Part -1:

The Magazine "Cover Gifts" War
Revised: August 28, 2002

Magazines frequently include free gifts on their covers to entice readers. Examples have ranged from Bach CDs to scented candles to DVDs. The gifts started as an attempt to increase readership, but some business insiders now feel that they have become a serious problem for the industry. According to Simon Kippin, publishing director of Good Housekeeping: "My colleagues say they wish they had never started doing it because it costs them a fortune." Adds Ian Rockett, business director at MindShare, a media planning and buying agency: "It's often a defensive measure for publishers. ... Publishers are afraid they will lose market share if they don't offer gifts to readers." Noleen Wyatt-Jones, group manager of the press department at Zenith Media, argues that "cover mounting is a very dangerous thing because once you start you cannot get out of it."

Analysts say that the situation varies considerably across segments of the industry. In women's magazines, publishers typically bear a large share of the cost of cover gifts.

The magazines often use gifts to enhance the brand image of the magazine. For example, Elle recently offered its readers an Elle metal key chain. With music, computer, and video-game magazines, however, the cost of gifts is typically covered by the supplier, who pays for the privilege of having its product reach a targeted audience. "We give them the space; they give us the product," says Andy Harris, sales executive at PC Plus magazine. There is also variation across geographic segments. Cover gifts are very common in the UK, less so in the US.

Questions for Analysis

(a) What are the elements of competition and cooperation in this industry?

(b) Is the "cover gifts" war a win-win game or a prisoner's dilemma?

(c) Do these elements differ across market segments?

(d) Would magazines be better off if they agreed to refrain from using cover gifts?

Part -2:

Christie's and Sotheby's
Revised: November 17, 2003

On Friday, October 6, 2000, Diana D. Brooks, the former president and Chief Executive of Sotheby's Holdings Inc. pleaded guilty to conspiring with Christie's International to violate antitrust laws. Christie's and Sotheby's are alleged to have agreed to fix prices on a number of sales. Brooks admitted to U.S. District Courts that she had a number of meetings with a representative from Christie's in which the parties involved agreed to fix prices with respect to commissions charged to sellers during the period from April 1993 to December 1999. Brooks claimed that these meetings were directed by order of her superior, Mr. Taubman. (Mr. Taubman has denied any involvement with the price fixing in a released press statement.)

Christie's and Sotheby's have dominant market shares in the global auction market, but they have both become more aggressive about muscling into new types of business and fattening the commissions that buyers must pay on their goods. While art enthusiasts have become used to dealing with a relatively uniform commission structure, the admissions of collusion have angered dealers who are talking about taking their business elsewhere. This is hardly a credible threat however, as the two companies are powerhouses that dominate every major sale worldwide.

In the meantime, both auction houses have revised their rates. They now charge different rates, and both charge more than they used to. Since 1993, both auction houses had charged 15 percent on the fast $50,000 and 10 percent on the rest. Now, Sotheby's charges 20 percent for the first S 100,000 and 10 percent for values over $100,000. Christie's charges 17.5 percent on the first $80,000 and the same 10 percent on any amount above $80,000.

Sotheby's announced that Mr. Taubman, who resigned as Sotheby's chairman in February 2000, would pay S156 million of the company's S256 million share of the settlement agreement. Sotheby's share price is shown in Exhibit 1. Christie's is privately held.

Questions for Analysis

What do you expect will happen to prices after a cartel collapses? What happened to auction rate since the investigation started?