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Why Apple's E-Book Pricing Model Might Not Be Unfair

Why Apple's E-Book Pricing Model Might Not Be Unfair
Photograph by Scott Eells/Bloomberg

The U.S. antitrust lawsuit against Apple and five major book publishers alleges that they conspired to fix prices for e-books ahead of the 2010 launch of the iPad and iBookstore, forcing Amazon to raise e-book prices for its Kindle. The heart of the argument raised by the Department of Justice is that Apple’s “agency” model of selling e-books, in which the retailer retains a fixed percentage of the book’s sale price, is fundamentally less fair and leads to higher retail prices than the traditional “wholesale” model, in which the retailer buys a book from the publisher at a discount and resells it at a profit.

A key difference between the agency and the wholesale models, underscored in the lawsuit, is the process of setting the retail price. In Apple’s agency model, the publisher sets the final price and the retailer (Apple) receives a fixed commission based on that price. (Apple has the right to match the lower price of another online retailer.) In the wholesale model, the publisher sets a suggested retail price (often imprinted on the book cover) and sells the book at a discount to the retailer (Amazon), which is then free to set a price of its choosing. The argument against the agency model is that because it removes retailers’ control over the final price to consumers, it leads to higher prices and is therefore unfair to consumers.