Price-Fixing Suit Could be a Spot on Apple

Will consumers associate “price-fixing” with the popular brand?

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Several news sources and blogs have at various times applied the term "evil empire" to Apple, blasting some of its policies on distributing music and news content. Today they got more fodder, when the Justice Department filed an antitrust suit against Apple and five major publishers, accusing them of price-fixing e-books. Three of the publishers—Hachette, HarperCollins, and Simon & Schuster—have agreed to a settlement, as the Justice Department announced on Wednesday. The ramifications could include an Apple disadvantage in the e-book market, not to mention another spot on Apple's brand.

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The Justice Department says the alleged collusion is fundamentally unfair to consumers. "For the growing number of Americans who want to take advantage of this new technology, the Department of Justice is committed to ensuring that e-books are as affordable as possible," Attorney General Eric Holder said at a Wednesday press conference. Apple has told U.S. News that it declines to comment on the matter.

Previously, retailers had set their own e-book prices. To gain an advantage, Apple's e-book rival Amazon had discounted some popular books to $9.99. The government's suit accused publishers of colluding with Apple to set prices higher. Under the publishers' alleged agreement with Apple, the publishers—not retailers like Apple and Amazon—set the prices, and gave Apple a 30 percent cut of its e-book sales. This ended Amazon's discounts and instead moved prices in the e-book marketplace up to $12.99 or $14.99 for many popular titles.

No longer. While it remains to be seen what will come of the case against Apple and the other two publishers, Macmillan and Penguin, the settlement sets strict limits on the sort of price agreements that the Justice Department is alleging took place. Among other things, the terms of the settlement require the three publishers to terminate their current contracts with Apple, and to terminate any similar contracts with other sellers that set prices, though all of these contracts can be renegotiated. In addition, there is a two-year prohibition on preventing retailers from discounting retail prices.

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But the market has shifted, and e-book price expectations are now well over $9.99. It's not clear that the e-book marketplace will shift back down to that price level, says Harry First, professor of law at NYU School of Law.

"It's hard to put Humpty Dumpty together again," he says. "Will [the old prices] come back? What will Amazon do? I don't know."

In addition, after two years, the publishers could individually come back to Apple—or Amazon, if they so chose—and pursue the same types of agreements, says First. That's because publishers' real transgression arose not from the their agreements with Apple but with the alleged mass agreement. Had the publishers individually made such deals with Apple, it would not have been unlawful, he says.

One ramifications of this could be a blemish on the respected Apple brand.

"They seem to have lots of e-mails, and statements from Apple, which presumably they call the ringleader in this, coordinating this cartel," says First.

If consumers perceive Apple not only to be fixing high prices but also intransigent in the face of the allegations, says Jeffrey Durgee, professor of marketing at Lally School of Management and Technology at Rensselaer Polytechnic Institute, it could also hurt the company's popular appeal.

"Apple does hurt itself when it thumbs its nose at the courts, the American system, and that could hurt it." Apple's "brand personality," says Durgee, is that of "a maverick, but not outside the law."

However, there is in fact a case to be made for why Apple's pricing system is, in fact, better for consumers, says Catherine Tucker, associate professor of marketing at MIT's Sloan School of Management.

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"What Apple was trying to do was ensure that they had a very simple pricing policy on their books, and there's evidence out there that says that consumers like that," she says. Having to hunt for a bargain, for example, can be time-consuming. Knowing what price an Apple e-book is going to cost every time makes purchasing easier, if a bit more costly. Depending on what happens with the suit's remaining firms, consumers may perhaps get to keep some of that pricing simplicity...even if they don't get to keep a few extra dollars.

Corrected on : Update: This story has been updated to reflect Apple's decision not to comment on the Department of Justice lawsuit.