Like a scene from a movie, executives from the largest U.S. book publishers gathered in private dining rooms around New York to discuss how to unseat Amazon, the king of the e-book market. With certain bestsellers and new releases priced at just $9.99 for its Kindle, Amazon ruled the market in e-book and e-reader sales in 2009.
The group’s ringleader, Apple, wanted a piece of Amazon’s 90 percent share of the market. During their long conversations, the publishers colluded with Apple to strategize how to seize control of e-book pricing — and it worked.
By the first quarter of 2010, the publishers had captured 48 percent of U.S. e-book sales. Bestseller prices rose 40 percent, allowing Apple to charge as much as $14.99 for popular e-books.
The conspiracy between Apple and the publishers succeeded in raising e-book prices, but it was a costly move. In 2012, the U.S. Department of Justice filed an antitrust case against the tech giant, which was ultimately ordered to pay $450 million in retribution and legal fees.
“Apple did not want to compete with Amazon on price and proposed to the publishers a method through which both Apple and the publishers could each achieve their goals,” Judge Denise Cote said in the ruling against Apple.
“Through their conspiracy they forced Amazon (and other resellers) to relinquish retail pricing authority and then they raised retail e-book prices. Those higher prices were not the result of regular market forces but of a scheme in which Apple was a full participant.”
If there’s a lesson companies can take away from the Apple verdict, it’s that price fixing isn’t as easy to get away with as it used to be.
“Companies cannot ignore the antitrust laws when they believe it is in their economic self-interest to do so,” said U.S. Assistant Attorney General Bill Baer.
Although collusion has been illegal in the United States since the Sherman Act passed in 1890, price fixing was largely treated as a mere misdemeanor up until about 25 year ago. Most companies “saw it as like going 5 miles per hour over the speed limit,” said antitrust attorney Roxann Henry.
“It’s tempting to see it as victimless because each customer is hurt only a little,” said famous whistleblower Mark Whitacre. “But it’s bank robbery without the mask and gun.”
That all changed in the mid-1990s after Whitacre exposed a scheme to rig prices for lysine, an animal feed additive. The brazenness of the conspirators shocked both authorities and the public.
Since then, enforcement has gotten tougher and penalties have become harsher. The maximum fine for U.S. corporations has grown tenfold — and that doesn’t take into account the nearly inevitable civil litigation, in which conspirators can face up to three times more damages. Private collusion lawsuits cost U.S. companies $33 billon between 1990 and 2008. That’s four times the amount generated from government fines.
But punishment isn’t just doled out to the company as a whole. Individual employees, officers or directors who authorize or participate in a violation can also be convicted or imprisoned. The United States leads the world in putting price-fixers behind bars; the average jail term has risen from eight months to more than two years.
Like all antitrust laws, the prohibition on price fixing is intended to ensure market competition and protect consumers from artificial or unfair price inflation.
“When consumers make choices about what products and services to buy, they expect that the price has been determined freely on the basis of supply and demand, not by an agreement among competitors,” says the Federal Trade Commission (FTC).
Price-fixing cartels have historically proliferated in industries involving standardized products, such as industrial components, that inspire little customer loyalty. Today, however, the collusion landscape is changing. Products as diverse as seafood, computer monitors and candle wax have all been subject to price fixing in recent years, and a growing number of cases involve digital commerce — such as Apple’s e-book conspiracy.
Two-thirds of cartels form in industries where the top four firms dominate 75 percent or more of the market. Most last around five years, but some continue for decades.
To avoid breaking antitrust laws, businesses should understand that:
Circumstantial evidence is enough for a conviction. When competitors agree to fix prices, it’s almost always illegal — but price fixing isn’t usually so obvious. For that reason, authorities don’t need to prove that the conspirators made an overt agreement.
“Price fixing, bid rigging, and other collusive agreements can be established either by direct evidence, such as the testimony of a participant, or by circumstantial evidence, such as suspicious bid patterns, travel and expense reports, telephone records, and business diary entries,” says the U.S Department of Justice.
Conversations can be dangerous. A simple conversation between competitors can be enough to arouse suspicion. For example, it’s a red flag for enforcement authorities if competing businesses discuss:
As Adam Smith said in The Wealth of Nations, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Companies must be wary when talking to competitors to avoid raising allegations of collusion.
Enforcement authorities reward whistleblowers. Most big price-fixing cases today are exposed when one co-conspirator snitches on the other. That’s because the DOJ has a leniency program that incentivizes companies to snitch on their fellow price-fixers. It’s been so successful that some 50 other countries have imitated it.
Price fixing is illegal even when it increases competition. In defending itself against collusion charges, Apple argued that by unseating Amazon’s as e-book king, its agreements with publishers were actually pro-competitive. The company also attempted to show that the e-book market suffered no harm. But the court disagreed, affirming that even if Amazon’s low pricing was shutting out competition, it doesn’t justify collusion.
“Another company’s alleged violation of antitrust laws is not an excuse for engaging in your own violations of law,” Cote said. “It is essential to remember that the antitrust laws were enacted for the protection of competition, not competitors.”
A little collaboration between competitors can create a better business climate for everyone, but not if it harms consumers by undermining market competition. Businesses must tread carefully in all dealings with competitors to avoid potential accusations of price fixing or collusion.