Booksellers Seek Tacit Collusion to Fight Against Amazon

Amazon has a competitive strategy when it comes to their e-books: First, offer the cheapest prices. Second, become the monopoly. 

Done and done. 

In 2012, Amazon offered top-notch, brand new e-books for an astoundingly low price of $9.99, sometimes even coming at a loss to themselves (this was lower than what they were even paying the publishers for the books). Whether their plan was simply predatory pricing or gaining a competitive advantage in order to raise prices in the future, it doesn't matter. Other booksellers noticed this move. Since they didn't have pockets as deep as Amazon, they were worried.

Seeing this threat of rivalry, Apple and five other major book sellers realized that with a price that low, they would be less likely to earn economic profits. So, they successfully implemented a collusive strategy in order to exploit an opportunity to neutralize the threat: coordinate their production and pricing strategies indirectly by observing the output and pricing decisions of other firms. (Otherwise known as tactic collusion.) 

To break Amazon's monopoly, these publishers raised prices. To do this, Apple conspired with the publishers so they would all move from the $9.99 “wholesale” model to a tiered “agency” model that gave publishers the power to dictate retail prices, after which they coordinated a price hike. This would ultimately raise book prices by up to 40%, thus challenging Amazon and forcing them to raise its prices or lose access to all those books if they did not accept the new arrangement. 

Funny enough, this resulted in the Department of Justice (DOJ) filing an antitrust lawsuit against Apple and the other publishers, the penalties of which are in effect until 2018. At that time, we will get to see if the agency model can prevail, even if it started from less-than-wholesome foundations.

More importantly, I stated that this was a tacit collusion strategy. Collusion of any sort exists when firms in an industry agree to coordinate their strategic choices to reduce competition in an industry. However, with Apple being at the center of the conversations with the other publishers, it sounds like it could potentially be explicit collusion, especially now that the law is involved (explicit collusion is typically illegal). Two other reasons this could be explicit collusion:

1. It's explicit when firms negotiate production output and pricing agreements directly in order to reduce competition.
2. The best way a firm can learn what its rivals' intentions are is to communicate directly with each other about their current price and output decisions and their future price and output decisions. Then they can jointly maximize profits.

According to the evidence, Apple could have talked to each publisher separately and this could be the result of “parallel” actions by competitors facing the same market pressures. The fact remains that there was coordination and intent to co-operate, and they are a great example of a business-level cooperative strategy -- we don't have $9.99 Amazon e-books anymore, do we?

Sources: 

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• Litigation & Trial by Max Kennerly [http://www.litigationandtrial.com/2012/04/articles/business-lawsuits/apple-ebooks-antitrust/]
• Pick your Monopoly: Apple or Amazon? by Steven Pearlstein [https://www.washingtonpost.com/pick-your-monopoly-apple-or-amazon/2012/03/05/gIQA0kBB4R_story.html]