Amazon and the Unwisdom of the Populist Crowd

Kristian Stout —  1 May 2018 — 9 Comments

There are some who view a host of claimed negative social ills allegedly related to the large size of firms like Amazon as an occasion to call for the company’s break up. And, unfortunately, these critics find an unlikely ally in President Trump, whose tweet storms claim that tech platforms are too big and extract unfair rents at the expense of small businesses. But these critics are wrong: Amazon is not a dangerous monopoly, and it certainly should not be broken up.  

Of course, no one really spells out what it means for these companies to be “too big.” Even Barry Lynn, a champion of the neo-Brandeisian antitrust movement, has shied away from specifics. The best that emerges when probing his writings is that he favors something like a return to Joe Bain’s “Structure-Conduct-Performance” paradigm (but even here, the details are fuzzy).

The reality of Amazon’s impact on the market is quite different than that asserted by its critics. Amazon has had decades to fulfill a nefarious scheme to suddenly raise prices and reap the benefits of anticompetive behavior. Yet it keeps putting downward pressure on prices in a way that seems to be commoditizing goods instead of building anticompetitive moats.

Amazon Does Not Anticompetitively Exercise Market Power

Twitter rants aside, more serious attempts to attack Amazon on antitrust grounds argue that it is engaging in pricing that is “predatory.” But “predatory pricing” requires a specific demonstration of factors — which, to date, have not been demonstrated — in order to justify legal action. Absent a showing of these factors, it has long been understood that seemingly “predatory” conduct is unlikely to harm consumers and often actually benefits consumers.

One important requirement that has gone unsatisfied is that a firm engaging in predatory pricing must have market power. Contrary to common characterizations of Amazon as a retail monopolist, its market power is less than it seems. By no means does it control retail in general. Rather, less than half of all online commerce (44%) takes place on its platform (and that number represents only 4% of total US retail commerce). Of that 44 percent, a significant portion is attributable to the merchants who use Amazon as a platform for their own online retail sales. Rather than abusing a monopoly market position to predatorily harm its retail competitors, at worst Amazon has created a retail business model that puts pressure on other firms to offer more convenience and lower prices to their customers. This is what we want and expect of competitive markets.

The claims leveled at Amazon are the intellectual kin of the ones made against Walmart during its ascendancy that it was destroying main street throughout the nation. In 1993, it was feared that Walmart’s quest to vertically integrate its offerings through Sam’s Club warehouse operations meant that “[r]etailers could simply bypass their distributors in favor of Sam’s — and Sam’s could take revenues from local merchants on two levels: as a supplier at the wholesale level, and as a competitor at retail.” This is a strikingly similar accusation to those leveled against Amazon’s use of its Seller Marketplace to aggregate smaller retailers on its platform.

But, just as in 1993 with Walmart, and now with Amazon, the basic fact remains that consumer preferences shift. Firms need to alter their behavior to satisfy their customers, not pretend they can change consumer preferences to suit their own needs. Preferring small, local retailers to Amazon or Walmart is a decision for individual consumers interacting in their communities, not for federal officials figuring out how best to pattern the economy.

All of this is not to say that Amazon is not large, or important, or that, as a consequence of its success it does not exert influence over the markets it operates in. But having influence through success is not the same as anticompetitively asserting market power.

Other criticisms of Amazon focus on its conduct in specific vertical markets in which it does have more significant market share. For instance, a UK Liberal Democratic leader recently claimed that “[j]ust as Standard Oil once cornered 85% of the refined oil market, today… Amazon accounts for 75% of ebook sales … .”

The problem with this concern is that Amazon’s conduct in the ebook market has had, on net, pro-competitive, not anti-competitive, effects. Amazon’s behavior in the ebook market has actually increased demand for books overall (and expanded output), increased the amount that consumers read, and decreased the price of theses books. Amazon is now even opening physical bookstores. Lina Khan made much hay in her widely cited article last year that this was all part of a grand strategy to predatorily push competitors out of the market:

The fact that Amazon has been willing to forego profits for growth undercuts a central premise of contemporary predatory pricing doctrine, which assumes that predation is irrational precisely because firms prioritize profits over growth. In this way, Amazon’s strategy has enabled it to use predatory pricing tactics without triggering the scrutiny of predatory pricing laws.

But it’s hard to allege predation in a market when over the past twenty years Amazon has consistently expanded output and lowered overall prices in the book market. Courts and lawmakers have sought to craft laws that encourage firms to provide consumers with more choices at lower prices — a feat that Amazon repeatedly accomplishes. To describe this conduct as anticompetitive is asking for a legal requirement that is at odds with the goal of benefiting consumers. It is to claim that Amazon has a contradictory duty to both benefit consumers and its shareholders, while also making sure that all of its less successful competitors also stay in business.

But far from creating a monopoly, the empirical reality appears to be that Amazon is driving categories of goods, like books, closer to the textbook model of commodities in a perfectly competitive market. Hardly an antitrust violation.

Amazon Should Not Be Broken Up

“Big is bad” may roll off the tongue, but, as a guiding ethic, it makes for terrible public policy. Amazon’s size and success are a direct result of its ability to enter relevant markets and to innovate. To break up Amazon, or any other large firm, is to punish it for serving the needs of its consumers.

None of this is to say that large firms are incapable of causing harm or acting anticompetitively. But we should accept calls for dramatic regulatory intervention  — especially from those in a position to influence regulatory or market reactions to such calls — to be supported by substantial factual evidence and legal and economic theory.

This tendency to go after large players is nothing new. As noted above, Walmart triggered many similar concerns thirty years ago. Thinking about Walmart then, pundits feared that direct competition with Walmart was fruitless:

In the spring of 1992 Ken Stone came to Maine to address merchant groups from towns in the path of the Wal-Mart advance. His advice was simple and direct: don’t compete directly with Wal-Mart; specialize and carry harder-to-get and better-quality products; emphasize customer service; extend your hours; advertise more — not just your products but your business — and perhaps most pertinent of all to this group of Yankee individualists, work together.

And today, some think it would be similarly pointless to compete with Amazon:

Concentration means it is much harder for someone to start a new business that might, for example, try to take advantage of the cheap housing in Minneapolis. Why bother when you know that if you challenge Amazon, they will simply dump your product below cost and drive you out of business?

The interesting thing to note, of course, is that Walmart is now desperately trying to compete with Amazon. But despite being very successful in its own right, and having strong revenues, Walmart doesn’t seem able to keep up.

Some small businesses will close as new business models emerge and consumer preferences shift. This is to be expected in a market driven by creative destruction. Once upon a time Walmart changed retail and improved the lives of many Americans. If our lawmakers can resist the urge to intervene without real evidence of harm, Amazon just might do the same.

Kristian Stout

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Kristian Stout is the Associate Director for Innovation Policy at the International Center for Law and Economics (ICLE) and a contributor to TheHill.com. As a technology professional and entrepreneur for over ten years, Kristian’s scholarship is influenced by a practical understanding of the challenges facing innovators in the modern economy. Kristian has previously been a lecturer in the computer science department of Rutgers University, is frequently invited to speak on law and technology topics, and has been published in law journals and legal treatises. Kristian is an attorney licensed to practice law in New Jersey and Pennsylvania; is a partner at A&S Technologies, a software services firm; a member of the NJ State Advisory Committee to the United States Commission on Civil Rights; and sits on the board of the New Jersey Leadership Program, a nonprofit that places southasian youth into political internships in New Jersey.

9 responses to Amazon and the Unwisdom of the Populist Crowd

  1. 

    The first objective was to destroy the competition (brick & mortar stores). Is it any wonder that Amazon’s ‘surge’ began after the real estate crisis in 2007? Of course, intellectual property is as phony as Bork’s reasoning and the fact that the term ‘intellectual property’ didn’t even become a thing until the late 70’s/early 80’s and has since become the phrase of choice for the clueless.

    We have a system where we tax labor far more than we do Land and “Property”. Under such a system, wages will always face downward pressure.

  2. 

    Interesting to have taken books, rather than diapers, as the commodity about which Khan’s Amazon article most clearly alleged predatory pricing concerns.

    There is a real problem in the neo Brandeis movement — particularly among its historically- but not legally- or economically-minded exponents — of muddling “Big is bad” (a company’s absolute size, which seems tied to concerns about campaign finance and other impacts on politics); with “market power is bad” (the structuralism view in which certain levels of concentration are suspect — which actually is relevant to antitrust, eg HHI); with “having few firms is bad” (which has been connected in economic studies to worse outcomes for labor).

    I think all these concerns will have more credibility once they are clearly articulated as distinct. At the moment, opponents of the movement can easily conflate the “big is bad” political concern with the “market power is bad” monopolization concern, to accuse the neo-Brandeisians of wanting to import political concerns into anti-monopoly enforcement.

    • 
      Dom Armentano 2 May 2018 at 6:38 am

      Excellent argument that rebuts all of the important criticisms of Amazon’s behavior. Let me note, as an aside only, that the Dem’s reference to Standard Oil’s “dominance” cuts both ways. While Standard is often termed a monopoly, they were not. In fact, Standard’s share of oil refining declined substantially in the decade prior to the federal antitrust case and there were dozens of important refining competitors before the divestiture in 1911.

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