Apple’s 30% commission elimination and price increase

An article in the Wall Street Journal (June 10, 2013) describes the Justice department’s claim that Apple’s 30% revenue sharing contract (uniform for all products Apple sells) is a violation of antitrust and uncompetitive. The article claims that when this revenue sharing contract and associated most-favored-nation pricing (i.e., the item cannot be sold by the publisher for a lower price elsewhere) was introduced, Amazon.com had a 90% market share. Elimination of this pricing was supposed to result in lower prices but, instead, increased average prices from $8.20 to $8.85. Does the approval of wholesale pricing, which letters etailers set retail prices and the prevention of revenue sharing seem rational if it results in higher consumer prices ? Since revenue sharing is purported to improve supply chain coordination and thus permit more efficiency, does preventing it make sense ? How should the consumer interest be protected in this space and should the author and publisher’s interests be protected too ?

4 Responses to Apple’s 30% commission elimination and price increase

Biswarup Das says:

August 19, 2013 at 7:30 pm

The aim of revenue sharing should be to lead to a win win situation for the producer and the consumer.Revenue sharing model enables the alignment of the incentives of various stakeholders.In this case prevention of revenue sharing does not makes sense if it results in higher prices.With better supply chain coordination,efficiency, revenue sharing ought to lead to more competitive prices.
In this context, I remember the revenue sharing model of Airtel and IBM in India. IBM managed the IT services of Airtel and the costing mechanism was revenue sharing. This led to better services and economical costing for the customers.

Randall Miao says:

August 20, 2013 at 12:17 am

Good notice for SCM coordination strategy. I think it might be three possible reasons. First, the products from Apple ranged from cellphone, computer to music players. The markets are different and the major competitors are also different. It could be a case that this strategy work well for cellphone but not good for selling computers. In addition, maybe we can have a insight of what Apple’s major competitors do for SCM coordination. Is some major competitor also provide revenue sharing contract? For example, is Samsung provide a even more attractive contract to wholesaler? Third, a revenue sharing contract doesn’t mean that it will lead to a lower price. Wholesaler may spend more effort to promote the Apple product. And demand may increase without enough supplement. Thus price may also increase.

Suvarthi Datta says:

August 20, 2013 at 3:03 am

The wholesale approach here results in an increased price to the consumers. Moreover, the wholesale approach need not necessarily result in supply chain integration. Hence, it is better to move to a revenue-sharing kind of model, wherein the end consumers are benefited with a low price and the other business partners remain integrated. Ultimately only those business models, which serve the customers best, will prevail in the long run.

Jiaji (Ashley) Zhou says:

August 23, 2013 at 4:38 pm

A successful reveneue sharing strategy should not necessary cause higher price. The strategy Apple uses does not really help on supply chain integration. Also it transfers most risk to wholesalers. No matter for wholesalers or consumers this is not a win win strategy.