Market Structure, Conduct and Performance - Violations of Antitrust Laws - Case Study Example

Market structure, conduct and performance: Violations of antitrust laws BY YOU YOUR SCHOOL INFO HERE HERE Market structure, conduct and performance Introduction In 2012, the United States of America filed a lawsuit against Apple, Inc., Harper Collins, and several other organisations indicating a violation of antitrust laws. Antitrust laws are competition laws which prohibit companies from engaging in practices that block the practice of free trade between competing businesses in a free market economy. Antitrust further regulates companies from engaging in practices that create the ability to dominate a market, such as price gouging or other predatory pricing strategies (Taylor 2006). In the aforementioned lawsuit, the U.S. alleged that Apple and many other book publishing companies deliberately established a collusive agreement that would force Amazon.com to raise its prices on the sale of e-books in order to ensure that Apple would achieve a higher profit margin on e-books. Amazon had been able to sell customers e-books for a standardised price of $9.99, thereby ending price competition in this market. What occurred is that the book publishers identified as defendants in the lawsuit utilised their ability to control the sale of e-books to various retailers, thereby increasing the price by which retailers were forced to sell e-books to various customer markets. This essay identifies the reasons for why this type of practice is considered illegal, discusses the structural factors for why collusion is obstructed by competition law, and the practices of firms in the e-book retail industry that created the foundation of collusion between the identified firms in the free market economy. Why collusion is prohibited In an oligopolistic market structure, there are a small number of sellers of a product and rival firms’ decision-making is strongly influenced by the competitive actions of competing companies in the industry (Estrin and Laidler 1995). In a free market economy, there is minimal government regulation which determines the ability of rival firms to establish their own pricing mechanisms so long as such pricing strategies do not impede the ability of other retailers to compete successfully. In the case study, Apple would have been limited to achieve higher profitability through the sale of e-books to consumer markets due to the high level of pricing control that Amazon had previously established in this market. At a standardised price of $9.99 for all e-books, other businesses in the oligopoly would not have been able to achieve substantial profitability as sellers of e-book products. Hence, collaborative agreements between Apple and several other book publishers occurred which established that such businesses as Harper Collins and Simon and Schuster (among others named in the suit) would agree to set higher prices as e-book vendors, thereby driving out Amazon’s ability to maintain its $9.99 pricing model. Apple was guaranteed a 30 percent profit when prices were raised up to $16.99 (retail) under this collusive agreement. Collusion is restricted in a free market economy as it provides significantly unfair advantages to those involved in attempting to limit the competitive prowess of rival businesses (Sullivan and Sheffrin 2003), such as with the case study involving Amazon.com. Amazon, prior to Apple’s attempt to compete in the e-book market, maintained significant buyer power and thereby was able to raise the switching costs of e-book suppliers as one of the most dominant e-book retailers. Buyer power is recognised by Porter (2010) as being a factor that gives businesses considerable competitive advantage when taking into consideration the supply chain and procurement. However, as the e-book industry evolved, new market entrants (such as Apple) now maintained the operational model and technologies to sustain the sale of e-books, thereby injecting new buyers into the market and subsequently lowering the switching costs of such suppliers as Harper Collins. With more buyers available, Amazon no longer maintained its competitive advantages in terms of e-book procurement and being able to control price negotiations along the supply network. With Apple now making it clear that it was disappointed that pricing for e-books had gotten consumers used to a low pricing model, the only way to control pricing was to have the main suppliers (those identified in the aforesaid lawsuit) charge much higher prices for e-books at wholesale (not retail) prices. Therefore, in order for Amazon.com to make a profit, they would be absolutely forced to raise its pricing models. This is the rationale for why collusion is considered an illegal and unfair activity in certain market environments. Amazon had spent years developing a business model that provided the firm with much buyer power in the supply chain that was built on fair and legal competitive practices. Apple, a new brand name in e-book sales, was able to successfully undo this market authority experienced previously by Amazon by having major book publishers agree to spontaneously change their sale prices to major retailers in order to give Apple a rapid advantage in the market. Even though Amazon had proven that e-book sales could be successful at a standard price of $9.99, the expectations that Apple and several suppliers of e-books should be obtaining higher profitability led to an agreement that drove out Amazon’s dominance in the e-book marketplace. The government and antitrust laws recognise that collusive agreements are damaging to the consumer and thereby are prohibited to ensure fair competition as well as safeguarding the needs of consumer markets which are often targets to corporate covetousness in the free market economy. Anti-collusion laws are protective legalities that ensure consumer markets and businesses are protected from monopolistic behaviour by firms with insatiability for profit growth, willing to take advantage of market weaknesses to achieve this goal. Structural factors impeding collusion It was the ability of major book publishers in the e-book industry to ensure their intellectual property protections that guaranteed the firms were able to enter collusive agreements to force Amazon to offer customers much higher prices. Having only a handful of suppliers in the oligopolistic market structure, when coupled with intellectual property protections mandated by legalities, gives suppliers considerable power in the industry. The e-book industry maintains many barriers that make it virtually impossible for more sellers to enter the market which allows such companies as Harper Collins to maintain their price controls along the procurement network. A combination of marketing advantages gained by major book publishers over years of operations, control of all essential supply resources, and the high costs of market entry for incumbent competitors are what provided suppliers with the ability to force price increases in the retail sales model for major buyers such as Amazon. In this case, the major book publishers alleged as defendants in the court case could have quadrupled the price of procurement to major retailers and the buyers would have had very little influence or control over this activity, thereby being forced to pass higher prices onto their consumer markets. Furthermore, the market was heavy influenced by consumer preferences and rising demand for e-book sales with growing ease and convenience provided by the tangible technology availability to access a variety of e-books. The market, being in its immature and growth stages, had not yet established an equilibrium price for e-book products. Demand and supply were both increasing as consumers began to prefer e-books over traditional hardcover book sales in previous years. Therefore, consumers had not provided the influence altering the supply or demand curves to establish a set price that consumers would be willing to pay for e-books. This gave major suppliers the ability to establish higher prices for wholesale procurement on e-books in a market that had not yet stabilised. Dawes (2004) highlights, in marketing theory, that pricing is most often the criterion by which consumers judge product quality. Being such an immature market that had not yet achieved price equilibrium between supply and demand, consumer markets did not maintain any significant influence on the pricing structures of e-book suppliers and retailers which gave such companies as Simon and Schuster a very high advantage in the market to establish higher prices. E-books are also rather homogenous products that are not easily differentiated. With Amazon being the market dominator in e-book sales prior to Apple’s entry as a retailer incumbent, pricing was the most significant promotional tool to ensure that customers were loyal to Amazon.com for their e-book procurement needs. No competitive market structure designed to differentiate one brand of e-books from another had yet been established, thus the $9.99 standardised price offered by Amazon, based on the theory provided by Dawes (2004), allowed Amazon to be perceived by consumer markets as the most top quality retailer of e-books. Furthermore, the wholesale model that had driven the majority of supplier procurement in e-book retailing allowed companies to freely set their own prices, which gave Amazon (which maintained ample capital resources) to provide consumers with very low cost pricing structures on e-book sales in an environment with virtually no competitive forces in e-book sales. Lack of new competitive entrants into this market made Amazon the dominant seller of e-books which threatened the profit expectations for new incumbent entrants such as Apple. Therefore, all situations considered, if there had been a higher volume of e-book suppliers instead of the handful of businesses operating in the oligopolistic market structure, it would have impeded the ability of those businesses identified in the case study lawsuit to create collusive, mutually-beneficial anti-competitive agreements with Apple. It would have provided lower switching costs for companies such as Amazon along its procurement model for e-books and given Amazon much more price negotiation power along the supply chain. Furthermore, if the market had been more mature, there would have been established brand differentiation occurring competitively whereby consumers would not only be judging quality on price alone, but on other mitigating factors associated with marketing brand management. These structural factors prevent collusion from occurring successfully, however the market structure of supplier and available buyers of e-books under the wholesale model made it relatively easy for such companies as Harper Collins to engage in anti-competitive pricing activities. Strategies leading to collusion success Consumer price elasticity was unknown in this developing market environment which allowed suppliers of e-books to establish much higher wholesale prices to buyers such as Amazon.com. Price elasticity of demand involves consumer responsiveness to price changes in a market and affects the volume of a product demanded by consumers (Gillespie 2007). Therefore, consumers had not yet established significant influence in demand and apparently were willing to pay the higher retail prices that were being coerced by the collusive agreements between Apple and major publishers. It would be some time, according to economic theory, before consumers began rejecting this innovative method of accessing literature based on recurring price increases. The only available substitute in this market, a threat to competition according to Michael Porter (Hill and Hoskisson 2004) were higher priced, printed books that had once dominated the consumer market prior to the advent of e-book availability. Therefore, again, under economic theory, lack of substitutes impacts the demand ratio of consumers, making them willing to pay higher prices in order to ensure procurement of their desired goods. This is why the collusive agreement between main suppliers of e-books and Apple was so instantly successful and led Amazon to raise its prices to consumers. Conclusion As identified by research and the legal case study provided, it illustrates how companies in an oligopoly are able, in some market conditions, to create collusive agreements utilising price changes to gain competitive and profit advantage. It would not be until this market was more mature and an equilibrium price was influenced by consumer elasticity that this type of activity would be impossible to achieve positive results. However, as identified, the market was ripe for allowing such illegal and anti-competitive behaviours to achieve success which led to unfair competition and, ultimately, a lawsuit alleging improper business behaviour by all defendants identified as conspirators. Unfair competitive activities ultimately harm consumers and legal protectionism under antitrust laws ensures that oligopolistic market participants remain loyal to ethical pricing activities internationally and within the United States. References Dawes, J. (2004). Assessing the impact of a successful price promotion on brand, category and competitor sales, Journal of Product and Brand Management, 13(5), pp.303-313. Estrin, S. and Laidler, D. (1995). Introduction to microeconomics, 4th edn. Harvester Wheatsheaf. Gillespie, A. (2007). Foundations of economics. Oxford: Oxford University Press. Hill, I. and Hoskisson, C. (2004). Strategic management, competitiveness and globalization: concepts and cases, 6th edn. South Western. Porter, M.E. (1998). Competitive strategy: techniques for analyzing industries and competitors. New York: Free Press. Sullivan, A. and Sheffrin, S.M. (2003). Economics: principles in action. Pearson Prentice Hall. Taylor, M.D. (2006). International competition law: a new dimension for the WTO? Cambridge: Cambridge University Press. Read More