a. What does Section 1 of the Sherman Act prohibit?
b. Was the agreement between Apple and the publishers a vertical or horizontal agreement? Why?
c. Was Apple's agreement with the publishers an example of a per se violation or a rule of reason violation? Why?
Amazon's e-book reader, the Kindle, not only changed how people bought and read books, it lowered prices dramatically.2 Amazon charged $9.99 for every e-book, no matter how much its print version cost. On many of the books it sold, Amazon lost money because it paid the publisher more than it charged customers. It did so to create a market where there had been none.
But publishers were unhappy because the $9.99 e-book price made it harder to sell print books. Why would anyone pay $30 for a hardcover? Also, publishers worried (with reason) that cheap e-books threatened the viability of the brick-and-mortar stores in which books were displayed and sold. But Amazon had such market power, it was able to ignore the individual publisher's pleas to raise prices.
On to this unhappy scene came Apple, about to launch its first iPad. To ensure the iPad's success, Apple needed to be able to offer books in its iBook store. Apple was not, however, willing to sell books below cost as Amazon did. But why would anyone buy from iBook store if its books cost more than Amazon's?
To solve this fundamental problem, Apple approached the six major U.S. publishers with a proposal: They would all agree on a higher e-book price for the iBook store, but also insist that Amazon charge the same higher price.3 Apple would benefit by obtaining titles for its I Book store, while also ensuring that competition with Amazon was based on technology (iPad versus Kindle), which Apple thought it could win, rather than on price, where Amazon had the advantage.
All of the publishers except Random House agreed to Apple's plan.4 they met, emailed and spoke on the phone with Apple and each other hundreds of times to negotiate the precise terms of the deal - in particular, the prices that would be charged for each category of books. All these discussions were hardly secret-the Wall Street Journal reported on them. Finally, a deal was reached.
The publishers then each individually informed Amazon of the new pricing structure. Amazon at first resisted but ultimately agreed to the prices that the publishers and Apple had negotiated . . . . but then sent a letter of complaint to the FTC. As a result of the Apple agreement, prices of e-e-book increased, in some cases by 50 percent or more.
The FTC and some states filed suit against Apple and the five publishers (Publisher Defendants), alleging illegal price-fixing in violation of §1 of the Sherman Act. The five publishers admitted guilt and settled their cases, but Apple went to trial.