Hachette v. Amazon: The Feud That’s Going Nowhere

By Alexandra Stembaugh | August 5, 2014

For a few months now, retail giant Amazon.com, and book publisher Hachette have been feuding. The most recent development in their fight came on July 30, 2014, when Amazon pushed for Hachette to allow the sale of e-books at a cheaper price of $9.99. The math behind Amazon’s reasoning is laid out clearly on their website. For every book priced at $14.99, Amazon would sell 1.74 more copies if the book was priced at $9.99.  As the saga stretches onward, Hachette’s bargaining power continues to erode, and it’s looking like this will turn into a clear win for Amazon.

The Background

The battle began earlier this year when readers logged on to Amazon only to discover the pre-order button for certain Hachette books, like J.K. Rowling’s “The Silkworm,” had disappeared. Amazon began understocking Hachette books. Customers reported the books they ordered took extra time to arrive. The website recommended users buy a non-Hachette book instead.

Some observers cite these tactics as instances of bullying by the retail giant. Many saw it as a new low, since the company was actively damaging the customer experience. More than 900 prominent authors have staked their positions against Amazon. Stephen Colbert, carried by Hachette, is not just mad, but “mad prime.”

E-book pricing disputes are nothing new. Book publishers have long pushed for an “agency” model of pricing, where the publishers dictate pricing. Amazon instead advocates a “wholesale” model, where retailers set the retail price and can offer discounts. Publishers aren’t fans of these hefty discounts which can give one retailer–like Amazon–a huge advantage.

The “big five” publishers–Hachette, HarperCollins, MacMillan, Penguin Random House, and Simon and Schuster–thought they found a way out of the issue when they signed contracts with Apple in 2010 to ensure an agency pricing model for e-books. Amazon was not happy. The Department of Justice’s Antitrust Division rushed to Amazon’s aid and brought a suit against these companies for price fixing. The publishers all settled out of court, but Apple was found guilty of price-fixing–a decision it is still appealing. Since the settlement, Amazon has been allowed to discount e-books up to 30 percent. But any discount by Amazon comes from their own pocket, which obviously isn’t preferable for the company.

A Lawsuit in the Works?

With the 2012 settlement set to expire this year, it is likely the recent dispute is Amazon’s attempt to open a new window for pricing negotiations. Amazon wants to buffer its own earnings rather than taking a hit from out-pricing competitors. Publishers are fearful Amazon will dominate the market even further, demand lower wholesale prices, and squeeze profit margins to zero.

Despite Amazon’s questionable tactics, it is difficult to see how Hachette could win in an antitrust suit against Amazon. First, Amazon is not a classic monopoly. If anything, Amazon would be a monopsony. While a monopoly occurs when a dominant seller can raise prices of what it sells, a monopsony occurs when the buyer of goods can unlawfully lower the price of what is buys. Both can distort the market, and both can violate antitrust laws.

Amazon controls more than 60 percent of the e-book market and more than 40 percent of new book sales. But simply dominating the market is not an antitrust violation. The precedent for pushing a monopsony case against Amazon does not look promising. There has never been a case in U.S. competition law where a single company was declared a monopsonist. Most scholars today agree the Amazon and Hachette dispute is just that–a typical business dispute–rather than an antitrust violation.

“Dominant Power”

Section Two of the Sherman Antitrust Act, the 1890 Act which regulates anti-competitive business practices, outlaws monopolistic power in the relevant market acquired or maintained through exclusionary or anti-competitive behavior.

By bringing a lawsuit, Hachette would first have to prove Amazon is the dominant buyer in the “relevant market.” It is unclear if the market would be defined as the market for e-books, for Hachette books in general, or for Hachette books online. For Amazon to be the dominant power in the market, Hachette must have no other viable options to sell their e-books. Since publishers do have the freedom to sell e-books through other websites, many argue Amazon cannot be considered a monopsony.

“Anticompetitive Practices”

Secondly, Amazon must have engaged in “exclusionary or anticompetitive practices,” such as refusal to deal or predatory pricing. “Refusal to deal” involves restricting the supply of goods or the methods of buying or selling goods. By partially cutting off Hachette from the market in recent months, the argument could be made that Amazon is refusing to deal. However, courts narrowly interpret “refusal to deal” and are unlikely to see Amazon’s acts as an antitrust violation.

A lawsuit could be brought on the grounds that Amazon is engaged in predatory pricing practices by setting low prices to drive out all other competition. However, the bar to prove predatory pricing is very high. It would be hard to prove Amazon is not simply engaged in legitimate price competition. Since antitrust suits aim to help consumers, low prices are not typically seen as a problem.

Proving predatory pricing usually means proving that suppliers are forced to sell books at such a loss that there is decrease in the overall supply of books for consumers. So far this has not been the case. There has been no reduction in the variety of new books, nor has Amazon driven out all competitors to later jack up prices themselves.

The Upshot

Book publishers realize how little power they have against Amazon, so the recent trend in the industry has been to merge for greater bargaining power. Penguin recently merged with Random House, and HarperCollins bought Harlequin. Bigger publishers mean greater power plays and a better chance for even pricing negotiations with Amazon.

Ultimately it isn’t likely that Hachette has a case against Amazon on its own. If anything, the legal battle may be whether Amazon engaged in deceptive sales practices by saying certain Hachette titles were unavailable. For now, Amazon’s market power itself isn’t hurting consumers’ wallets, and Hachette can still sell e-books through other vendors. The pricing wars will continue, but don’t expect Hachette to win an antitrust suit anytime soon.

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Alexandra Stembaugh is a senior at the University of Notre Dame studying Economics and English. She plans to go on to law school in the future. Her interests include economic policy, criminal justice, and political dramas. Contact Alexandra at staff@LawStreetMedia.com.

Featured image courtesy of [Karin Lizana via Flickr]