On April 11 2012, an article by Jim Puzzanghera on the Los Angeles Times reported a possible legal suit against Apple Inc. and five other book publishing firms (Jim, 2012). The companies were being investigated for allegedly conspiring to fix the prices of e-books in their databases. For the Antitrust officials, this act violated some of the provisions of the US Antitrust policies and warranted investigations and a possible legal suit (Jim, 2012). In essence, the US has explicitly stated antitrust legislations that vehemently prohibit any business transaction that is likely to undermine competition in the market. The Sherman Antitrust Act (especially section 1) is one such Act that is precise on the transactions that may deprive US consumers of the benefits associated with competition.
By colluding with the publishing firms to fix prices of e-books, Apple Inc. company, after being investigated by the Antitrust officials, was found to have violated the provisions of section 1 of the Sherman Act (Waller, 2013). Actions by the accused companies involved monopolizing the interstate e-book business and shielding potential competition. This practice is a pure violation of the US Antitrust laws that prohibit unhealthy market competitions and creation of monopoly (Waller, 2013).
Market and price fixing arrangements between Apple Inc. and the five publishers clearly violate the Sherman Act, and the antitrust officials were tasked with investigating such infringements. The Antitrust officials emphasized that by merging Apple Inc. and the five publishing companies, market competition was reduced and a monopoly (imperfect competition) was likely to ensue (Waller, 2013). Essentially, a pure monopoly is characterized by the presence of and existence of a single seller and many buyers. In a monopoly, there are restraints on the entry and exit of firms into the market (Waller, 2013). Similarly, the firms in a monopoly have the capability of setting marking prices given that the consumers will be obliged to consume irrespective of the fixed prices.
This can be attributed to the fact that in a monopoly, there are no close substitutes, and the choices to consumers will be limited to the products from the Apple Inc. and the five publishing companies (Bradford, & Büthe, 2012). Notably, monopolies (such as the Apple Inc. and publishing companies) are price-makers while customers in this form of market system are price-takers. As such, companies operating in a monopoly are free to choose the production unit and the prices that will enhance the maximization of revenue (Bradford, & Büthe, 2012).
In a situation where there is a single firm supplying the product in the market, and the firm is also dictating the prices of that particular commodity, monopoly is claimed. A firm selling skin care oil for ladies and another producing hair coloring products describes a situation of highly differentiated products. The two firms in their respective market niches will do everything to remain relevant in the business by, for example, keeping any interested firm from accessing the supply market of ladies’ oil. In essence, monopoly is bad for any viable market as it deprives the consumers the benefits associated with competition. For example, in a monopoly, a firm may decide to fix the prices of commodities and given that there are no close substitute goods, the consumers are obliged to purchase at the prevailing fixed price that may be exorbitant for some customers.
In an oligopoly, a real example may be in the business of automobiles, produced and sold by a few individuals or firms. However, buyers in this type of market structure are many, resulting in high competition between the operating firms, which all wish to increase their ability to make more profits from increased sales. Oligopoly is beneficial for consumers given that all firms are competing for market control and will do everything possible – including a possible reduction in market prices – to attract a customer base. For example, when a firm in an oligopoly decides to reduce the market prices of products, the other firms are also more likely to reduce their prices in order to remain competitive for the benefit of clients. Correspondingly, if the same firm decides to increase their market prices, the other firms are less likely to increase their prices, further benefiting the consumers.
The arrangement between Apple Inc. and the five publishing companies was investigated to determine whether it violated any of US Antitrust Laws, for instance, the provisions of the Sherman Acts. Essentially, the arrangement to fix the prices of e-books deprived the consumers of benefits such as low market prices and the availability of substitute goods mostly associated with market competition, and punishable as a criminal felony in the US. The Antitrust officials further investigated the firms to determine the presence of an unlawful monopoly created by the plan to fix prices. Such anticompetitive conducts practiced by Apple Inc. and five publishing companies in the market are direct violations of the US Antitrust legislations, especially Section 1 of the Sherman Acts.
Bradford, A., & Büthe, T. (2012, September). The Law and Politics of Antitrust in Open Economies. In Annual Conference of the European Association of Law and Economics (EALE), Stockholm.
Jim, P. (2012). Antitrust Officials reportedly sue Apple, Publishers over e-books. Los Angeles Times.
Waller, S. W. (2013). Private Enforcement of Antitrust Laws in the United States: A Handbook, edited by Albert A. Foer & Randy M. Stutz. (Cheltenham, UK: Edward Elgar, 2012). World Competition, 36(2), 347-348.