Apple's E-Books are Pro-Competitive
By David Henderson
The Wall Street Journal had an excellent editorial today (print) and yesterday (electronic) on the absurd antitrust suit against Apple. It’s titled “Throwing the Book at Apple.”
At the time, prior to the existence of the tablet device market that Jobs created with the iPad, Apple did not sell e-books. Amazon sold nine of every 10. Justice claims Jobs then forced Amazon and every other e-book distributor to adopt a new e-book pricing model that harmed consumers.
Yet the average retail price for “trade” e-books has since dropped to $7.34 from $7.97, and Amazon’s Kindle is still the industry leader with Apple trailing in third. Over the same period readers bought 447% more e-books, and they can choose from dozens of tablets for titles and other media content.
If you want to read more about this case, see the July 2012 Econlib Feature Article, “In Defense of Apple,” by Richard B. McKenzie. McKenzie lays out the economics more extensively. Here are two paragraphs from McKenzie’s article that cover some of the same ground:
Fourth, seen from the perspective of a world in which goods and their markets are not given, but must be created, firms need solid incentives to develop them, which means they also need market pricing power. The resulting “monopoly profits” can be welfare-enhancing. Even collusion (or collaboration) on price among competitors or among suppliers and resellers (e-book publishers and Apple, for example) can also be welfare-enhancing because the collaboration can expand the array and quantity of the goods sold. Monopoly pricing power and the resulting monopoly profits can cause producers to bring more goods than otherwise into existence. Seen from this perspective, consumers don’t lose the inefficiency, or “Harberger,” triangle from underproduction (which, in conventional monopoly graphics is the area bounded by the marginal cost curve and the demand curve to the right of the monopoly price); they gain as consumer surplus the rarely mentioned “Dupuit” triangle (which is the area above the monopoly price and bounded by the demand curve and the vertical axis). In short, you can’t consume what doesn’t exist. The prospect of temporary monopoly profits is what entices producers to develop new products. Consumers might not get the “statically optimal” amount of the good (which, again, is grossly unrealistic and unachievable), but at least they get the good.
Interestingly, since 2010, when Apple and the publishers were supposedly conspiring against consumers, e-book sales have escalated by several hundred percent and as a percentage of all book sales, perhaps, in part, because of the so-called “anticompetitive conspiracy.” That fact is prima facie evidence that the “conspiracy” is pro-competitive.
One criticism of the Wall Street Journal editorial. After the two paragraphs I quoted from the Journal editorial, the editors write:
Lower prices, more sellers and better products don’t sound like a return to the days of Standard Oil . . . .
Actually, with the exception of “more sellers,” that’s exactly what it sounds like. Here’s what I wrote in the March Econlib Feature Article, “The Robber Barons: Neither Robbers Nor Barons:”
He did so [Rockefeller of Standard Oil, New Jersey increased market share] by cutting prices and almost quadrupling sales. University of Chicago economics professor Lester Telser, in his 1987 book, A Theory of Efficient Cooperation and Competition, points out that between 1880 and 1890, the output of petroleum products rose 393 percent, while the price fell 61 percent. Telser writes: “The oil trust did not charge high prices because it had 90 percent of the market. It got 90 percent of the refined oil market by charging low prices.” Some monopoly!