AT&T plans to sell the new iPhone for $200. The lower-priced phone would give AT&T an attractive weapon to win new subscribers. AT&T’s revenue is an average of $95 a month from each iPhone customer, nearly twice the average of its conventional cell phone user. AT&T has a revenue-sharing agreement with Apple that requires it to give Apple 25% of its iPhone customers’ monthly payments. AT&T offers a $200 subsidy to customers who lock into the carrier for two years. It’s a small investment for AT&T for a large return. After giving Apple its cut of the revenue, AT&T receives between $70 and $75 a month per iPhone user, totaling more than $1,700 over the life of the two-year contract.
a. How does this arrangement between AT&T and Apple regarding the iPhone affect competition in the market for cell-phone service?
b. Does the iPhone arrangement between AT&T and Apple violate U.S. antitrust laws? Explain.