Amazon brooks no rivals with Bezos in the saddle
Amazon’s general counsel, David Zapolsky, had a lot on his mind last month when he and four members of his legal team visited the offices of New America, a liberal-leaning think tank in Washington. The retail juggernaut was days from announcing its $13.8 billion purchase of Whole Foods, a deal that would not only roil the grocery industry but also trigger a government antitrust investigation into the strategies and practices of the “Everything Store.” And, as Zapolsky was no doubt aware, no organisation had been more dogged in raising those concerns than New America — and, in particular, a 28-yearold law student named Lina Khan.
Earlier this year, the Yale Law Journal published a 24,000-word “note” by Khan titled Amazon’s Antitrust Paradox. The article laid out with remarkable clarity why American antitrust law has evolved to the point that it is no longer equipped to deal with tech giants such as Amazon.com, which has made itself as essential to commerce in the 21st century as the railroads, telephone systems and computer hardware makers were in the 20th.
For Amazon, which prides itself on its relentless consumer focus, the suggestion that its spectacular growth might not be in the public interest poses a particular challenge.
Khan is amazed and a bit amused by all the attention. Born in London, where her Pakistani parents met as college students, she grew up in a well-to-do New York City suburb before heading off to Williams College, where she was editor of the school newspaper. Looking toward a future in journalism, she moved to Washington and found herself working as a researcher at New America on issues relating to economic power.
She then headed off to Yale Law, where she impressed instructors with her keen mind, thorough preparation and passion for economic justice. In her second year, she began researching the history of antitrust law to understand why it has failed to provide much of a check on corporate power. Amazon’s Antitrust Paradox was the result.
The Chicago antitrust theory is ill equipped to deal with high-tech industries, which naturally tend toward winner-take-all competition. In these, most of the expenses are in the form of upfront investments, such as software (think Apple and Microsoft), meaning that the cost of serving additional customers is close to zero. Customers naturally gravitate to the platform with the largest network of customers (think Facebook). Or their success depends on having the most customer data (think Google).
What this “post-Chicago” economics shows is that in such industries, firms that jump into an early lead can gain an overwhelming advantage that new rivals find it nearly impossible to enter the market, while even experienced ones find it difficult to stay in the game.
To varying degrees, Amazon displays all these characteristics, and by its breadth and complexity, confounds traditional antitrust analysis. What began as an online book retailer now sells just about everything under the sun — not just online but, more recently, also through physical stores and pickup depots. In hundreds of high-volume categories, Amazon is not only a retailer but also produces its own branded line of merchandise.
Through its online marketplace, customers can buy from Amazon but also from millions of competing retailers who typically pay a 15 per cent to 20 per cent commission and now account for half of all unit sales on the Amazon platform — and a quarter of Amazon’s
While Amazon is not yet a threat to competition, it is well on its way to becoming one
total profits. Many of these “third-party sellers” pay additional fees to store their inventory in Amazon warehouses, use Amazon robots and personnel to fulfill customer orders, or rely on Amazon to deliver their goods to customers across the globe through its fleet of 25 planes and 4,000 trucks or its deeply discounted delivery contracts with UPS and FedEx.
This remarkable business machine, offering 350 million items for sale, is fast approaching the point where it can claim nearly every household in America as a customer. And through its $99-a-year Prime programme, Amazon uses free delivery and access to its premium video service to bolster loyalty of customers who each spend an average of $1,500 per year. By one estimate, at current growth rates, half of all American households will be Prime customers by 2020.
This description of Amazon’s business is drawn largely from its public filings and reports from market analysts. As is its custom, Amazon declined to comment or answer questions for the record. Jeffrey P. Bezos, the company’s founder and chief executive, is the owner of The Washington Post.
Is Amazon so successful, is it getting so big, that it poses a threat to consumers or competition? By current antitrust standards, certainly not.
Here is a company, after all, known for disrupting and turbocharging competition in every market it enters, lowering prices and forcing rivals to match the relentless efficiency of its operations and the quality of its service. That is, after all, usually how firms come to dominate an industry, and there is nothing illegal about that. But under the antitrust law, once a firm is dominant, its actions and business practices become subject to more rigorous scrutiny, to make sure it is not abusing its dominant position. And like all dominant firms, Amazon disputes its dominance.
Even with the Whole Foods purchase, Amazon will have only a 2 per cent share of the $600 billion-ayear American grocery market. That is why most antitrust experts think there is little chance that the government will try to block the deal.
If Amazon is so small and its growth so benign, Khan asks, then why does the prospect of Amazon’s entry into a market dramatically drive up its own stock price while driving down those of its rivals? Why, she asks, have so many bricks-and-mortar retailers been unable to make inroads into online retailing?
Antitrust analysis generally assumes dominant firms often exercise their market power by raising prices, but what if Amazon exercises its market power, Khan asks, by squeezing the profit margins of its suppliers? What if its strategy is to keep prices low in markets it dominates to gain entry into new markets that will generate still more sales and profits?
While Amazon is not yet a threat to competition, it is well on its way to becoming one, which is probably why the company is taking these arguments — and those who make them — more seriously. Amazon is reported to be in the market for an antitrust economist, and in the wake of the Whole Foods announcement, it has engaged the services of two former heads of the Justice Department antitrust division, one Democrat and one Republican.
“Google, Apple and Amazon have created disruptive technologies that changed the world, and every day they deliver valuable products,” said Sen. Elizabeth Warren, D-Massachusetts, in a speech last month at New America. “But the opportunity to compete must remain open for new entrants and smaller competitors that want their chance to change the world.”
There is nothing in economic theory that makes it inevitable that successful disrupters will be disrupted. Indeed, what history demonstrates — and what a 28-year-old law student now reminds us — is that it sometimes takes a little public power to keep private power in check. — The Washington Post
Pearlstein received the Pulitzer Prize for Commentary for “his insightful columns that
explore complex economic ills