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The dust has barely settled on the European Commission’s record-breaking €4.3 Billion Google Android fine, but already the European Commission is gearing up for its next high-profile case. Last month, Margrethe Vestager dropped a competition bombshell: the European watchdog is looking into the behavior of Amazon. Should the Commission decide to move further with the investigation, Amazon will likely join other US tech firms such as Microsoft, Intel, Qualcomm and, of course, Google, who have all been on the receiving end of European competition enforcement.

The Commission’s move – though informal at this stage – is not surprising. Over the last couples of years, Amazon has become one of the world’s largest and most controversial companies. The animosity against it is exemplified in a paper by Lina Khan, which uses the example of Amazon to highlight the numerous ills that allegedly plague modern antitrust law. The paper is widely regarded as the starting point of the so-called “hipster antitrust” movement.

But is there anything particularly noxious about Amazon’s behavior, or is it just the latest victim of a European crusade against American tech companies?

Where things stand so far

As is often the case in such matters, publicly available information regarding the Commission’s “probe” (the European watchdog is yet to open a formal investigation) is particularly thin. What we know so far comes from a number of declarations made by Margrethe Vestager (here and here) and a leaked questionnaire that was sent to Amazon’s rivals. Going on this limited information, it appears that the Commission is preoccupied about the manner in which Amazon uses the data that it gathers from its online merchants. In Vestager’s own words:

The question here is about the data, because if you as Amazon get the data from the smaller merchants that you host […] do you then also use this data to do your own calculations? What is the new big thing, what is it that people want, what kind of offers do they like to receive, what makes them buy things.

These concerns relate to the fact that Amazon acts as both a retailer in its own right and a platform for other retailers, which allegedly constitutes a “conflict of interest”. As a retailer, Amazon sells a wide range of goods directly to consumers. Meanwhile, its marketplace platform enables third party merchants to offer their goods in exchange for referral fees when items are sold (these fees typically range from 8% to 15%, depending on the type of good). Merchants can either execute theses orders themselves or opt for fulfilment by Amazon, in which case it handles storage and shipping. In addition to its role as a platform operator,  As of 2017, more than 50% of units sold on the Amazon marketplace where fulfilled by third-party sellers, although Amazon derived three times more revenue from its own sales than from those of third parties (note that Amazon Web Services is still by far its largest source of profits).

Mirroring concerns raised by Khan, the Commission worries that Amazon uses the data it gathers from third party retailers on its platform to outcompete them. More specifically, the concern is that Amazon might use this data to identify and enter the most profitable segments of its online platform, excluding other retailers in the process (or deterring them from joining the platform in the first place). Although there is some empirical evidence to support such claims, it is far from clear that this is in any way harmful to competition or consumers. Indeed, the authors of the paper that found evidence in support of the claims note:

Amazon is less likely to enter product spaces that require greater seller efforts to grow, suggesting that complementors’ platform‐specific investments influence platform owners’ entry decisions. While Amazon’s entry discourages affected third‐party sellers from subsequently pursuing growth on the platform, it increases product demand and reduces shipping costs for consumers.

Thou shalt not punish efficient behavior

The question is whether Amazon using data on rivals’ sales to outcompete them should raise competition concerns? After all, this is a standard practice in the brick-and-mortar industry, where most large retailers use house brands to go after successful, high-margin third-party brands. Some, such as Costco, even eliminate some third-party products from their shelves once they have a successful own-brand product. Granted, as Khan observes, Amazon may be doing this more effectively because it has access to vastly superior data. But does that somehow make Amazon’s practice harmful to social social welfare? Absent further evidence, I believe not.

The basic problem is the following. Assume that Amazon does indeed have a monopoly in the market for online retail platforms (or, in other words, that the Amazon marketplace is a bottleneck for online retailers). Why would it move into direct retail competition against its third party sellers if it is less efficient than them? Amazon would either have to sell at a loss or hope that consumers saw something in its products that warrants a higher price. A more profitable alternative would be to stay put and increase its fees. It could thereby capture all the profits of its independent retailers. Not that Amazon would necessarily want to do so, as this could potentially deter other retailers from joining its platform. The upshot is that Amazon has little incentive to exclude more efficient retailers.

Astute readers, will have observed that this is simply a restatement of the Chicago school’s Single Monopoly Theory, which broadly holds that, absent efficiencies, a monopolist in one line of commerce cannot increase its profits by entering the competitive market for a complementary good. Although the theory has drawn some criticism, it remains a crucial starting point with which enforcers must contend before they conclude that a monopolist’s behavior is anticompetitive.

So why does Amazon move into retail segments that are already occupied by its rivals? The most likely explanation is simply that it can source and sell these goods more efficiently than them, and that these efficiencies cannot be achieved through contracts with the said rivals. Once we accept the possibility that Amazon is simply more efficient, the picture changes dramatically. The sooner it overthrows less efficient rivals the better. Doing so creates valuable surplus that can flow to either itself or its consumers. This is true regardless of whether Amazon has a marketplace monopoly or not. Even if it does have a monopoly (which is doubtful given competition from the likes of Zalando, AliExpress, Google Search and eBay), at least some of these efficiencies will likely be passed on to consumers. Such a scenario is also perfectly compatible with increased profits for Amazon. The real test is whether output increases when Amazon enters segments that were previously occupied by rivals.

Of course, the usual critiques voiced against the “Single Monopoly Profit” theory apply here. It is plausible that, by excluding its retail rivals, Amazon is simply seeking to protect its alleged platform monopoly. However, the anecdotal evidence that has been raised thus far does not support this conclusion.

But what about innovation?

Possibly sensing the weakness of the “inefficiency” line of arguments against Amazon, critics will likely put put forward a second theory of harm. The claim is that by capturing the rents of potentially innovative retailers, Amazon may hamper their incentives to innovate and will therefore harm consumer choice. Margrethe Vestager intimated this much in a Bloomberg interview. Though this framing might seem tempting at first, it falters under close inspection.

The effects of Amazon’s behavior could first be framed in terms of appropriability — that is: the extent to which an innovator captures the social benefits of its innovation. The higher its share of those benefits, the larger its incentives to innovate. By forcing out its retail rivals, it is plausible that Amazon is reducing the returns which they earn on their potential innovations.

Another potential framing is that of holdup theory. Applied to this case, one could argue that rival retailers made sunk investments (potentially innovation-related) to join the Amazon platform, and that Amazon is behaving opportunistically by capturing their surplus. With hindsight, merchants might thus have opted to stay out of the Amazon marketplace.

Unfortunately for Amazon’s critics, there are numerous objections to these two framings. For a start, the business implication of both the appropriability and holdup theories is that firms can and should take sensible steps to protect their investments. The recent empirical paper mentioned above stresses that these actions are critical for the sake of Amazon’s retailers.

Potential solutions abound. Retailers could in principle enter into long-term exclusivity agreements with their suppliers (which would keep Amazon out of the market if there are no alternative suppliers). Alternatively, they could sign non-compete clauses with Amazon, exchange assets, or even outright merge. In fact, there is at least some evidence of this last possibility occurring, as Amazon has acquired some of its online retailers. The fact that some retailers have not opted for these safety measures (or other methods of appropriability) suggests that they either don’t perceive a threat or are unwilling to make the necessary investments. It might also be due to bad business judgement on their part).

Which brings us to the big question. Should competition law step into the breach in those cases where firms have refused to take even basic steps to protect their investments? The answer is probably no.

For a start, condoning this poor judgement encourages firms to rely on competition enforcement rather than private solutions  to solve appropriability and holdup issues. This is best understood with reference to moral hazard. By insuring firms against the capture of their profits, competition authorities disincentivize all forms of risk-mitigation on the part of those firms. This will ultimately raise enforcement costs (as firms become increasingly reliant on the antitrust system for protection).

It is also informationally much more burdensome, as authorities will systematically have to rule on the appropriate share of profits between parties to a case.

Finally, overprotecting these investments would go against the philosophy of the European Court of Justice’s Huawei ruling.  Albeit in the specific context of injunctions relating to SEPs, the Court conditioned competition liability on firms showing that they have taken a series of reasonable steps to sort out their disputes privately.

Concluding remarks

This is not to say that competition intervention should categorically be proscribed. But rather that the capture of a retailer’s investments by Amazon is an insufficient condition for enforcement actions. Instead, the Commission should question whether Amazon’s actions are truly detrimental to consumer welfare and output. Absent strong evidence that an excluded retailer offered superior products, or that Amazon’s move was merely a strategic play to prevent entry, competition authorities should let the chips fall where they may.

As things stand, there is simply no evidence to indicate that anything out of the ordinary is occurring on the Amazon marketplace. By shining the spotlight on Amazon, the Commission is putting itself under tremendous political pressure to move forward with a formal investigation (all the more so, given the looming European Parliament elections). This is regrettable, as there are surely more pressing matters for the European regulator to deal with. The Commission would thus do well to recall the words of Shakespeare in the Merchant of Venice: “All that glisters is not gold”. Applied in competition circles this translates to “all that is big is not inefficient”.

On Tuesday, August 28, 2018, Truth on the Market and the International Center for Law and Economics presented a blog symposium — Is Amazon’s Appetite Bottomless? The Whole Foods Merger After One Year — that looked at the concerns surrounding the closing of the Amazon-Whole Foods merger, and how those concerns had played out over the last year.

The difficulty presented by the merger was, in some ways, its lack of difficulty: Even critics, while hearkening back to the Brandeisian fear of large firms, had little by way of legal objection to offer against the merger. Despite the acknowledged lack of an obvious legal basis for challenging the merger, most critics nevertheless expressed a somewhat inchoate and generalized concern that the merger would hasten the death of brick-and-mortar retail and imperil competition in the grocery industry. Critics further pointed to particular, related issues largely outside the scope of modern antitrust law — issues relating to the presumed effects of the merger on “localism” (i.e., small, local competitors), retail workers, startups with ancillary businesses (e.g., delivery services), data collection and use, and the like.

Steven Horwitz opened the symposium with an insightful and highly recommended post detailing the development of the grocery industry from its inception. Tracing through that history, Horwitz was optimistic that

Viewed from the long history of the evolution of the grocery store, the Amazon-Whole Foods merger made sense as the start of the next stage of that historical process. The combination of increased wealth that is driving the demand for upscale grocery stores, and the corresponding increase in the value of people’s time that is driving the demand for one-stop shopping and various forms of pick-up and delivery, makes clear the potential benefits of this merger.

Others in the symposium similarly acknowledged the potential transformation of the industry brought on by the merger, but challenged the critics’ despairing characterization of that transformation (Auer, Manne & Stout, Rinehart, Fruits, Atkinson).

At the most basic level, it was noted that, in the immediate aftermath of the merger, Whole Foods dropped prices across a number of categories as it sought to shore up its competitive position (Auer). Further, under relevant antitrust metrics — e.g., market share, ease of competitive entry, potential for exclusionary conduct — the merger was completely unobjectionable under existing doctrine (Fruits).

To critics’ claims that Amazon in general, and the merger in particular, was decimating the retail industry, several posts discussed the updated evidence suggesting that retail is not actually on the decline (although some individual retailers are certainly struggling to compete) (Auer, Manne & Stout). Moreover, and following from Horwitz’s account of the evolution of the grocery industry, it appears that the actual trajectory of the industry is not an either/or between online and offline, but instead a movement toward integrating both models into a single retail experience (Manne & Stout). Further, the post-merger flurry of business model innovation, venture capital investment, and new startup activity demonstrates that, confronted with entrepreneurial competitors like Walmart, Kroger, Aldi, and Instacart, Amazon’s impressive position online has not translated into an automatic domination of the traditional grocery industry (Manne & Stout).  

Symposium participants more circumspect about the merger suggested that Amazon’s behavior may be laying the groundwork for an eventual monopsony case (Sagers). Further, it was suggested, a future Section 2 case, difficult under prevailing antitrust orthodoxy, could be brought with a creative approach to market definition in light of Amazon’s conduct with its marketplace participants, its aggressive ebook contracting practices, and its development and roll-out of its own private label brands (Sagers).

Skeptics also picked up on early critics’ concerns about the aggregation of large amounts of consumer data, and worried that the merger could be part of a pattern representing a real, long-term threat to consumers that antitrust does not take seriously enough (Bona & Levitsky). Sounding a further alarm, Hal Singer noted that Amazon’s interest in pushing into new markets with data generated by, for example, devices like its Echo line could bolster its ability to exclude competitors.

More fundamentally, these contributors echoed the merger critics’ concerns that antitrust does not adequately take account of other values such as “promoting local, community-based, organic food production or ‘small firms’ in general.” (Bona & Levitsky; Singer).

Rob Atkinson, however, pointed out that these values are idiosyncratic and not likely shared by the vast majority of the population — and that antitrust law shouldn’t have anything to do with them:

In short, most of the opposition to Amazon/Whole Foods merger had little or nothing to do with economics and consumer welfare. It had everything to do with a competing vision for the kind of society we want to live in. The neo-Brandesian opponents, who Lind and I term “progressive localists”, seek an alternative economy predominantly made up of small firms, supported by big government and protected from global competition.

And Dirk Auer noted that early critics’ prophecies of foreclosure of competition through “data leveraging” and below-cost pricing hadn’t remotely come to pass, thus far.

Meanwhile, other contributors noted the paucity of evidence supporting many of these assertions, and pointed out the manifest value the merger seemed to be creating by pressuring competitors to adapt and better respond to consumers’ preferences (Horwitz, Rinehart, Auer, Fruits, Manne & Stout) — in the process shoring up, rather than killing, even smaller retailers that are willing and able to evolve with changing technology and shifting consumer preferences. “For all the talk of retail dying, the stores that are actually dying are the ones that fail to cater to their customers, not the ones that happen to be offline” (Manne & Stout).

At the same time, not all merger skeptics were moved by the Neo-Brandeisian assertions. Chris Sagers, for example, finds much of the populist antitrust objection more public relations than substance. He suggested perhaps not taking these ideas and their promoters so seriously, and instead focusing on antitrust advocates with “real ideas” (like Sagers himself, of course).

Coming from a different angle, Will Rinehart also suggested not taking the criticisms too seriously, pointing to the evolving and complicated effects of the merger as Exhibit A for the need for regulatory humility:

Finally, this deal reiterates the need for regulatory humility. Almost immediately after the Amazon-Whole Foods merger was closed, prices at the store dropped and competitors struck a flurry of deals. Investments continue and many in the grocery retail space are bracing for a wave of enhancement to take hold. Even some of the most fierce critics of deal will have to admit there is a lot of uncertainty. It is unclear what business model will make the most sense in the long run, how these technologies will ultimately become embedded into production processes, and how consumers will benefit. Combined, these features underscore the difficulty, but the necessity, in implementing dynamic insights into antitrust institutions.

Offering generous praise for this symposium (thanks, Will!) and echoing the points made by other participants regarding the dynamic and unknowable course of competition (Auer, Horwitz, Manne & Stout, Fruits), Rinehart concludes:

Retrospectives like this symposium offer a chance to understand what the discussion missed at the time and what is needed to better understand innovation and competition in markets. While it might be too soon to close the book on this case, the impact can already be felt in the positions others are taking in response. In the end, the deal probably won’t be remembered for extending Amazon’s dominance into another market because that is a phantom concern. Rather, it will probably be best remembered as the spark that drove traditional retail outlets to modernize their logistics and fulfillment efforts.  

For a complete rundown of the arguments both for and against, the full archive of symposium posts from our outstanding and diverse group of scholars, practitioners, and other experts is available at this link, and individual posts can be easily accessed by clicking on the authors’ names below.

We’d like to thank all of the participants for their excellent contributions!


What actually happened in the year following the merger is nearly the opposite: Competition among grocery stores has been more fierce than ever. “Offline” retailers are expanding — and innovating — to meet Amazon’s challenge, and many of them are booming. Disruption is never neat and tidy, but, in addition to saving Whole Foods from potential oblivion, the merger seems to have lit a fire under the rest of the industry.
This result should not be surprising to anyone who understands the nature of the competitive process. But it does highlight an important lesson: competition often comes from unexpected quarters and evolves in unpredictable ways, emerging precisely out of the kinds of adversity opponents of the merger bemoaned.

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So why this deal, in this symposium, and why now? The best substantive reason I could think of is admittedly one that I personally find important. As I said, I think we should take it much more seriously as a general matter, especially in highly dynamic contexts like Silicon Valley. There has been a history of arguably pre-emptive, market-occupying vertical and conglomerate acquisitions, by big firms of smaller ones that are technologically or otherwise disruptive. The idea is that the big firms sit back and wait as some new market develops in some adjacent sector. When that new market ripens to the point of real promise, the big firm buys some significant incumbent player. The aim is not. just to facilitate its own benevolent, wholesome entry, but to set up hopefully prohibitive challenges to other de novo entrants. Love it or leave it, that theory plausibly characterizes lots and lots of acquisitions in recent decades that secured easy antitrust approval, precisely because they weren’t obviously, presently horizontal. Many people think that is true of some of Amazon’s many acquisitions, like its notoriously aggressive, near-hostile takeover of

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Amazon offers Prime discounts to Whole Food customers and offers free delivery for Prime members. Those are certainly consumer benefits. But with those comes a cost, which may or may not be significant. By bundling its products with collective discounts, Amazon makes it more attractive for shoppers to shift their buying practices from local stores to the internet giant. Will this eventually mean that local stores will become more inefficient, based on lower volume, and will eventually close? Do most Americans care about the potential loss of local supermarkets and specialty grocers? No one, including antitrust enforcers, seems to have asked them.

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The gist of these arguments is simple. The Amazon / Whole Foods merger would lead to the exclusion of competitors, with Amazon leveraging its swaths of data and pricing below costs. All of this begs a simple question: have these prophecies come to pass?

The problem with antitrust populism is not just that it leads to unfounded predictions regarding the negative effects of a given business practice. It also ignores the significant gains which consumers may reap from these practices. The Amazon / Whole foods offers a case in point.

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Even with these caveats, it’s still worth looking at the recent trends. Whole Foods’s sales since 2015 have been flat, with only low single-digit growth, according to data from Second Measure. This suggests Whole Foods is not yet getting a lift from the relationship. However, the percentage of Whole Foods’ new customers who are Prime Members increased post-merger, from 34 percent in June 2017 to 41 percent in June 2018. This suggests that Amazon’s platform is delivering customers to Whole Foods.

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The negativity that surrounded the deal at its announcement made Whole Foods seem like an innocent player, but it is important to recall that they were hemorrhaging and were looking to exit. Throughout the 2010s, the company lost its market leading edge as others began to offer the same kinds of services and products. Still, the company was able to sell near the top of its value to Amazon because it was able to court so many suitors. Given all of these features, Whole Foods could have been using the exit as a mechanism to appropriate another firm’s rent.

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Brandeis is back, with today’s neo-Brandeisians reflexively opposing virtually all mergers involving large firms. For them, industry concentration has grown to crisis proportions and breaking up big companies should be the animating goal not just of antitrust policy but of U.S. economic policy generally. The key to understanding the neo-Brandeisian opposition to the Whole Foods/Amazon mergers is that it has nothing to do with consumer welfare, and everything to do with a large firm animus. Sabeel Rahman, a Roosevelt Institute scholar, concedes that big firms give us higher productivity, and hence lower prices, but he dismisses the value of that. He writes, “If consumer prices are our only concern, it is hard to see how Amazon, Comcast, and companies such as Uber need regulation.” And this gets to the key point regarding most of the opposition to the merger: it had nothing to do with concerns about monopolistic effects on economic efficiency or consumer prices.  It had everything to do with opposition to big firm for the sole reason that they are big.

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Carl Shapiro, the government’s economics expert opposing the AT&T-Time Warner merger, seems skeptical of much of the antitrust populists’ Amazon rhetoric: “Simply saying that Amazon has grown like a weed, charges very low prices, and has driven many smaller retailers out of business is not sufficient. Where is the consumer harm?”

On its face, there was nothing about the Amazon/Whole Foods merger that should have raised any antitrust concerns. While one year is too soon to fully judge the competitive impacts of the Amazon-Whole Foods merger, nevertheless, it appears that much of the populist antitrust movement’s speculation that the merger would destroy competition and competitors and impoverish workers has failed to materialize.

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