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Amazon’s Un-Scrutinized Monopolistic Practices

In August 2017, Amazon purchased Whole Foods for $13.7 billion with a “vision of making Whole Foods Market’s high-quality, natural and organic food affordable for everyone.” While Amazon’s Prime users were ecstatic to find organic, fresh strawberries at just $3.99/box compared to the usual $8.99, few people paused to consider the company’s mammoth market share in various industries.

In 1994, Jeff Bezos started Amazon as an e-bookstore in his garage in Bellevue, Washington. Since then, the company has expanded to “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 host of cloud server space.” As the world’s largest online sales company, Amazon asserts total control of consumption patterns, and strongly influences domains not traditionally associated with online retail. In other words, through low prices, Amazon has a monopoly in shaping consumer preferences and influencing demand patterns, especially through methods of personalized and targeted advertising. Despite its immense hold over the aforementioned parts of the economy, Amazon has received little scrutiny from federal regulators. Traditionally, antitrust laws maintain fair competition through protecting consumer welfare, or ensuring low prices. Because of Amazon’s affordability, current regulatory frameworks are unequipped to counter the company’s structural power in redefining social and cultural norms of consumption. Since consumer welfare is measured through achieving low prices and high output, monopolies that satisfy these criteria are often given free rein to control various industries, simultaneously barring fair entry for smaller firms. As such, antitrust must be revised to defend against all-encompassing monopolistic influences.

Joseph Schumpeter, a 20th century Austrian economist, wrote on the power dynamics between the masses and monopolies in democracies. Schumpeter defends monopolies, often big firms, as champions of low prices and maximal outputs, providing the most economic goods for society. Under Schumpeter’s dynamic and innovation-oriented economic theory, he argues that only entrepreneurs can break up traditionalist methods and invigorate development. Through self-correcting mechanisms, capitalism, as the process of creative destruction, accounts for changing consumer desires and preferences by replacing traditional methods with new technology. Insofar as monopolies are crucial to maximizing consumer welfare and instigating growth, Schumpeter defends their domination of the market.

While Schumpeter had in mind large firms like Standard Oil Company, Amazon and Uber are modern day equivalents that have consolidated vast swaths of power in their respective markets.  To contextualize Schumpeter’s theory, consider Bezo’s letter to Amazon’s shareholders:

“a fundamental measure of our success will be…our ability to extend and solidify our current market leadership position… measure[d] in terms of…the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We…will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.”

Market leadership put to practice, as evidenced in the letter above, Amazon’s business model is to aggressively invest and establish scale, even if that means cutting significant losses by slashing prices.  It is important to note during its twenty years in business, the company generated mostly losses not profits; in fact, only until 2013 did Amazon generate “a positive net income in just over half of its financial reporting quarters.”  For example, on Prime membership alone, Amazon has been losing $1 to $2 billion a year.  Like Schumpeter’s description of the entrepreneur who plays the long-game, Bezos demonstrates different weighing mechanisms in decision-making, and willingness to spend billions to become customers’ “onestop-shop” even at the cost of initial losses.  There is rationality to Bezos’ approach; in 2014, when the company raised the Prime Membership annual fee from $79 to $99, 99% of Prime users surveyed responded they would continue to subscribe. Amazon had created such buy-in that consumers do not want to shop anywhere else. Placed back into Schumpeter’s monopolistic practices, it becomes clear that innovative development through creative destruction is impossible under perfect competition conditions. Bezos needed long-term trust from his investors and incredible patience to fully conquer his economic territory. As such, monopolistic practices like price rigidity, long-term insurance, and temporary secrecy are necessary for growth even at the cost of initial inefficiencies and losses.

In current antitrust law practices, competition is equated with consumer welfare, which is measured through prices and outputs.  However, this understanding of consumer welfare fails to capture the current architecture of market power. In other words, insofar as consumers are satisfied with low prices and high outputs, Schumpeter ignores structural barriers to new competition entering the market. For example, once Amazon created massive buy-in, consumers, as creatures of habit, do not want to shop anywhere else. As such any store or product with an online presence struggles to compete with Amazon’s two-day delivery and expansive options. After all, why go to Walmart and buy an instant pot or tennis racquet when one e-commerce store has both and can deliver to your doorstep in 48 hours? Thus, pervasive social dominance spreads without any democratic check, and it is clear that Amazon has escaped any meaningful regulation. How did this happen?

The original purpose of antitrust law was to redistribute the concentrated power of industrial trusts and large business organizations.  Lina Khan suggests two methods to reduce monopolies’ social influence: policing forms of vertical integration to reduce the anticompetitive nature of markets, or regulating the domain of monopolies through nondiscrimination policy.  Khan’s methods mainly target Amazon, but these policies could be extended to regulating other big firms of a similar nature.

First, antitrust law could incorporate limits on vertical integration. For online platforms with a certain level of dominance involved in several related areas of business, they should be prohibited from “competing directly with the businesses that depend on it”.  Amazon runs as its own online company and as a host platform for third-party sellers (retailers, publishers, manufacturers), but it should not be allowed to dominate retail platforms in such a way; insofar as Amazon can create situations that privilege its own business and disadvantage other companies, it should be prohibited from owning multiple other platforms that are also competition.  Further condoning this behaviour enables bad incentives, as Amazon can pick and choose to whom it makes its services available. Currently, to consolidate market power, Amazon uses its insights from being a third-party host to help its own business, gaining unfair advantages over smaller firms who do not have the capacity to access such information, or the prominence to serve as an attractive host in the first place. As such, these exclusive insights distort competition and bar other companies from occupying shares in the internet economy. Second, regulations should include a nondiscrimination policy for price and services. Considering that many concerns about large firms orient around their business structure and avoiding conflicts of interest as they span across multiple sectors, it is crucial to prohibit firms from privileging its own goods and from discriminating among producers and consumers.”  Different from the first approach, nondiscrimination would allow firms to enjoying its presence across multiple sectors and the “benefits of scale” that Schumpeter observed; however, firms would be unable to price discriminate against platform users to gain unfair advantages or increase market power. Taking the policy in this direction, we can continue to get Schumpeter’s monopolistic benefits while checking against social domination.

If either method is implemented, the anticompetitive nature of market structure as is would be mitigated, and smaller businesses could enter the market and have a real chance at prospering alongside big firm presence. With more competition, the options available to consumers multiply. For example, rather than be swayed by Amazon’s free Kindle book deals, consumers have a better chance at staying committed to reading paperbacks and getting personalized recommendations from independent store owners that are not being rapidly eliminated. As Khan proves, it is possible to reap Schumpeter’s monopolistic benefits while giving smaller businesses a chance to compete and check against immense accumulation of market shares.

Photo: Image via Claudio Toledo (Flickr)