REGULATION OF BOOK MARKETS.

• Author: Marcowitz-Bitton, Miriam

ABSTRACT

Over the years, many European countries have regulated their national book markets. Chief among the regulatory schemes is the resale price maintenance ("RPM") regime, under which booksellers must offer books for a fixed price for a limited time period. The suggested rationales for this legal regime are mainly: (1) viewing books as cultural goods that deserve special treatment; (2) advancing diversity in the book market; (3) creating a wide distribution of and accessibility to books; and (4) supporting small booksellers. This Article explores the normative rationales for the RPM regime's adoption and design in book markets. The RPM regime has been discussed and analyzed using a positive economic framework, but its application in reality has been missing a normative theoretical basis. This Article demonstrates that absent such a theoretical basis, policymaking is meaningless. Policymakers as well as courts cannot solely rely on positive economic analysis. Normative analysis is inevitable. This Article explores the missing normative analysis of RPM regimes in the context of book markets. It exposes an important blind spot in regulatory policy and judicial judgment. Lastly, the normative framework introduced in this Article may prove relevant for American RPM arrangements. Since American antitrust scrutiny of RPM schemes recently transformed from a per se rule to a rule of reason analysis, American policymakers and courts are expected to encounter a new wave of resurfacing RPM schemes.

INTRODUCTION I. THE ARRANGEMENT OF BOOK PRICES IN EUROPE AND BEYOND A. Uniform and Fixed Book Prices B. Historical Background C. The Objectives of Modern RPM Regulation D. RPM Arrangements in European and Other Countries' Book Markets E. Objections to Regulation F. Effects of Arrangements 1. Effects on Pricing and Number of Titles 2. Effects on Diversity 3. Effects on the Number of Booksellers and Online Stores 4. Effects on Services' Competition II. CHARACTERISTICS OF BOOK MARKETS III. RPM ARRANGEMENTS: ECONOMIC ANALYSIS A. Positive Analysis B. Normative Analysis 1. Culture, Art, and Literature a. Definition and Meaning b. Public Economics c. Aesthetics 2. Diversity a. Definition and Meaning b. Normative Analysis CONCLUSIONS INTRODUCTION

The extent of legal intervention in markets has always been a highly contested and complex social question. A notable example is the "resale price maintenance" ("RPM") scheme used in many European countries to regulate national book markets. For more than a century, RPM arrangements have faced ambivalent views among legal scholars, economists, policymakers, and the public. (1) These views range from outright rejections of RPM schemes to varying degrees of acceptance to regulatory RPM mandates.

These views have affected legal rules in many countries, and have also significantly transformed the legal treatment of RPM arrangements in the United States. In the last hundred years, the legal treatment of RPM schemes went from outright illegal under a per se rule, (2) to a more limited applicability of per se illegality, (3) and then to four decades of statutory exclusions of RPM arrangements under "fair trade" laws, which encompassed almost all states as well as an exemption on the federal level. (4) However, courts tended to reject or limit these state laws, which were finally eliminated by federal legislation in 1975. (5) Soon after, the tide turned again with the Supreme Court moving, over a period of three decades, from per se illegality, to a rule of reason application, to vertical restraints, (6) including RPM arrangements. (7) Yet, states' authorities now support outright prohibition of RPM. (8)

Overseas, one witnesses less legal variation, but still an ambivalent attitude toward RPM agreements. Although generally disallowed, as RPM remains per se illegal under EC Competition Law, RPM agreements are supported in several specific markets--chief among them book markets. Several European countries allow for RPM agreements in book markets, which subject retailers to fixed book prices. While some European countries have rejected RPM arrangements altogether, in other prominent countries these arrangements have been stable for decades or even a century.

Economists have debated RPM schemes for as long as these arrangements have existed. (9) Our main argument is that the positive economic theory of RPM regimes is insufficient. Adoption of regulatory regimes requires normative analysis, which is not found in the economic literature. In this Article, we focus on this neglected part in the economic analysis--the normative theory and application of RPM regimes. A normative theory is crucial for any evaluation of an RPM arrangement, whether wide, limited, or piecemeal. Further, a normative theory has become much needed under the new rule of reason that applies to RPM arrangements in the United States. Any legal analysis of and decision regarding RPM arrangements, whether by policymakers or courts, is meaningless without a founded normative theory.

This Article offers and demonstrates a normative application of RPM regimes and their incidence in European book markets. European book markets function as a well-entrenched case study of RPM regimes. The background and stated goals of proponents of RPM arrangements in book markets are reminiscent of the common arguments found everywhere in support of RPM regimes, and are particularly similar to the stated rationales of past United States fair trade laws and current arguments in defense of a rule of reason application to RPM schemes. Thus, a careful normative study of RPM regimes in European book markets informs us about regulation of RPM arrangements in general.

The analysis focuses on the background for the adoption of RPM regimes in European book markets and explores to what extent RPM regimes can realize their stated goals. We introduce a normative framework for adoption of RPM regimes in book markets that is necessary in order both to make an informed decision regarding such a regime's adoption ex ante and to assess its success ex post. The normative requirements are not easily met, and our study shows that they were not encountered by policymakers. Accordingly, this Article demonstrates and emphasizes the normative failure of RPM regulation in European book markets. These RPM regimes are arguably baseless. This regulatory anatomy of RPM regimes should find its way into the legal analysis of RPM schemes in the United States. This is not necessarily a call for the elimination of RPM arrangements in the United States or for per se illegality. Instead, it is a call for careful regulatory and judicial application of normative theory. It is particularly important once a rule of reason applies.

The Article proceeds as follows. Part I provides a detailed overview regarding regulation of European book markets. First, it considers the structure and details of an RPM regime. Second, it provides the historical background and rationale for the adoption of RPM regimes in these markets. Third, it discusses modern RPM regulations and their objectives, including the rationales for the adoption of book RPM regimes in major European countries. Fourth, the Article progresses to a discussion of major objections to book RPM regulation, mainly touching on anticompetitive concerns that have been raised over the years as well as other objections. Fifth, and lastly, the Article addresses the unclear effects of such regulation, pointing to the lack of clear evidence for either the success or the failure of such regimes in achieving their stated goals. Part II proceeds to characterize book markets more generally. Part III offers the major contribution of this Article, providing a careful economic analysis of RPM arrangements, suggesting that a positive analysis of RPM regimes is insufficient and that a normative analysis is essential and inevitable, exposing an important blind spot in regulatory policy and judicial judgment.

1. THE ARRANGEMENT OF BOOK PRICES IN EUROPE AND BEYOND

   1. Uniform and Fixed Book Prices

      Several European and other countries have adopted a regulatory arrangement known as fixed book prices, which is a type of resale price maintenance (RPM). The RPM arrangement grants--contractually or regulatorily--the producer the legal right to determine consumer market prices down the production chain. Thus, the typical regulatory arrangement in book markets allows a publisher to fix consumer prices across each and every bookstore, thereby forming a uniform price in the book market. The prices are commonly fixed for a certain period of time from the publication date, after which the arrangement dissipates, and market prices may vary according to bookstores' decisions. RPM arrangements include additional variables, such as the type and extent of permitted discounts, necessary agreements between publishers and bookstores, etc. (10)

      Book market RPM arrangements do not allow bookstores to compete on book prices during the protected period but do allow competition between publishers or between writers and publishers. Under the RPM regime, the signed contract between the publishers and the bookstores or book chain stores determines profit margins.

      Since the retail price is fixed for consumers, the price determined between a publisher and an individual bookstore represents that store's profit margin on each book.

      Therefore, even though the established consumer price prevents competition between bookstores, the profit margins of different stores will vary as a result of their bargaining positions with the publisher. On the one side, retailers' profit margins are protected in publishing contracts, and, on the other side, by fixed market prices.

   2. Historical Background

      Historically, book markets have been regulated for many years, at first mainly in certain European countries such as Germany, Austria, Switzerland, France, the United Kingdom, the Netherlands, and...