The Federal Prosecution Of Apple Inc. Is Pointless And Harmful

By Richard Rush & Wayne Crews

The Justice Department’s prosecution of Apple for allegedly violating antitrust laws is but the latest example of misguided federal efforts that aim to protect consumers, but end up doing more harm than good. The DOJ’s stated goal is to bar companies from engaging in anti-competitive practices, but its actions will hinder innovation.

The trial, which began this month, stems from accusations Apple allegedly conspired to raise prices of electronic books (e-books) through contracts with several major U.S. publishers. The DOJ claims this was an attempt to undermine competitor Amazon’s ability to sell e-books at the low price of $9.99, and to squeeze out more profits from consumers left with fewer options.

Remarkably, given the DOJ’s long history of antitrust fishing expeditions seeking to create work for its lawyers, the department appears to have found an actual instance of a company clearly running afoul of the Sherman Antitrust Act, given the letter of the law. However, instead of confirming the need for stricter antitrust enforcement, this prosecution in fact shows how pointless our antitrust laws are.

Even if Apple were trying to capture monopoly profits in the e-book market, such efforts would still fail, even without government taking action, because of the market’s highly competitive nature and evolving dynamics. Rapidly evolving technology and market forces render such prosecutions irrelevant as soon as they’ve begun.

This insight dates back to Adam Smith, who warned that businessmen often engage in “conspiracies” to “raise prices” for their own narrow gain. But far from arguing that such collusion calls for state intervention, Smith maintained the free market would address the problem, because “an effectual combination” requires the “unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind.” In other words, competitors will move to provide the same product or service at a lower price because there are profits to be made.

A cursory glance at the publishing market reveals that there are literally thousands of firms waiting for an opportunity to undercut their competitors’ prices to gain greater market share. Applying Smith’s reasoning, there is little reason to believe that any would-be monopolists could corner some segment of the market without eventually coming under pressure from new competitors.

More importantly, the e-book industry is going through an innovative process known as the atomization of publishing, whereby publishers are being phased out as middlemen between authors and retailers. Mike Shatzkin, a partner of DigitalBookWorld.com, estimates: “Soon — in the next 5 or 10 years — every university (perhaps most departments within a university), every law firm and accounting firm and consulting firm, certainly every content creator in other media, as well as most manufacturers and retailers will become book publishers too.”

With digital content easy to produce, and online advertising’s ability to support it, publishers face a diminishing role, though many will successfully adapt and those that are phased out will not shut down overnight.

Were Apple’s supposed conspiracy to succeed, consumers might pay more for their e-books for some time, but that rise in prices is a necessary market signal. It would either be quickly undercut by new competitors or further incentivize authors and retailers to bypass publishers at an even faster pace. If the DOJ’s injunction against Apple has accomplished anything, it is to slow down this transition.

The lesson to take away from this episode is that we don’t need federal prosecutors to protect us in a fluid market where the most profit to be had is by satisfying customers.

Richard Rush is a research associate at the Competitive Enterprise Institute where Wayne Crews is director of technology studies.