, he emailed Apple “about Amazon's decision to remove Macmillan e-books from Kindle.” Apple, 791 F. 3d at 309. 147 " This was a particularly important consideration with regard to iBookstore pricing of Penguin's titles during April and May of 2010, when Amazon had not yet agreed to agency and therefore was continuing to price Penguin's pre-existing new release titles at $9.99. These titles therefore had to be priced at the iBookstore at $9.99. This explains why “[w]hen Penguin languished behind the others,” Jobs was informed “that Apple was ‘changing a bunch of Penguin titles to 9.99’ in the iBookstore ‘because they didn't get their Amazon deal done.’” Apple, 791 F. 3d at 309. 148 " “Whenever Amazon ‘would make a concession on an important deal point,’ it would ‘come back to us [Amazon] from another publisher asking for the same thing or proposing similar language.’” Id. at 309, citing Joint Appendix 1491. 149 " Id. at 297, 322. 150 " Id. at 343. 151 " Id. at 348, 350–51. Apple “had decided that it would not open the iBookstore if it could not make money on the store and compete effectively with Amazon.” Id. at 302, citing Apple, 952 F. Supp. 2d at 656. 152 " Id. at 332. The majority opinion only affirmed with regard to the illegality of Apple's actions under a per se standard. This statement is made by Judge Livingston in her separate affirmation under a “quick look” rule of reason analysis, which the other judges did not join. 153 " A predatory pricing claim would unlikely to be successful because Amazon was not pricing most e-books below cost and there was not an obvious “dangerous probability” that Amazon, after driving rivals out of the market, would be able to recoup losses by raising prices to monopoly levels. Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993). 154 " See supra note 53. 155 " Amazon's negotiation of lower wholesale prices does not involve Amazon control of publisher market power. Individual Publishers do not have market power; they are just pricing significantly above marginal cost because they are selling a differentiated product with a low marginal cost so that Amazon therefore has an opportunity to use its buying power to negotiate significantly lower wholesale prices. In addition, Amazon is not exercising monopsony power because e-books have non-rising marginal costs. 156 " Gregory J. Werden, Antitrust's Rule of Reason: Only Competition Matters, 79 Antitrust L.J. 713 (2014). 157 " See supra note 81. 158 " See supra note 96. 159 " Steven Mufson, Amazon Said to Play Hardball in Book Contract Talks with Publishing House Hachette, Wash. Post, May 16, 2014, https://www.washingtonpost.com/business/economy/amazon-said-to-play-hardball-in-book-contract-talks-with-publishing-house-hachette/2014/05/16/cdd40854-dc62-11e3-8009-71de85b9c527_story.html?utm_term=.3dae0a42e471. 160 " Jeffrey Trachtenberg, Amazon-Hachette Dispute Heats Up, Wall St. J., May 23, 2014, https://www.wsj.com/articles/amazon-hachette-dispute-heats-up-1400864729. During this negotiation, Amazon placed significant economic pressure on Hachette, no longer allowing its customers to pre-order forthcoming Hachette titles and holding only minimum physical book inventories of Hachette titles. This led to many older Hachette titles being listed by Amazon as out of stock with long shipping times. Id. Amazon had considerable bargaining power because by this time Amazon's share of physical and e-book sales had grown to 41 percent and its share of e-book sales alone was 67 percent. Jim Milliot, BEA 2014: Can Anyone Compete with Amazon?, PublishersWeekly.com, May 28, 2014, https://www.publishersweekly.com/pw/by-topic/industry-news/bea/article/62520-bea-2014-can-anyone-compete-with-amazon.html. 161 " Colin Dwyer, Amazon and Hachette Reach a Deal on E-book Pricing, NPR.org, Nov. 13, 2014, http://www.npr.org/sections/thetwo-way/2014/11/13/363794096/amazon-and-hachette-reach-a-deal-on-e-book-pricing. Contracts were reached around the same time with the other publishers. Jeffrey Trachtenberg, E-Book Sales Fall After New Amazon Contracts, Wall St. J., Sept. 3, 2015, https://www.wsj.com/article_email/e-book-sales-weaken-amid-higher-prices-1441307826-lMyQjAxMTE1MzAxNDUwMjQ2Wj. 162 " Id. 163 " Jeffrey Trachtenberg, E-Book Sales Fall After New Amazon Contracts, Wall St. J., Sept. 3, 2015, https://www.wsj.com/article_email/e-book-sales-weaken-amid-higher-prices-1441307826-lMyQjAxMTE1MzAxNDUwMjQ2Wj. 164 " Id. 165 " In fact, Amazon's market share continued to grow without below cost pricing, so that by 2017 it was 80 percent, with Apple's share at 12 percent, Barnes & Noble's at 4 percent, and others’ at 4 percent. Author Earnings, February 2017 Big, Bad, Wide & International Report: Covering Amazon, Apple, B&N, and Kobo Ebook sales in the US, UK, Canada, Australia, and New Zealand (May 17, 2017), http://authorearnings.com/report/february-2017/. 166 " AMAZON.COM, New York Times Bestseller's Lists (Apr. 23–July 23, 2017). Author notes * " Professor Emeritus of Economics, UCLA. Email: bklein@compasslexecon.com. I served in 2013 as an economic expert for Apple in the e-books litigation described in this article. The views expressed here, however, do not consist of my testimony in the matter and should not be considered the views of Apple or of the Publisher Defendants. I have not been compensated by any party for this article. I am grateful to Steve Stanis for extensive discussions and research assistance. Useful comments on earlier drafts were provided by Jonathan Baker, Kevin Green, Barak Orbach, Alan Meese, Gregory Sidak, Michael Smith, and Gregory Werden. © The Author 2017. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com
TI - THE APPLE E-BOOKS CASE: WHEN IS A VERTICAL CONTRACT A HUB IN A HUB-AND-SPOKE CONSPIRACY?
JF - Journal of Competition Law & Economics
DO - 10.1093/joclec/nhx021
DA - 2017-09-01
UR - https://www.deepdyve.com/lp/oxford-university-press/the-apple-e-books-case-when-is-a-vertical-contract-a-hub-in-a-hub-and-659P8qImF0
SP - 423
VL - 13
IS - 3
DP - DeepDyve
ER -