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Amazon’s Antitrust Paradox

From The Yale Law Journal (footnotes omitted):

In Amazon’s early years, a running joke among Wall Street analysts was that CEO Jeff Bezos was building a house of cards. Entering its sixth year in 2000, the company had yet to crack a profit and was mounting millions of dollars in continuous losses, each quarter’s larger than the last. Nevertheless, a segment of shareholders believed that by dumping money into advertising and steep discounts, Amazon was making a sound investment that would yield returns once e-commerce took off. Each quarter the company would report losses, and its stock price would rise. One news site captured the split sentiment by asking, “Amazon: Ponzi Scheme or Wal-Mart of the Web?”3

Sixteen years on, nobody seriously doubts that Amazon is anything but the titan of twenty-firstcentury commerce. In 2015, it earned $107 billion in revenue,4 and, as of 2013, it sold more than its next twelve online competitors combined.5 By some estimates, Amazon now captures 46% of online shopping, with its share growing faster than the sector as a whole.6 In addition to being a retailer, it is a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading provider of cloud server space and computing power. Although Amazon has clocked staggering growth—reporting double-digit increases in net sales yearly—it reports meager profits, choosing to invest aggressively instead. The company listed consistent losses for the first seven years it was in business, with debts of $2 billion.7 While it exits the red more regularly now,8 negative returns are still common. The company reported losses in two of the last five years, for example, and its highest yearly net income was still less than 1% of its net sales.9

Despite the company’s history of thin returns, investors have zealously backed it: Amazon’s shares trade at over 900 times diluted earnings, making it the most expensive stock in the Standard & Poor’s 500.10 As one reporter marveled, “The company barely ekes out a profit, spends a fortune on expansion and free shipping and is famously opaque about its business operations. Yet investors . . . pour into the stock.”11 Another commented that Amazon is in “a class of its own when it comes to valuation.”12

Reporters and financial analysts continue to speculate about when and how Amazon’s deep investments and steep losses will pay off.13 Customers, meanwhile, universally seem to love the company. Close to half of all online buyers go directly to Amazon first to search for products,14 and in 2016, the Reputation Institute named the firm the “most reputable company in America” for the third year running.15 In recent years, journalists have exposed the aggressive business tactics Amazon employs. For instance Amazon named one campaign “The Gazelle Project,” a strategy whereby Amazon would approach small publishers “the way a cheetah would a sickly gazelle.”16 This, as well as other reporting,17 drew widespread attention,18 perhaps because it offered a glimpse at the potential social costs of Amazon’s dominance. The firm’s highly public dispute with Hachette in 2014—in which Amazon delisted the publisher’s books from its website during business negotiations—similarly generated extensive press scrutiny and dialogue.19 More generally, there is growing public awareness that Amazon has established itself as an essential part of the internet economy,20 and a gnawing sense that its dominance—its sheer scale and breadth—may pose hazards.21 But when pressed on why, critics often fumble to explain how a company that has so clearly delivered enormous benefits to consumers—not to mention revolutionized e-commerce in general—could, at the end of the day, threaten our markets. Trying to make sense of the contradiction, one journalist noted that the critics’ argument seems to be that “even though Amazon’s activities tend to reduce book prices, which is considered good for consumers, they ultimately hurt consumers.”22

In some ways, the story of Amazon’s sustained and growing dominance is also the story of changes in our antitrust laws. Due to a change in legal thinking and practice in the 1970s and 1980s, antitrust law now assesses competition largely with an eye to the short-term interests of consumers, not producers or the health of the market as a whole; antitrust doctrine views low consumer prices, alone, to be evidence of sound competition. By this measure, Amazon has excelled; it has evaded government scrutiny in part through fervently devoting its business strategy and rhetoric to reducing prices for consumers. Amazon’s closest encounter with antitrust authorities was when the Justice Department sued other companies for teaming up against Amazon.23 It is as if Bezos charted the company’s growth by first drawing a map of antitrust laws, and then devising routes to smoothly bypass them. With its missionary zeal for consumers, Amazon has marched toward monopoly by singing the tune of contemporary antitrust.

. . . .

This analysis reveals that the current framework in antitrust—specifically its equating competition with “consumer welfare,” typically measured through short-term effects on price and output24—fails to capture the architecture of market power in the twenty-first century marketplace. In other words, the potential harms to competition posed by Amazon’s dominance are not cognizable if we assess competition primarily through price and output. Focusing on these metrics instead blinds us to the potential hazards.

My argument is that gauging real competition in the twenty-first century marketplace—especially in the case of online platforms—requires analyzing the underlying structure and dynamics of markets. Rather than pegging competition to a narrow set of outcomes, this approach would examine the competitive process itself. Animating this framework is the idea that a company’s power and the potential anticompetitive nature of that power cannot be fully understood without looking to the structure of a business and the structural role it plays in markets. Applying this idea involves, for example, assessing whether a company’s structure creates certain anticompetitive conflicts of interest; whether it can cross-leverage market advantages across distinct lines of business; and whether the structure of the market incentivizes and permits predatory conduct.

. . . .

This market structure-based understanding of competition was a foundation of antitrust thought and policy through the 1960s. Subscribing to this view, courts blocked mergers that they determined would lead to anticompetitive market structures. In some instances, this meant halting horizontal deals—mergers combining two direct competitors operating in the same market or product line—that would have handed the new entity a large share of the market.26 In others, it involved rejecting vertical mergers—deals joining companies that operated in different tiers of the same supply or production chain—that would “foreclose competition.”27 Centrally, this approach involved policing not just for size but also for conflicts of interest—like whether allowing a dominant shoe manufacturer to extend into shoe retailing would create an incentive for the manufacturer to disadvantage or discriminate against competing retailers.28

The Chicago School approach to antitrust, which gained mainstream prominence and credibility in the 1970s and 1980s, rejected this structuralist view.29 In the words of Richard Posner, the essence of the Chicago School position is that “the proper lens for viewing antitrust problems is price theory.”30 Foundational to this view is a faith in the efficiency of markets, propelled by profit-maximizing actors. The Chicago School approach bases its vision of industrial organization on a simple theoretical premise: “[R]ational economic actors working within the confines of the market seek to maximize profits by combining inputs in the most efficient manner. A failure to act in this fashion will be punished by the competitive forces of the market.”31

. . . .

Practically, the shift from structuralism to price theory had two major ramifications for antitrust analysis. First, it led to a significant narrowing of the concept of entry barriers. An entry barrier is a cost that must be borne by a firm seeking to enter an industry but is not carried by firms already in the industry.34 According to the Chicago School, advantages that incumbents enjoy from economies of scale, capital requirements, and product differentiation do not constitute entry barriers, as these factors are considered to reflect no more than the “objective technical demands of production and distribution.”35 With so many “entry barriers . . . discounted, all firms are subject to the threat of potential competition . . . regardless of the number of firms or levels of concentration.”36 On this view, market power is always fleeting—and hence antitrust enforcement rarely needed.

The second consequence of the shift away from structuralism was that consumer prices became the dominant metric for assessing competition. In his highly influential work, The Antitrust Paradox, Robert Bork asserted that the sole normative objective of antitrust should be to maximize consumer welfare, best pursued through promoting economic efficiency.37 Although Bork used “consumer welfare” to mean “allocative efficiency,”38 courts and antitrust authorities have largely measured it through effects on consumer prices. In 1979, the Supreme Court followed Bork’s work and declared that “Congress designed the Sherman Act as a ‘consumer welfare prescription’”39—a statement that is widely viewed as erroneous.40 Still, this philosophy wound its way into policy and doctrine. The 1982 merger guidelines issued by the Reagan Administration—a radical departure from the previous guidelines, written in 1968—reflected this newfound focus. While the 1968 guidelines had established that the “primary role” of merger enforcement was “to preserve and promote market structures conducive to competition,”41 the 1982 guidelines said mergers “should not be permitted to create or enhance ‘market power,’” defined as the “ability of one or more firms profitably to maintain prices above competitive levels.”42 Today, showing antitrust injury requires showing harm to consumer welfare, generally in the form of price increases and output restrictions.43

. . . .

Two areas of enforcement that this reorientation has affected dramatically are predatory pricing and vertical integration. The Chicago School claims that “predatory pricing, vertical integration, and tying arrangements never or almost never reduce consumer welfare.”49 Both predatory pricing and vertical integration are highly relevant to analyzing Amazon’s path to dominance and the source of its power. Below, I offer a brief overview of how the Chicago School’s influence has shaped predatory pricing doctrine and enforcers’ views of vertical integration.

Link to the rest at The Yale Law Journal

It has been a long time since PG took an antitrust course in law school.

That said, he disagrees with the fundamental premise of the OP that, at the present time, Amazon must be reined in because it is too big and competitors are having a hard time.

PG agrees with the Chicago School argument that antitrust law is designed to benefit purchasers. If a company pushes prices down, absent some other factor, that’s a good thing. Competition that benefits purchasers is a public good. Antitrust law is designed to punish those who act improperly to push prices up.

Under PG’s view, if a seller pushes prices down for a period of time in order to force competitors out of business, then raises prices because competitors are gone, it is then that an antitrust violation occurs and the seller may be punished.

Amazon has not shown any price-increasing tendencies. PG also suggests that Amazon has a lot of competitors selling goods and services online. As far as competition is concerned, the online retail world is very easy to enter – a website, a spare room for inventory, a nearby UPS dropbox and a credit card processing service (there are lots) is about all that is needed. After all, Amazon began in Jeff Bezos’ garage.

Since the infrastructure necessary to become an online seller of goods and services is already in place and that infrastructure is not controlled by Amazon, Amazon cannot raise prices on its merchandise without leaving itself open to underpricing by competitors.

Walmart has put at least tens of thousands of merchants in small and medium-sized cities out of business.

Only a few years ago, Walmart was the bête noire of the same types of people who are complaining about Amazon’s antitrust violations today.

From The Unconvincing Antitrust Case Against Wal-Mart:

I recently picked up a copy of the July Harper’s Magazine to read an essay by Barry C. Lynn entitled, “Breaking the Chain: The Antitrust Case Against Wal-Mart.” If you can’t tell from the title, the basic point is that antitrust authorities should break up Wal-Mart and put an end to the immense havoc that the retail giant has caused the economy.

. . . .

Let me first summarize the Lynn’s argument and then discuss why they are entirely wrong as a matter of economics and sensible antitrust policy below the fold. Here are the basic moves in Lynn’s case against WM:

First, Wal-Mart is a monopsonist. Lynn writes that one in five of every American retail sales occurs at WM, and WM is dominating its retail rivals.

Second, WM leverages its monopsony power in a manner which antitrust law should prohibit. Lynn seems to have two antitrust harms in mind here.

The first is that WM has “changed the game” with respect to bargaining between supplier and retailers. WM dominates upstream suppliers by demanding lower prices, and using its own in-house brands to discipline suppliers, resulting in shrinking manufacturer profit margins. The article discusses WM’s reputation as a hard-nosed, no nonsense negotiator and cites examples of negotiations with Coca-Cola and Kraft. Lynn points to the use of “category management,” a practice where retailers delegate shelf space display decisions to a manufacturer (called the “category captain”) within a product category (say, sodas or soups).

Of category management, Lynn alleges without any substantiation that the practice has resulted in collusion by suppliers as well as retailers:

“one common result is that many producers simply stop competing head to head . . . . in many instances, a single firm ends up controlling 70% or more of US sales in an entire product line . . .. In exchange, its competitor will expect that firm to yield 70% or more of some other product line, say, snacks or spices. Such sharing out of markets by oligopolies is taking place throughout the non-branded economy . . . but nowhere is it more visible than in the aisles of Wal-Mart.”

Note the tension between the claim of supplier collusion and shrinking supplier margins. However, more importantly is the notion that category management and other changes in the bargaining relationships are necessary bad on antitrust grounds. There has been very little economic analysis of category management As a side note, Benjamin Klein, Kevin M. Murphy and are working on a paper entitled “Exclusive Dealing and Category Management in Retail Distribution,” which analyzes the economics of these arrangements as well as exclusive dealing contracts in retail . . . . From an antitrust perspective, it is difficult to imagine why category management would be any more of a concern than exclusive dealing, which is analyzed under the rule of reason and violates the Sherman Act when a number of conditions are satisfied (monopoly power, substantial foreclosure, barriers to entry, etc.). Category management only grants the manufacturer the right to favor his own product, and can be terminated by the retailer at any time, whereas exclusive dealing completely forecloses rivals from shelf space.

. . . .

The second antitrust harm Lynn points to is equally unconvincing. Lynn writes that even if WM is efficient, increased concentration in retail represents a “gathering of power unchecked and unaccountable,” and those who would defend efficiency must “view the American citizen not as someone who yearns to decide for himself or herself what to buy and where to work in a free market but to say, instead, ‘let them eat Tastykake.’”

. . . .

The data don’t match the theory. Taking Lynn’s antitrust theories on their own terms, perhaps the best place to start is that the data simply don’t agree. Retail margins have remained nearly constant for the past twenty years . . . .  Barriers to entry at retail are negligible, and because supracompetitive profits are dissipated through competition, payments to retailers are ultimately passed through to consumers.

What about prices? Lynn talks a great deal about the good old days of antitrust before the Reagan administration where the “goal was to enforce a balance of power among economic actors of all sizes, to maintain some degree of liberty at all levels within the economy.” The essay is essentially an ode to these discredited days of antitrust when consumer welfare took a back seat to attacking concentration for its own sake. For example, Lynn describes comments by then AG William French Smith that “bigness is not necessary badness” as “radical” and “astounding.” Really? Not to any undergraduate student of industrial organization. But what about prices? Does Lynn consider any of the competitive benefits of Wal-Mart, or is the antitrust case against Wal-Mart to be made at the expense of the consumer in the name some fuzzy principle of antitrust populism? Lynn’s essay says very little about prices except the following:

“to defend Wal-Mart for its low prices is to claim that the most perfect form of economic organization more closely resembles the Soviet Union in 1950 than 20th century America. It is to celebrate rationalization to the point of complete irrationality.”

Does anyone really believe that a retailer who earns 30% retail market share by competing vigorously for consumers is the equivalent to a central planner? I hope not. Retail competition is incredibly robust, as is easily observed by watching retail profit margins over the past 20 years in which concentration has increased substantially. To describe Wal-Mart’s negotiations with large manufacturers like Coca-Cola and Kraft as analogous to central planning activity is ridiculous.

Luckily, there is economic evidence that Wal-Mart is in fact very good for consumers.

Link to the rest at The Unconvincing Antitrust Case Against Wal-Mart

PG suggests that bigness is not badness. Bad actions by large or small entities is badness.

Walmart (“Low prices every day”) and Amazon (“Free Shipping” “Prime Day) are especially beneficial to middle class and lower class consumers for the simple fact that those consumers can buy more with their dollars.

PG suggests that the current consumer-oriented antitrust regimen is far more friendly than its predecessors, such as the now-gone Fair Trade laws which granted producers the right to set the final retail price of their goods, limiting the ability of chain stores to discount.

Even if a retailer wanted to sell products to consumers at a lower price and believed it could do so profitably, Fair Trade laws allowed manufacturers to prohibit such discounting. Essentially, Fair Trade laws allowed manufacturers the right to engage in legal price-fixing, a practice that only benefitted inefficient retailers, not consumers.


Amazon, Legal Stuff

20 Comments to “Amazon’s Antitrust Paradox”

  1. The problem with WalMart is that, once they put all the competition out of business, they close their store at that location to save costs, leaving entire communities with no stores at all. No stores, no jobs, a 30-mile drive to buy groceries, etc.

  2. As a consumer, I head to Amazon first, most of the time.

    As an investor, I wish I had more of its stock.

    As an author, the company has created a place where I, with a single novel, can sell.

    Their strategy of plowing profits back into makes more sense than paying executives great big bonuses while demanding government payouts.

    Is it just me, or is there a subtle ADS going on in this article, such as quoting the Hachette debacle as a bad thing?

    • Felix J. Torres

      More than a bit.

      The whole anti-Amazon crusade is predicated on the idea that it is possible to be “too successful” , that “too much success” however achieved is inherently bad, and that excellence must be crippled to accommodate mediocrity.

      It is not new.
      It has happened before and it will happen again.
      It is part of the populist anti-intellectual current that has been part of American culture since the nineteenth century.

  3. Ah, I love the smell of really bad ADS in the morning. And my thanks to ‘The Yale Law Journal’ for showing those there can not be trusted to know or understand laws or even simple words like ‘antitrust’.

    Where was this ‘The Yale Law Journal’ when Walmart and B&N were crushing their competitors?

    “PG suggests that the current consumer-oriented antitrust regimen is far more friendly than its predecessors, such as the now-gone Fair Trade laws which granted producers the right to set the final retail price of their goods, limiting the ability of chain stores to discount.”

    Oh, you mean like that agency thingy the qig5 are using? I do hope ‘The Yale Law Journal’ covered that ‘badness’ and I somehow missed it …

  4. Terrence OBrien

    Who cares if Amazon raises prices? Since they don’t control production, other online retailers are always ready to provide goods at a lower price.

  5. On a related note, I see this article on The Verge today touching on similar issues…


    • Felix J. Torres

      Seriously flawed approach.
      The problem ADSers fail to recognize is that Amazon doesn’t sell products at a loss and they certainly don’t sell below production cost.

      Amazon often sells below competitors’ costs but not below their own costs. Nobody has actually demonstrated that. They acquire product at a lower cost than many (but not all) competitors and their own operational costs are lower than most of their competitors. Their online services costs are definitely lower than those of competitors who rely on for-profit third parties, like Microsoft or Google.

      The classic example is pbooks: publishers volume discounts favor big players like Amazon to start with, then Amazon does its own pickup at the publishers instead of relying on third party transportation, it owns its online infrastructure, and it is increasingly doing more of the retail delivery.

      PBooks are a low margin business and Amazon is efficient enough they can survive on low single digit margins where smaller B&M “competitors” can’t.

      Being efficient is hardly the same as predatory pricing.

      And if the current version of Amazon is annoying, wait until they see what comes next:


      Haven’t they noticed how Amazon is now doing their own version of “ship to store”? Combine that with standard next day delivery (in the works) and same day pickup and whatever advantages WalMart and Target may gain by belatedly leveraging their B&M assets evaporates.

      • Indeed. And that was discussed as part of the antitrust matter concerning agency pricing. Save for a few loss leaders, Amazon priced at such a level that its ebook business could turn a profit overall.

        The thing is, I’m not so sure what’s magical about whether or not they’re selling at a loss. Even if they’re scrupulously doing a little better than breaking even, they can still discount so steeply no one else can match them and stay in business because they make so much of their money from other things. Is it all right because they’re not actually losing any money even if they’re not making any?

        • Felix J. Torres

          Depends on whether you care about the law or abstract degrees of “fairness”.

          As somebody or other once said, “Fair? Only children and progressives care about fairness. The rest live in the real world.”

          It should be no surprise that the deprecated legal principle that mandated price fixing was called “Fair trade”.

  6. Some random comments regarding both the piece that “inspired” PG’s posting and antitrust law:

    (1) This is a student note at the Yale Law Journal. That is, Ms Khan isn’t even a lawyer yet, let alone experienced practicing antitrust law. So don’t ascribe too much reputationally to anyone or anything on the basis of this piece, ok? It’s like saying “This medical student rundown of a patient’s condition at Mass. General was inadequate, so Harvard Med School must be terrible.” (Well, maybe… but not for that reason! <vbeg>)

    (2) The Chicago School is actually worse because it denies the efficacy of predatory pricing in a marketplace that begins with significant consumer choice. Leaving aside the counterfactual nature of that conclusion, it also denies noneconomic coercion, nonmarket anticompetitive methods (e.g., anti-comparative-advantage purported “union” ad campaigns with “buy American” messages), and — at least implicitly — nonprice means of harming consumers, such as by tying arrangements. Those paying attention to the news this morning regarding Apple’s latest antitrust setback should take carefuly note of the latter… and compare the rigidity of Apple’s purported “ecosystem” to the looseness of Amazon’s.

    (3) The real problem is the overfocus on price, because it’s measurable and therefore can be used as one of the input parameters to impressively complex statistical-calculation packages without regard to the underlying validity of the parameters themselves, as the sole concern or function. Price is an important, not the only, antitrust harm of concern to consumers; innovation matters, too, as the buggy-whip-manufacturers of the nineteenth century knew all too well. More to the point, as real-estate speculators and multigenerational rural stores, with their “settled expectations” of relatively captive markets, know all too well. (I can’t reference it immediately, but a few months back PG ran a highly informative piece on how bookstores were being forced out not by unprofitable sales but by ridiculous rent increases — and even that’s an understatement.)

    (4) That a particular vendor has a dominant market position is one fact in antitrust inquiry. Only under the ideologically dominant Chicago and Austrian definitions of “competition” (both of which apply only to completely fungible items… and there isn’t much that is less fungible, by definition, than intellectual property and the arts) is that fact more than context. The key problem is that both the Chicago and Austrian schools handwave “this is what happens after intervention” with “necessarily, perfect competition will produce the most efficient possible result”… which sort of ignores that “efficiency” is itself a value judgment and reifies the initial distribution of capital as the correct and just one.

    • Terrence OBrien

      Chicago says nothing about the correctness or justification of the initial distribution of capital. Nor do they define the point in time that is initial.

      There is also no system that has actually demonstrated it brings more prosperity to more people than what Chicago advocates.

      Progressives from 100 years back thought consumers should be willing to pay more so the market could be structured as Progressives wanted. Consumers disagreed.

      • Mr O’Brien:

        The problem is that “Chicago says nothing” about an awful lot, because it buries so much in its unstated, critical, normative assumptions. The specific example you cite can be refuted if you look at the mathematical underpinning for the definition of “efficient” that the Chicago school has converged upon since the early 1980s (there are unstated boundary conditions that require treating initial capital distribution as the equilibrium condition or there will be either an asymptotic result or divide-by-zero error; this also deals with the “point in time” issue).

        Which is not to say that the Austrian school is any better (it’s arguably worse), or that pure Keynesian (or even impure Keynesian systems are better. Heterodox economics has rejected the Enlightenment understanding that economics also has profound ethical/moral/philosophical aspects without actually justifying that rejection — it’s usually just assumed away, when the consideration is so explicit that it even rises to the level of “assumption.” The only reason that these emperors have clothes is that they’ve redefined “textile.”

        • Terrence OBrien

          Equilibrium tells us nothing about the correctness or justification of initial capital distribution.

          • Felix J. Torres

            Uh, if I may interject: the rejection of moral/ethical considerations in contemporary law isn’t limited to antitrust or economics. It is in fact intrinsic to the modern secularist legal system, which is why it goes unstated. It is not a bug but rather a feature.

            The modern secular state is not supposed to legislate mores or ethics, just the lowest common denominator of behavior that is acceptable/tolerable to the state. A diversity of mores and ethics is expected to coexist above those laws.

            In the US, the ongoing culture wars are the result of the various “tribes” seeking to institutionalize their mores and impose them on those who don’t share them.

    • Felix J. Torres

      Of all Amazon’s businesses the one where they are closest to antitrust troubles is KINDLE UNLIMITED’s ties to KDP. The courts would have to be keenly aware of their competitors’ history of missteps for them to skate through on that.

      It’s hard to blame them for being too successful in the face of the sheer incompetence of the rest of the field.

  7. Felix J. Torres

    The continued focus on Amazon retail pricing (especially of pbooks) is rather disingenuous in waving off the supplier (especially publisher) volume discounts that primarily make it possible and give rise to the myth that Amazon sells below cost.

    There’s quite a few businesses that thrive without volume discoubts, letting retailers compete solely on their internal process efficiency.

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