Judge Denise Cote

Two economists file pro-Apple brief in e-book antitrust case

March 5, 2014: 4:58 PM ET

Judge Denise Cote, they write, doesn't understand markets. Or antitrust law.

Screen Shot 2014-03-05 at 4.05.45 PMFORTUNE -- I don't know how much weight friends of the court carry in the U.S. Court of Appeals for the Second Circuit.

But the pro-Apple (AAPLamici curiae brief filed Wednesday by two economists lays out clearly -- more clearly perhaps than Apple's own trial lawyers -- the economic and legal issues the company tried and failed to get across to Judge Denise Cote last June. (See The view from the hard benches.)

The document submitted by CalTech's Bradford Cornell and NYU's Janusz Ordover fills more than 30 pages, but the heart of their argument is laid out in a three-paragraph summary:

Efficient markets depend on firms acting in their independent business interests. In this case, the District Court's failure to consider the economics of the vertical agreements between Apple and the Publisher Defendants led it to infer that Apple facilitated and participated in a horizontal price-fixing conspiracy. The District Court never considered evidence and economic reasoning that the vertical agreements were in Apple's independent business interest in entering e-book retailing, wholly apart from any horizontal conspiracy.

The provisions of the agreements at issue—agency, 'most-favored-nation' (MFN) clauses, and price caps—can be instrumental in facilitating new entry, particularly into markets with an entrenched, dominant firm. In this case, the District Court disregarded economic evidence and reasoning that these provisions served Apple's independent business interest in entering the e-book market, where Amazon was a near-monopolist. The District Court also ignored economic evidence and reasoning suggesting that Apple's entry into e-book retailing, and not the MFNs, allowed the Publisher Defendants to persuade Amazon to switch from a wholesale to an agency business model.

The District Court also erred in equating price increases for some e-books with harm to competition. Apple's entry into the e-book retail market dramatically increased competition by diminishing Amazon's power as a retail monopolist (and its ability to pursue a "loss-leader" strategy that inefficiently priced e-books below their acquisition cost).  That increased competition gave publishers more bargaining power, thereby bringing ebook pricing closer to competitive levels. These errors threaten to chill competition by discouraging the use of common vertical contracting techniques that are often essential to facilitating the expensive and risky investments needed for entry into highly concentrated markets.  Our antitrust laws should encourage, not penalize, vertical contracting arrangements that facilitate entry and enhance competition.

Apple appealed Judge Cote's ruling two weeks ago. A DOJ spokesperson said it would file its brief in May.

LINK: Economist Amicus Brief

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