Distribution, Competition, and Antitrust / IP Law

Price Erosion and Restricting Online Distribution Rights

English: Vegetables reseller at rue Mouffetard...

An early vegetables reseller. (Photo credit: Wikipedia)

A reader who works with clients who sell online asked me to address online distribution restrictions.  This is more-or-less the reverse of the question I addressed in “Can My Supplier Refuse to Sell Products to Me?”  As always, I offer general thoughts here, not specific legal advice.

First, to frame the issue a bit further – if you sell products online, particularly through third-party sites such as Amazon, eBay, etc., then you very well may have concerns about controlling not only product quality and service but also price.  Many online sellers are seeing price erosion caused by multiple distributors or resellers, and they want to know what they can do about it.

Before getting to the several possibilities below, keep in mind that if you – or anyone in your distribution chain – is a monopolist or near-monopolist, many of these possibilities may be problematic.  It’s often more difficult than you might think to figure out if a firm is a monopolist, but you can use market share as a sort of rough proxy.  A share above 40% starts putting you in the potential yellow zone.  A share above 60%-70% is often (though not always) evidence of monopoly power.

But let’s assume that neither you, nor your supplier (to the extent you have one), has a market share close to these levels.  In that case, what can you do to control product distribution – and particularly product pricing – on third-party Internet sites?

Exclusive distribution

First, you can be appointed (or appoint yourself) as the exclusive distributor of the product.  You can define the rights as they best work for your business.  You could have the exclusive rights to:

  • Distribute product anywhere;
  • Distribute product online; or
  • Distribute product on certain third-party sites (like Amazon).

By having exclusive distribution rights, you can of course maintain better control over product pricing.  (Note – I’m not talking here about actual price agreements – only the natural result of having a limited distribution network.)

Online distribution “territories”

You can appoint distributors, sub-distributors, or resellers for limited purposes – for example, you can have a single authorized sub-distributor for Amazon, another for eBay, etc.  Again, by limiting your distributors, you should see less intra-brand price competition.  Because the antitrust laws are designed to encourage inter-brand competition, a loss of intra-brand competition is not usually a matter of significant (or indeed any) concern.

Minimum advertised price programs

If you use a number of sub-distributors, or if you are one of many sub-distributors, you can use minimum advertised price (“MAP”) programs.  These do not limit actual consumer pricing (e.g., the pricing in an online checkout cart), but they impose limits on what prices can be advertised.  Sometimes advertising coop dollars are awarded for compliance with the program and withheld for non-compliance.  It is important to properly structure any MAP program.  If structured properly, they are lawful throughout the country.

Resale price agreements

This one is a little tricky.  Under federal law, agreements on resale prices are no longer per se unlawful.  They can still be condemned if they are anti-competitive, but it is usually quite difficult to establish that they are.

The problem is that at least several states still consider agreements on minimum resale prices to be per se unlawful.  So before entering into such agreements, you need to consider whether you are going to be selling or distributing products in those states.  If you’re selling on a national platform like Amazon, you may have to assume that you will be selling in all 50 states.

Price discrimination

Can you offer (or be offered) different (e.g., better) pricing than other distributors or sub-distributors?  Maybe, maybe not — there is a complex law called the Robinson-Patman Act that governs such price “discrimination.”  The law makes discrimination unlawful, but there are many exceptions, and I don’t have space to get into all of them here.

Terminations for price

If your sub-distributor is pricing product in a way you don’t like, you can always terminate him/her (putting aside any contract rights he may have).  However, it is very important that you make a clean termination – promises, commitments, and suggestions followed by a reinstatement can amount to an agreement, which again may still be per se unlawful in several states.


There are a number of options for limiting online distribution to maintain better control over product placement and pricing.  Keep in mind, however, that you should never agree on such options with your competitors – or else you may have a horizontal agreement on pricing, which can be extremely problematic.

Could Amazon Possibly Be a Monopolist? (Updated) (Again)

Deutsch: Logo von Amazon.com

(Photo credit: Wikipedia)

Franklin Foer, at the New Republic, argues that the answer is yes.  The alleged “crime”: predatory pricing — if not express, than at least in spirit.

In “There’s one huge problem with calls for anti-trust action against Amazon” at vox.com, Matthew Yglesias rightly points out that market share does not by itself a monopoly make, and further argues that

One important hint about Amazon’s non-monopoly status can be found in its quarterly financial reports. That’s where you find out about a company’s profits. In its most recent quarter, for example, Amazon lost $126 million. Losing money is pretty typical for Amazon, which is not really a profitable company. If you’d like to know more about that, I published 5,000 words on the subject in January. But suffice it to say that “low and often non-existent profits” and “monopoly” are not really concepts that go together.

Competitors hate Amazon because retail was an ultra-competitive low-margin game before Jeff Bezos ever came to town. To delve into this field and make it even more competitive and even lower-margin seems somewhere between unseemly and insane — but it’s the reverse of a monopoly.

Of course, U.S. price predation law can be violated when a firm prices below cost — and loses money — if it is likely to recoup its losses later after its competitors exit the market and it raises prices.  Query whether that is a possibility with online distribution — I don’t know, and am not taking a position for now, but there are certainly reasons to be pretty skeptical — low entry barriers and the like.

Interesting discussion, though.

Update: Paul Krugman says that “Amazon’s Monopsony Is Not O.K.”  But the problems he identifies seem largely theoretical.

Update II: The Wall Street Journal reports that Amazon just reported its biggest operating loss.

If Your Allegations Don’t Establish a Price Effect, You May Lack Antitrust Standing

ipod shuffle loja online leilao

ipod shuffle (Photo credit: sucelloleiloes)

In Somers v. Apple, Inc., Case No. 11-16896 (9th Cir. Sept. 3, 2013), the Ninth Circuit affirmed the district court’s dismissal of a putative class action against Apple, Inc., alleging antitrust violations in connection with Apple’s iPod and its Tunes Music Store.  The case illustrates the dangers of failing to adequately allege a price effect caused by a defendant’s purportedly anticompetitive conduct.

On behalf of a putative class, Somers alleges that she suffered injury in the form of inflated music prices. The premise of her overcharge theory is that Apple used software updates to thwart competitors (e.g., Real Networks) and gain a monopoly in the music download market, which permitted Apple to charge higher prices for its music than it could have in a competitive market. Specifically, Somers alleges that if Apple had not engaged in anti-competitive conduct to exclude Real Networks from the market, “it would have had to price Audio Downloads to compete on price with Real Networks.”

(Slip Opinion at 19-20.)

But, unfortunately for Somers, her allegations did not square with her overcharge theory.  Apple’s price for music downloads remained stable before the time it allegedly acquired a monopoly and afterwards.


if Somers’ overcharge theory were correct, then Apple’s music prices from 2004 to 2008 were supracompetitive as a result of software updates that excluded competition, and the emergence of a large seller such as Amazon would have caused iTS [iTunes] music prices to fall. But Somers alleges no such price reduction. Somers’ overcharge theory is thus implausible in the face of contradictory market facts alleged in her complaint. As Somers herself acknowledges, under basic economic principles, increased competition—as Apple encountered in 2008 with the entrance of Amazon—generally lowers prices.

(Id. at 20.)  “The fact that Apple continuously charged the same price for its music irrespective of the absence or presence of a competitor renders implausible Somers’ conclusory assertion that Apple’s software updates affected music prices.”  (Id. at 21.)

The Ninth Circuit agreed that price “is only one possible indicator in assessing competitive markets.  Monopoly power may be evaluated by other factors, such as barriers to entry or structural evidence of a monopolized market.”  (Id. at 21.)  “But if Apple did not charge inflated prices for its music, then this fact contradicts Somers’ overcharge theory, and there would be no basis for damages in the first place.”  (Id.)

While Somers suggested that it was conceivable that Apple’s music was not priced higher because of some other factor, such as superior product or greater efficiency, the court found that to state a plausible antitrust injury, a plaintiff must allege facts that rise beyond mere conceivability or possibility.  “We are only left to speculate on what factors could have permitted Apple to charge 99 cents continuously.”  (Id. at 22.)  Somers therefore failed to plead a plausible, non-speculative claim.

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Does Amazon Engage in “Razor and Blade” Pricing?

Third generation Amazon Kindle, showing text f...

(Photo credit: Wikipedia)

Some people have suggested that Amazon’s pricing of products such as the Kindle e-reader is similar to the pricing strategies of razor manufacturers: sell the primary product cheaply (and maybe even at a loss), and make it up on the back end through the sale of complementary products (in the case of razors, razor blades; in the case of Kindles, e-books).

The courts have not uniformly settled on an approach to this pricing strategy. When the products are actually bundled together for sale, some courts have concluded that bundled pricing is lawful so long as the price of the entire bundle exceeds some appropriate measure of its cost. See, e.g., Cascade Health Solutions v. PeaceHealth, 515 F.3d 383 (9th Cir. 2008).  But compare LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) (en banc).  State law is often even less clear in this area.  (California, for example, has a specific loss leader statute.)  And of course, Kindles aren’t actually bundled with e-books; you can buy a Kindle and never buy an e-book (you could use the Kindle to read your own PDF files, for example), so bundled pricing may not technically be involved.  (Razors are almost always sold with some blades, by contrast.)

Given the somewhat unsettled nature of the law, I was interested to see a Wall Street Journal / AllThingsD interview last week with Amazon’s founder and CEO Jeff Bezos.

Mr. Bezos stated that Amazon does not like the razor and razor blade model, but also does not like the “other” model, “where you make a lot of money on the device.” As to the Kindle specifically, Amazon does not want to “lose a lot of money on the device.” Mr. Bezos wouldn’t disclose specifics, though.

So for whatever reason, even though Amazon perhaps arguably could do so, it apparently isn’t losing money on Kindles and making it up on e-books. (If it were doing that, it’s hard to see how Amazon could be engaged in e-book price predation, as some have alleged.)

The Kindle price points are impressive, though. I have no actual information, but I would guess that, given Mr. Bezos’ comments, Amazon is probably just about breaking even on the Kindle hardware (in total – maybe not on each device, especially the newer, more sophisticated ones). Amazon seems happy to sell you a Kindle, but they are equally happy to sell you books that you read on a tablet or a PC. In the very long run, selling Kindles helps create and maintain demand for e-books, and Amazon still hopes to be king of e-book distribution.

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You Can’t Try to Monopolize a Market In Which You Don’t Compete

That message was delivered, again, by the court in Infostream Group, Inc. v. PayPal, Inc., 2012 U.S. Dist. LEXIS 122255 (N.D. Cal. Aug. 28, 2012) (Illston, J), which dismissed antitrust claims against PayPal.

In Infostream, adult, “nontraditional” online dating services objected to PayPal’s refusal to deal with them, and alleged that PayPal’s contractual excuse was pretextual because PayPal was dealing with competitors such as Ashley Madison.com and ArrangementFinders.com. Plaintiffs alleged that PayPal has a monopoly in the “Confidential Payment Services” market and exercised its monopoly power in that market to injure competition in downstream markets, including the “Specialty Online Dating Services” market in which plaintiffs compete.

The problem for plaintiffs is that PayPal does not compete in the plaintiffs’ market. In Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536 (9th Cir. 1991), the Ninth Circuit rejected monopoly leveraging doctrine as an independent theory of liability under the Sherman Act.

Although plaintiffs alleged that they had a “belief” that PayPal has an ownership interest in plaintiffs’ competitors, that allegation raised plausibility concerns under Iqbal and Twombly. Moreover, plaintiffs did not allege a dangerous probability of success in the downstream market, and in fact “wholly failed to allege any specific facts with respect to market power of their competitors . . . .”

The court gave plaintiffs leave to amend.

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