Amazon, Amazon Marketplace, Apple, e-Commerce, eBay, Elizabeth Warren, Home Depot, Jeff Bezos, Lina M. Kahn, Market Concentration, monopoly, Monopsony, Predatory Pricing, QVC, Was Mart, Wayfair
It’s almost always best to resist the temptation to “fix” perceived market failures, perceptions that are often incorrect to begin with. An equivalent truism is that government intervention in any market will almost always damage outcomes for consumers and producers alike. So it is with ill-advised calls to bring antitrust action against Amazon. Elizabeth Warren is a prominent voice among the would-be meddlers. She tells the story of a hypothetical pillow manufacturer reliant on sales through Amazon’s platform. But alas, the small company is squeezed out of its market because Amazon gives its own brand of pillows superior placement and pricing. Is this a clear case of anti-competitive behavior? And if so, what’s to be done?
In this Yale Law Journal article Lina M. Kahn asserts that there is an antitrust case against Amazon. From the abstract:
“We cannot cognize the potential harms to competition posed by Amazon’s dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. These concerns are heightened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational—even as existing doctrine treats it as irrational and therefore implausible. Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors.”
A basic argument against anti-trust action is that the retail market and e-commerce market are not as concentrated as Kahn and Warren suggest. Amazon’s share of U.S. retail sales was an estimated 5% in 2018, but its share of e-commerce is the more worrisome to modern-day trust busters: Amazon is estimated to have controlled about 49% of U.S. online sales in 2018.
Obviously 49% is not close to monopolization, but the company is far ahead of other on-line rivals: eBay’s share was slightly less than 7%; Apple and Walmart each had less than 4%, and an assortment of sellers such as Home Depot, QVC and Wayfair, had shares of 1.5% share or less. The point is, however, that there are prominent rivals, some with aggressive plans to compete in the space. For example, apart from its traditional auction model, eBay is instituting a number of changes to its platform and offerings that it hopes will help it to compete with Amazon, some of which are very much like the practices for which Amazon is now criticized, such as preferential placement for big advertisers. Wal Mart is investing heavily in an effort to expand its online sales.
Companies like these rivals have the resources and access to capital to pose a legitimate threat to Amazon’s online dominance. That sort of competitive pressure, or even its mere possibility, imposes a far more effective form of market discipline than government regulators can hope to achieve, assuming they wouldn’t break the market. The governance imposed by the market itself keeps the focus squarely on bringing value to customers, which for Amazon means both buyers and third-party sellers. And while Amazon’s business model and platform are highly successful, no one, including Amazon management, can anticipate the shape of new technological developments that could lead to the next revolution in retail. Again, there are potent incentives for those who might be in a position to foment such a revolution.
But what about those sellers who rely so heavily on Amazon’s platform? Does Amazon exercise monopsony power to the detriment of these sellers, as Kahn and Warren contend? Again, sellers have alternatives. While it might be a burden for the smallest startups to compete on several different platforms, they do have choices. Therefore, the monopsony story just doesn’t hold up. Amazon has a large marketplace precisely because so many third-party sellers have chosen to compete there. But they can compete elsewhere.
If barriers to entry are created by Amazon’s platform management, it would involve a loss of revenue earned from hosting third-party sellers and create market opportunities for competitive platforms. The same can be said of “predatory placement” of Amazon’s own first-party product offerings. This practice bears a similarity to grocery stores giving preferred placement to certain brands in exchange for fees, which allow grocers to offer those products at lower prices. Indeed, few if any grocery stores carry all national brands, but those brands are usually available at competing stores. If anything, it would seem that getting a product listed on an online platform is relatively easy compared to getting space on grocery shelves, though like grocery brands, preferred placement is another matter. Building a brand has never been easy, and it may be necessary for less established products to be marketed on multiple platforms, including platforms based on auction models.
It would be very difficult to prove that Amazon engages in predatory pricing of their own offerings (also see here). That involves pricing below cost (including the loss of revenue from third-party sellers). Amazon might practice what has been described as loss leadership: offering products below cost from time-to-time in oder to spur sales of other products, which is a time-honored marketing tradition. The following quote, taken from the first link in this paragraph, is from a judge in a recent price fixing case involving Apple and Amazon:
“… the Complaint asserts that Amazon’s e-books business was ‘consistently profitable.’ Moreover, to hold a competitor liable for predatory pricing under the Sherman Act, one must prove more than simply pricing ‘below an appropriate measure of . . . costs.’ There must also be a ‘dangerous probability’ that the alleged predator will ‘recoup its investment in below-cost prices’ in the future. None of the comments demonstrate that either condition for predatory pricing by Amazon existed or will likely exist. Indeed, while the comments complain that Amazon’s $9.99 price for newly-released and bestselling e-books was ‘predatory,’ none of them attempts to show that Amazon’s e-book prices as a whole were below its marginal costs.”
The basic considerations discussed above are couched in terms of traditional anti-trust thinking: monopoly, concentration, competitive threats, and predatory pricing. However, there is another, more fundamental point to be made: Amazon’s massive success is due precisely to the popularity of their platform as well as service to consumers and third-party sellers. That’s capitalism, baby! Does Amazon extract a price from users? Yes, it engages in mutually beneficial trade! If it tries to extract too much, it will suffer at its own hands by creating market opportunities for others. It is Amazon’s platform, asset, and private property. The Amazon Marketplace belongs to Amazon, and the company is free to manage it as shareholders allow. There is no social value in interfering with private property and voluntary arrangements that bring unambiguous benefits to customers on both sides of the transactions sponsored on the platform. Such interference would diminish those benefits and destroy private value belonging to Amazon shareholders.
Jeff Bezos’ recent letter to Amazon shareholders tells of third-party sellers “kicking our first-part butt.” Amazon’s total sales have grown fast over the past two decades, and while its sales in first-party transactions have grown at a robust 20% a year, third-party sales on the platform have grown at a rate of 52%! The last link provides this Bezos quote:
“Why did independent sellers do so much better selling on Amazon than they did on eBay? And why were independent sellers able to grow so much faster than Amazon’s own highly organized first-party sales organization? There isn’t one answer, but we do know one extremely important part of the answer: We helped independent sellers compete against our first-party business by investing in and offering them the very best selling tools we could imagine and build.”
Bezos also tells of the heavy investments Amazon makes in efforts to improve its platform, which have brought tremendous successes and a few noteworthy failures. His letter is obviously self-serving, both as an effort to engage shareholders and as an implicit appeal against anti-trust action. Nevertheless, it is hard to deny the company’s outstanding performance, the benefits it brings to the consuming public, and the opportunities it creates for enterprising sellers and entrepreneurs. The unfortunate fact is we must always be vigilant for the itchy fingers of leftists grasping for the value created by private effort.