It's not about competition between products, it's about competition between distributors of the same product.
To use your app store example, you would need to imagine an alternate universe where there are two competing iOS App Stores: one run by, say, Apple and another by Amazon. You're Macmillr, one of the hottest startups in the valley, and you have a bunch of apps you want to get on the market.
In this world, you sell your apps "wholesale" to Apple and Amazon. Apple comes to you and says "I'll buy your apps for $0.50 per copy", and you forge a similar deal with Amazon. Then they compete with each other to on-sell them to the public. Obviously, that's pretty difficult for the two 'A's. How do they compete with someone selling an equally-priced product?
First they'd reduce their own margins as much as possible. Then maybe they do some clever discounting tricks, loss-leaders and promos and the like. Maybe they add some intangibles like a nice recommendation system or a pretty shop UI. Eventually, though, you just know one of them is going to come back to you and say "Forget your $0.50. I want it for $0.45."
So now you're in a tough spot, because Apple controls 90% of the app market. If they say "$0.45 or we walk", there's not much you can do about it. Bad times. As you see this happening, you realise something: Apple must have reached this dominant position by price gouging you and your fellow developers. At this rate, it'll only get more popular and more powerful, which means your future profits look pretty bleak.
But then Amazon comes to you and says "Hey, buddy, we're new in this App Store game, but we play to win, and we have a proposal for you. These Apple assholes are squeezing us dry because they set prices we can't compete with at our market share, and they're driving your wholesale price down to meet their ridiculous margins. But that's the key. We've got this new system where you set the price and they just take a fixed percentage. If you stop letting them set the retail price, the pressure will let up on you and us both."
"Alright", you say, "but if I start dictating prices, won't Apple and their 90% monopoly just drop my sorry apps like a hot potato?"
"Well", says Amazon, with a wink, "you might not be the only meeting we have lined up today in the valley."
Two weeks later, you tell Apple it's $1 and they get 30%. They say no. You say yes. They drop all your apps. You take out a full page ad in Techcrunch. You hear word that 37Schusters and Harpr.Coll.ns are preparing to do the same. Apple gives up. Agency pricing is the new standard for iOS apps. You win! ...until the DoJ comes asking about those meetings.
As to whether the agency model in general keeps prices high, I don't know. Smarter people than I [1] with prettier graphs [2] say no, but my own experience suggests that, at least at the moment, ebooks are way too expensive. I can't help but think that they'd be lower with Amazon calling the shots, but without any data to back me up I'm left with just a vague sense of unease.
"my own experience suggests that, at least at the moment, ebooks are way too expensive"
Why would you think that? People that buy ebooks are generally more affluent (they have kindles and ipads) and we'd expect ebook price to follow the road of profit maximization.
The typical reason people see ebooks as being too expensive is that, post-agency, they often cost more than the hardcover edition of the same title. Since it is fairly obvious that the cost of producing and distributing the ebook is substantially less than the cost of producing and distributing the hardcover book many people feel there's something fishy going on there.
I'd add that if you're right and it is more profitable for ebook publishers to charge more because ebook buyers are typically more affluent that, by itself, suggests that there are issues with ebook competition. In an appropriately competitive market we'd expect prices to be more related to the supplier's costs (and the costs of alternatives like getting a book from a different publisher or getting the hardcover) than they would be to the customers ability-to-pay.
"In an appropriately competitive market we'd expect prices to be more related to the supplier's costs (and the costs of alternatives like getting a book from a different publisher or getting the hardcover) than they would be to the customers ability-to-pay."
This might be true absent IP laws but people who want to read Harry Potter can only get that from one legal source and if the profit maximizing price for Harry Potter was $100 that's what it would cost.
A cotton shirt with a designer logo stiched in at a supply cost of 20 cents can still sell for 50 or 100 times what a near identical shirt without it can. Price does not follow supply cost for these items.
To use your app store example, you would need to imagine an alternate universe where there are two competing iOS App Stores: one run by, say, Apple and another by Amazon. You're Macmillr, one of the hottest startups in the valley, and you have a bunch of apps you want to get on the market.
In this world, you sell your apps "wholesale" to Apple and Amazon. Apple comes to you and says "I'll buy your apps for $0.50 per copy", and you forge a similar deal with Amazon. Then they compete with each other to on-sell them to the public. Obviously, that's pretty difficult for the two 'A's. How do they compete with someone selling an equally-priced product?
First they'd reduce their own margins as much as possible. Then maybe they do some clever discounting tricks, loss-leaders and promos and the like. Maybe they add some intangibles like a nice recommendation system or a pretty shop UI. Eventually, though, you just know one of them is going to come back to you and say "Forget your $0.50. I want it for $0.45."
So now you're in a tough spot, because Apple controls 90% of the app market. If they say "$0.45 or we walk", there's not much you can do about it. Bad times. As you see this happening, you realise something: Apple must have reached this dominant position by price gouging you and your fellow developers. At this rate, it'll only get more popular and more powerful, which means your future profits look pretty bleak.
But then Amazon comes to you and says "Hey, buddy, we're new in this App Store game, but we play to win, and we have a proposal for you. These Apple assholes are squeezing us dry because they set prices we can't compete with at our market share, and they're driving your wholesale price down to meet their ridiculous margins. But that's the key. We've got this new system where you set the price and they just take a fixed percentage. If you stop letting them set the retail price, the pressure will let up on you and us both."
"Alright", you say, "but if I start dictating prices, won't Apple and their 90% monopoly just drop my sorry apps like a hot potato?"
"Well", says Amazon, with a wink, "you might not be the only meeting we have lined up today in the valley."
Two weeks later, you tell Apple it's $1 and they get 30%. They say no. You say yes. They drop all your apps. You take out a full page ad in Techcrunch. You hear word that 37Schusters and Harpr.Coll.ns are preparing to do the same. Apple gives up. Agency pricing is the new standard for iOS apps. You win! ...until the DoJ comes asking about those meetings.
As to whether the agency model in general keeps prices high, I don't know. Smarter people than I [1] with prettier graphs [2] say no, but my own experience suggests that, at least at the moment, ebooks are way too expensive. I can't help but think that they'd be lower with Amazon calling the shots, but without any data to back me up I'm left with just a vague sense of unease.
[1] http://www.teleread.com/paul-biba/does-agency-pricing-lead-t... [2] http://www.digitopoly.org/2012/03/31/are-prices-higher-under...