Is Apple's App Store Competitive?

Applying our price theory lessons to Epic Games v. Apple

Epic Games wants more money. Who doesn’t? I do. That’s why I charge the monopoly price for this newsletter.

Unfortunately, Epic Games wants to use antitrust law to extract more money. Last year, they sued Apple after a dispute over the 30 percent commission that Apple charges on transactions through the iPhone app store. According to Epic Games, Apple uses its position to avoid competitive pressure and charge monopoly prices.

“The 30 percent number has been there since the inception. And if there was real competition, that number would move. And it hasn’t," according to Judge Gonzalez Rogers of the U.S. District Court for the Northern District of California, who recently heard almost three weeks of oral arguments. Unfortunately, the judge's implicit complaint against Apple, like many related complaints raised around the trial, is merely confused about the basic economics.

Luckily, we have already covered important price-theoretic ideas that can help us make sense of the world. Let’s apply some to the Epic Games v. Apple case.

If we picture an active, competitive market, the "real competition" Judge Gonzalez Rogers has in mind, we may think of the New York Stock Exchange, where traders are yelling out bids at the top of their lungs. As more buy orders come in, the price moves up; as more sell orders come in, the price moves down. The market price is constantly changing to coordinate supply and demand. That’s real competition!

But the NYSE is not the only type of competitive market. In other markets, prices stay constant for a long time, as Josh has stressed many times. For example, restaurants, even restaurants on busy streets with lots of other, competing restaurants, do not change their prices day-to-day or even week-to-week. Even in a college football town that is empty from Sunday to Friday, the restaurants do not raise prices systematically on Saturdays.

The reason is that customers value predictable prices. If a family has budgeted to spend $200 at the game, they value assurance on what the meal price will be before sitting down at a restaurant. Even if some game-day visitors do not have a good understanding of the prices in a restaurant, the regulars to the stadium will choose the nearby restaurants that have predictable prices. The competitive pressure for their business creates an incentive to keep prices constant.

And there are many other cases where this predictability of price matters. Coca-Cola kept the price of a 6.5 oz bottle of Coke at a nickel for 73 years, including through periods of high inflation and deflation, as Josh has explained using real options theory. To take a modern example, stores like Dollar General compete by offering low prices and by offering predictable prices. It does not take a sophisticated market analyst to predict prices before entering a Dollar Tree. Even I can figure that one out!

If customers in every other situation value steady prices, why wouldn't app-makers also value a predictable commission that they have to pay? Of course, everyone wants a lower price, and Epic is paying lawyers to help get a lower price. But Judge Gonzales Rogers suggested the predictability was bad.

The most common complaint against Apple about the app store is that the 30 percent commission is unfair or too high. It's a “tax” that distorts the market. This complaint falls apart too on closer scrutiny. First, there is no meaningful way to simply look at the price and determine whether it is too high or too low. Antitrust law acknowledges this by not making high prices illegal. Instead, the Sherman Antitrust Act, passed in 1890, outlaws, “every contract, combination, or conspiracy in restraint of trade” and “monopolization, attempted monopolization, or conspiracy or combination to monopolize.” A high price, if we grant 30 percent is high, is not a conspiracy in restraint of trade.

There is indirect evidence that the 30 percent commission, instead of being "too high", is the outcome of competitive forces balancing the value to app-makers and customers and the costs of maintaining a safe and valuable app store. Other similar businesses charge a 30 percent commission as well. The Google Play Store, which is Apple's main rival in the market for mobile apps, charges 30 percent commission, as does Steam, the major distributor of video games for personal computers.

If we see two gas stations charging the same price for gas, we attribute that to the forces of competition. Unless there is some evidence of collusion (of which there is none), the same price across competitors and different platforms is indirect evidence, not of monopoly power but competition in the app/gaming world. It’s not case-closed, but it is some evidence.

Without a clear economic argument against Apple in this case, we should be hesitant about using antitrust law to meddle in business strategy, otherwise, we risk losing the dynamism of innovation that is Apple. We shouldn't dare imagine that the app store would be as vibrant as it is today if the antitrust authorities had set prices for Apple since the app store launched in 2011. Why would the next 10 years be any different?