BACKGROUND INFORMATION

Price Fixing Horizontal price fixing occurs when competitors in the same line of business agree to set the price of goods or services they sell. Price fixing is defined as raising, depressing, fixing, pegging, or stabilizing the price of a commodity or service. Illegal price fixing includes setting minimum or maximum prices or fixing the quantity of a product or service to be produced or provided. Although most price fixing agreements occur between sellers, an agreement among buyers to agree to the price they will pay for goods or services is also price fixing. The plaintiff bears the burden of proving a price fixing agreement. Price fixing is a per se violation of Section 1 of the Sherman Act. No defenses or justifications of any kindsuch as the price fixing helps consumers or protects competitors from ruinous competitioncan prevent the per se rule from applying. Example If the three largest automobile manufacturers agreed among themselves what prices to charge automobile dealers for this years models, they would be engaging in sellers illegal per se price fixing.

In the following case, the court had to decide whether price fixing had occurred.

Case 22.1 Federal Court Case Price Fixing United States v. Apple, Inc. 791 F.3d 290, 2015 U.S. App. Lexis 11271 (2015)United States Court of Appeals for the Second Circuit

A coordinated effort to raise prices across the relevant market was present in every chapter of this story. Livingston, Circuit Judge Facts Amazon.com, Inc. (Amazon) produces and sells the Kindle, a portable device that can hold digital copies of books, known as e-books. Amazon offered desirable e-books, including new releases and best-selling books, for $9.99. The multi-billion-dollar book-publishing industry saw Amazons e-books, and particularly its $9.99 pricing strategy, as a threat to their way of doing business. Apple, Inc. created iBookstore on its iPad to sell and distribute e-books. Apple entered negotiations with the five largest publishing companies in the United States to distribute their e-books. Apple was not willing to do so at the $9.99 retail price to compete with Amazon. The publishers saw colluding with Apple as a way of breaking Amazons retail price and having both Apple and Amazon sell e-books at a higher price so that publishers and Apple could make a higher profit on their e-books. To put pressure on Amazon to raise prices the publishers agreed to withhold books from Amazon. In two months, Apple had orchestrated an arrangement whereby it had coerced the five publishers to enter the same agreement with Apple whereby the publishers had the authority to set prices of their books sold on Apples iBookstore. The result was that Amazon was forced to give in and enter agreements with the publishers that raised the price of e-books sold on Amazon, which increased the profits that the publishers made on e-books. The price of new e-books increased by 24 percent and the price of best-seller e-books increased by 40 percent. The U.S. Department of Justice (DOJ) filed suit in U.S. district court against Apple and the five book publishers, alleging that Apple, by entering into the same agreement with the five publishers, had conspired with the defendant publishers to engage in a price-fixing scheme to raise prices in the e-book market. The DOJ argued that this hub-and-spoke agreement between Apple and the book publishers constituted price fixing that was a per se violation of Section 1 of the Sherman Act. The defendant publishers settled their cases with the DOJ. Apple went to trial. The U.S. district court concluded that Apple, by orchestrating a conspiracy among five major publishing companies to enter an agreement to raise the retail price of digital books, had engaged in a per se violation of Section 1 of the Sherman Act. The district court issued an injunction against Apple that prevented it from engaging in similar conduct in the future. Apple appealed.

Issue Is Apple liable for violating Section 1 of the Sherman Act?

Language of the Court Because this conspiracy consisted of a group of competitorsthe publisher defendants assembled by Apple to increase prices, it consisted of a horizontal price-fixing conspiracy and was a per se violation of the Sherman Act. Courts have long recognized the existence of hub-and-spoke conspiracies in which an entity at one level of the market structure, the hub, coordinates an agreement among competitors at a different level, the spokes. The conspiracy among Apple and the publisher defendants comfortably qualifies as a horizontal price-fixing conspiracy. A coordinated effort to raise prices across the relevant market was present in every chapter of this story.

Decision The U.S. court of appeals affirmed the district courts decision that Apple, with the defendant publishers, had engaged in a per se violation of Section 1 of the Sherman Act. The court of appeals upheld the injunction against Apple that prevented it from engaging in similar conduct in the future.

Please use this discussion to talk about the following questions:

• Do you think that the agreement between the defendant publishers was a horizontal price-fixing agreement?
• Was Apple, the hub, as guilty as the spokes, the defendant publishers? Did Apple act ethically in this case?