9.8 Business Case




Amazon and Hachette Go to War

In May 2014, all-out war broke out between Amazon, the third largest U.S. book retailer, and Hachette, the fourth largest book publisher. Suddenly Amazon took weeks to deliver Hachette publications (paper and e-books), including their best-sellers, meanwhile offering shoppers suggestions for non-Hachette books as alternatives. In addition, pre-order options for forthcoming Hachette books—including one by J. K. Rowling of Harry Potter fame—disappeared from Amazon’s website along with many other Hachette books. These same books were readily available, often at lower prices, at rival book retailers, such as barnesandnoble.com.

All publishers pay retailers a share of sales prices. What set off hostilities in this case was Amazon’s demand that Hachette raise Amazon’s share from 30 to 50%. This was a familiar story: Amazon has demanded ever-larger percentages during yearly contract negotiations. Since it won’t carry a publisher’s books without an agreement, protracted disagreement and the resulting loss of sales are disastrous for publishers. This time, however, Hachette refused to give in and went public with Amazon’s demands.

Amazon claimed that the publisher could pay more out of its profit margin—around 75% on e-books, 60% on paperbacks, and 40% on hardcovers. Indeed, Amazon openly admitted that its long-term objective was to displace publishers altogether, and deal directly with authors itself. And it received support from some authors who had been rejected by traditional publishers but succeeded by selling directly to readers via Amazon. But publishers countered that Amazon’s calculations ignored the costs of editing, marketing, advertising, and at times supporting struggling writers until they became successful. Amazon, they claimed, would eventually destroy the book industry.

David Ryder/Getty Images

Meanwhile Amazon had other problems, announcing in July 2014 that it lost $800 million in the previous quarter. At the time, after 20 years in existence, Amazon had never made a profit, and investors were growing impatient.

For several months, Amazon was also in a public relations battle with Authors United, a group of over 900 best-selling authors who protested that “no bookseller should block the sale of books or otherwise prevent or discourage customers from ordering or receiving the books they want.” A leader of that group, Douglas Preston, a best-selling Hachette author of thrillers, had seen sales of his books drop by over 60% since the conflict began. Speaking of the comfortable lifestyle that his successful writing supports, Preston observed that if Amazon should decide not to sell his books at all, “All this goes away.”

In November 2014, Hachette and Amazon arrived at a settlement that ended their dispute. Hachette won the right to set prices for its e-books. Although Amazon got less than it wanted and its reputation was left bruised, it remained in a strong position. Amazon still controlled almost half of the book business, and it had demonstrated a willingness to use its market power to affect sales.


  1. What is the source of surplus in this industry? Who generates it? How is it divided among the various agents (author, publisher, and retailer)?

  2. What are the various sources of market power here? What is at risk for the various parties?




Virgin Atlantic Blows the Whistle … or Blows It?

The United Kingdom is home to two long-haul airline carriers (that fly between continents): British Airways and its rival, Virgin Atlantic. Although British Airways is the dominant company, with a market share generally between 50% and 100% on routes between London and various American cities, Virgin has been a tenacious competitor.

The rivalry between the two has ranged from relatively peaceable to openly hostile over the years. In the 1990s, British Airways lost a court case alleging it had engaged in “dirty tricks” to drive Virgin out of business. In April 2010, however, British Airways may well have wondered if the tables had been turned.

AP Photo/Alastair Grant

It all began in 2004, when oil prices were rising. British prosecutors alleged that the two airlines had plotted to levy fuel surcharges on passengers. For the next two years, according to the prosecutors, the rivals had established a cartel through which they coordinated increases in surcharges. British Airways first introduced a £5 ($8.25) surcharge on long-haul flights when a barrel of oil traded at about $38. It increased the surcharge six times, so that by 2006, when oil was trading at about $69 a barrel, the surcharge was £70 ($115). At the same time, Virgin Atlantic also levied a £70 fee. These surcharges increased within days of each other.

Eventually, three Virgin executives blew the whistle in exchange for immunity from prosecution. British Airways immediately suspended its executives under suspicion and paid fines of nearly $500 million to U.S. and U.K. authorities. And in 2010 four British Airways executives were prosecuted by British authorities for their alleged role in the conspiracy.

The lawyers for the executives argued that although the two airlines had swapped information, this was not proof of a criminal conspiracy. In fact, they argued, Virgin was so fearful of American regulators that it had admitted to criminal behavior before confirming that it had actually committed an offense. One of the defense lawyers argued that because U.S. laws against anti-competitive behavior are much tougher than those in the United Kingdom, companies may be compelled to blow the whistle to avoid investigation: “If you don’t get to them and confess first, you can’t get immunity. The only way to protect yourself is to go to the authorities, even if you haven’t [done anything].” The result was that the Virgin executives were given immunity in both the United States and the United Kingdom, but the British Airways executives were subject to prosecution (and possible jail terms) in both countries.

In late 2011 the case came to a shocking end for Virgin Atlantic and U.K. authorities. Citing e-mails that Virgin was forced to turn over by the court, the judge found insufficient evidence that there was ever a conspiracy between the two airlines. The court was incensed enough to threaten to rescind the immunity granted to the three Virgin executives.


  1. Explain why Virgin Atlantic and British Airlines might collude in response to increased oil prices. Was the market conducive to collusion or not?

  2. How would you determine whether illegal behavior actually occurred? What might explain these events other than illegal behavior?

  3. Explain the dilemma facing the two airlines as well as their individual executives.