When bureaucrats and politicians (including 17 state attorney generals) attack a successful, entrepreneurial company, is it surprising that it looks like a circus? On the suit of the Federal Trade Commission against Amazon, I read in Thursday’s Wall Street Journal (“Lina Khan Once Went Big Against Amazon. As FTC Chair, She Changed Tack,” September 29, 2023):
Advertising is part of the FTC’s argument for why it says Amazon has provided worsening service to consumers. The company’s shopping results pages are now “cluttered with advertisements,” making it harder to find the products they want, the FTC’s lawsuit said.
That would make some sense if Amazon were trying to maximize its revenues at the cost of losing the consumers of its services, a behavior more suggestive of the approach of governments than of private companies competing in the market. Imagine a citizen shopping on the federal government’s sprawling websites, especially if he is shopping for liberty. He will find these sites cluttered with propaganda, especially at the political level, which makes it very difficult to find what he wants.
Speaking of the FTC’s chair, Lina Khan, the Wall Street Journal notes:
In her 2017 academic paper, Khan argued that Amazon sweet-talked customers by using predatory pricing, or slashed prices so low that it lost money but rivals couldn’t compete. Her paper acknowledged that predatory pricing was almost obsolete as a legal theory, the Supreme Court having set the bar so high that enforcers stopped trying to prove it.
Now the FTC accuses Amazon of hurting consumers with higher prices, mainly through punishing its marketplace sellers if they offer lower discounts anywhere else. …
“It’s really hard to square the circle of the earlier theory of harm that Lina Khan enunciated with the current complaint,” said John Mayo, an economist who leads Georgetown University’s Center for Business and Public Policy. “The earlier complaint was that prices were going to be too low and therefore anticompetitive. And now the theory is they are too high and they are anticompetitive.”
This illustrates the arbitrariness of bureaucratic and political processes. If you can’t sue them because their prices are too low, sue them because they are too high. And of course, the government knows what would be a price neither too low nor too high.
The foundation of the argument against antitrust is that competition and potential competition provide a built-in constraint against concentration. Competition only requires that the market be free from government-granted privileges and legal restrictions to entry. In a free market, greed controls greed. In an overgrown state, power does not control power as much as it fuels it. One can find a short exposé of the arguments against antitrust (including the idea of predatory pricing) in David Friedman’s Law’s Order: What Economics Has to Do with Law and Why It Matters (2000), chapter 16 on antitrust. For the broader economic-philosophical argument, we get a concise summary from James Buchanan (James M. Buchanan and Richard A. Musgrave, Public Finance and Public Choice: Two Contrasting Visions of the State [MIT Press, 1999]), which reminds us what freedom of contract and free enterprise look like:
If I observe someone with apples and somebody else with oranges, I don’t want to try to say a particular allocation of oranges and apples in a final position is better than in the other allocation. If I observe them trading without defrauding each other, whatever emerges, emerges, and that is the way I define what is efficient.
READER COMMENTS
Richard Fulmer
Oct 2 2023 at 7:09am
Show me the man, I’ll show you the crime. Whatever tool is at hand.
Jon Murphy
Oct 2 2023 at 7:40am
I suppose there is a way to square that circle: if, through predatory pricing, one drives out all competitors, then one can raise prices above marginal cost and create an anticompetitive atmosphere.
Of course, as has been known for decades now, that particular scheme is unlikely to come about (even Ms Kahn acknowledges it’s an absolete theory). But it is a way to square the circle.
Jon Murphy
Oct 2 2023 at 7:41am
That should say “obsolete” theory in my second to last sentence.
Pierre Lemieux
Oct 2 2023 at 10:39am
Jon: You’re right. But then, you would expect the complaint to at least mention predatory pricing as a first step to its current strategy, whouldn’t you?
Jon Murphy
Oct 2 2023 at 1:23pm
Agreed 100%. I was just doing a thought exercise.
Jose Pablo
Oct 2 2023 at 5:22pm
if, through predatory pricing, one drives out all competitors, then one can raise prices above marginal cost and create an anticompetitive atmosphere.
If “predatory pricing” “drives out all competitors”, why “raising prices” does not create opportunities to “drive in” a lot of competitors?
Prices should be above marginal cost (for most participants in the market), otherwise it was a terrible decision to invest in the business in the first place and doesn’t make any sense to keep investing in it.
Price should be even more above marginal cost in sectors with high entry barriers (a pre-requisite if you want to keep competitors out while rising prices in the second phase of the “master plan”).
So prices, to be anticompetitive in the “second leg” of this squaring of the circle, should be above “marginal cost + fair compensation for the cost of capital (whatever its “regulatory” meaning)”. But in this case you should expect new competitors entering the market.
And for this circle to be squared, all competitors should have been driven out, which AFAIK has not happened. Some competitors are driven out on a regular basis, but this is because competition exists not because “anticompetitive atmospheres”
Jon Murphy
Oct 2 2023 at 6:47pm
You’re absolutely right. That’s the main argument against predatory pricing and why it fell out of favor in legal and economic circles. It just doesn’t make sense
Bill
Oct 2 2023 at 12:48pm
“If you can’t sue them because their prices are too low, sue them because they are too high.”
And to make sure all bases are covered:
“Don’t try to charge the same amount:
That would be collusion!”
This is from the old poem,
R.W. Grant, “Tom Smith and His Incredible Bread Machine”
https://mises.org/library/tom-smith-and-his-incredible-bread-machine
Craig
Oct 2 2023 at 1:34pm
“The foundation of the argument against antitrust is that competition and potential competition provide a built-in constraint against concentration.”
They’re price fixing though.
vince
Oct 2 2023 at 10:00pm
And with such a constraint, why so much concentration?
Craig
Oct 2 2023 at 10:13pm
The price fixing prevents more nimble competitors from undercutting them.
Don Boudreaux
Oct 4 2023 at 6:29am
It’s not at all clear that collusion to fix prices is an especially effective way to seize monopoly profits without the colluders having to worry about cheating or entrants.
Pierre Lemieux
Oct 3 2023 at 11:19am
Craig: To the statement “The foundation of the argument against antitrust is that competition and potential competition provide a built-in constraint against concentration.” You replied “They’re price fixing though.” Yes, in the sense that if somebody wants to use your website or your living room for his business, you’ll quote a price of a fee. There is nothing economically (or morally) wrong in price fixing; it’s just that you better not ask for a price higher than what buyers think is a similar alternative.
David Crawley
Oct 2 2023 at 4:27pm
Amazon is clearly and flagrantly engaging in anti-competitive behavior that is anti-consumer. Why are they doing this? To line their own pockets.
When you go to Amazon and search for a product, they don’t display the product that they think you are most likely to want. Sellers that pay Amazon extra get listed first – and of course get more revenue as a result. Sometimes amazon is clear about this. But in other cases sellers that use Amazon’s over priced warehouse fulfillment services get listed first. This is the worst kept secret among Amazon sellers.
This behavior is not in the interests of consumers, nor is it in the interests of sellers.
It is particularly clear that they are engaged in anti-competitive behavior, because if there was perfect competition their warehouse fulfillment services would be cost competitive other peoples – they aren’t and its not even close.
They charge different fees to their sellers with whom Amazon also directly competes. This is clearly anti-competitive.
We don’t even need to get in to Amazon’s other odious practices, such as taking sales data from 3rd party products that they sell and using it to decide which 3rd part products to copy. No one thinks that knocking off other peoples products is OK, but Amazon swims in the grey zone of ripping off products from small scale entrepreneurs that have likely not had their product patented, and even if they did wouldn’t be able to afford expensive litigation to enforce them against one of the world’s largest companies. None of this would be possible if they didn’t have access to sales data of their competitors which in all other situations is clearly a trade secret that would never be shared with a competitor, and would be shared with a competitor here either except for the monopolistic power of Amazon. Prior to a merger’s approval the FTC would prohibit this type of data being shared between two merging entities so that they can compete freely. This is well understood and not controversial however Amazon harvests this data galore and uses it with gusto.
In short it is obvious from space that Amazon is engaged in anti-competitive behavior that is harmful to consumers and sellers everywhere. Given they seem unable to control themselves from engaging in their own Anti-competitive behavior intervention is regrettably necessary just like a wife-beater who is unable to control himself from harming his wife.
Jon Murphy
Oct 3 2023 at 10:38am
I’m confused: Amazon’s behavior, as you describe it, would result in lower profit to them, not higher. How is their behavior designed to “line their own pockets” when, mathematically, it would lead to lower profit?
Fraser Orr
Oct 5 2023 at 1:53pm
So some products get listed first — and this is cause for government action? Isn’t a better, simpler idea to expect the customer to scroll down a bit?
Andrea Mays
Oct 2 2023 at 6:19pm
Just dropping in to say you can read the chapter you mentioned ( Chapter 16 in Friedman’s Law’s Order ) free online on David Friedman’s web page. It is worth a look.
Jose Pablo
Oct 2 2023 at 7:45pm
What is amazing about Amazon (forgive the redundancy) is that its retail business is and always has been a terrible business as far as margins are concerned.
In 2022 Amazon lost money in the North American retail segment of the business (and even more money in the “International” retail segment).
In 2021 the margin (defined as Operating Income over Sales) on the North America retail business was “just”2.6%. Granted, a tiny margin over a big amount of sales, but the problem of business with margins so close to zero is that you have to be “paranoid” to avoid them turning negative at the slightest problem with your operations. As, in fact, happened to Amazon in 2022 due to “increased fulfillment and shipping costs, due in part to increases in investments in our fulfillment network, transportation costs, and wage rates and incentives, increased technology and content cost” (2022 Annual Report).
On the other hand, the AWS segment has (and always have had) very healthy margins (15-20%). As a matter of fact, more than 75% of Amazon Operating Income (on a good year for retail and more than 100% on a bad one), come from the AWS segment.
And yet this business segment is never mentioned in “antitrust” complains.
I guess that the FTC doesn’t want to be seen as the “protector” of Netflix, LinkedIn, Facebook, Walt Disney … and all the other AWS clients. But looking at the margins they seem to be the ones being charged prices well above Amazon’s marginal costs.
Craig
Oct 2 2023 at 10:29pm
“What is amazing about Amazon (forgive the redundancy) is that its retail business is and always has been a terrible business as far as margins are concerned.”
Yes, and by the way this applies to Walmart as well. They’re both high volume, low margin businesses. Amazon charges its third party sellers 15% of the sale and I’m pointing that out because Amazon, if it paid a 15% commission on the gross sale, they’d lose money. Walmart and Amazon aren’t selling you the widget though…entirely. Amazon is selling you the widget delivered to your porch tomorrow, Walmart is selling you the widget available for pickup now at one of its many locations. The cost of doing that is ENORMOUS though. So they’re good at that, right? (and they’d good at other things too, specifically logistics and they’re own branded items, etc).
But what they would have trouble competing with is the widget discounted 25% but delivered 7 days from now (and if you happen to be in my one day UPS Ground zone you get it tomorrow anyway, but I digress). And I can do that because I don’t have that widget at 1000+ locations. There’s trillions of dollars at stake, they will buy politicians, get subsidies, engage in price fixing in the form of retail price maintenance agreements. Their business materially depends on you NOT being given the OPTION of paying less and waiting. Both Amazon and Walmart would still exist, both do world class things that unequivocally add value, but instead of them being a $500bn per year business, they’d be an $80-$250bn per year business. Hard for me to say specifically the impact on gross sales, but they’d still be a multibillion dollar transnational corporation.
Jose Pablo
Oct 2 2023 at 11:35pm
instead of them being a $500bn per year business, they’d be an $80-$250bn per year business.
The impact on gross sales is irrelevant. The impact on operating income, the relevant one, would be very low.
The retail business in Amazon (US + International) represents between 25% and 0% of its operating income. Let’s say that you are right and thru all these horrible practices, they unfairly capture the segment of the retail business corresponding to “clients that would be willing to pay less and wait a week“. Let’s say this represents 20% of Amazon’s business (I am pretty sure I am overstating this segment here). Let’s say the margin on this clients is the average margin (very likely not since this particular clients seem to be particularly money conscious).
These clients would then represent between 5 and 0% of Amazon’s operating income.
All this is irrelevant to Amazon “true” business which is AWS
Jose Pablo
Oct 2 2023 at 11:42pm
My point Craig is that what the FTC seems to forget is that Amazon is something between 75 a 100% a cloud computing business. Not a retail business.
My guess is that the Amazon retail business standing along (and the much lower corresponding Amazon retail business standing along market value) would not attract the attention of the FTC
The FTC is going after Amazon because it is a huge company and they are going after Amazon’s retail business because it is the most visible part of the company.
But Amazon is not a huge company because of its retail business. It is a huge company because of AWS.
Craig
Oct 3 2023 at 12:32am
That’s because AWS is a much higher value added service of course (I am pretty sure if memory serves me correctly that Amazon got into AWS because their retail operation had so many computers around never being used at full capacity that this spare capacity was a byproduct of the business that they put to good use), but in terms of gross sales and footprints, retail still dwarfs AWS. AWS is 16% of gross sales.
“Let’s say this represents 20% of Amazon’s business (I am pretty sure I am overstating this segment here)”
Of course its difficult to know but there’s many examples where customers choose price over service. The airlines are a good example, even Walmart v the old school mall anchors.
If Amazon and Walmart had to compete on price they couldn’t cut prices by 25% across the board because they’d actually lose money. Now you are correct if Amazon loses $100bn in gross sales and we presume a 5% net margin (I am seeing 5.02% for Amazon and that’s bolstered by AWS of course and 4.88% for Walmart), they’d seem to lose only 5bn in net income though if that happened “tomorrow” they’d lose alot of money actually because remember in the very very short term all costs are fixed and in the very very long term all costs are variable. So if they absorbed a $100bn torpedo tomorrow, they’d be in trouble. But I digress, let us assume that they only lose the $5bn in net income
But from the consumer’s point of view if the reason Amazon loses $100bn in gross sales is because the former Amazon customers spend 25% less elsewhere, for the consumers, its a $25bn gain.
Pierre Lemieux
Oct 3 2023 at 11:03am
Craig: You write:
They would also have trouble competing against somebody offering the widget at a 25% premium delivered within three hours. Or perhaps they would have trouble competing against somebody offering the widget discounted 50% and delivered in a couple of months. Or… Many would’s.
There is no armchair that provides the answer. What is needed is for markets to discover what investors are willing to voluntarily finance and what consumers are willing to freely pay. The market is a discovery process. If the market is reasonably free, saying that consumers are not offered the nirvana option that I imagine they would prefer reminds me of the philosopher-king and casuistry on the “just price.”
Craig
Oct 3 2023 at 1:40pm
“saying that consumers are not offered the nirvana option that I imagine they would prefer”
They know that’s why they vigilantly police it. Bottom line they’re engaged in price fixing.
“There is no armchair that provides the answer. ”
Perhaps, but if you shop somewhere and the owner is launching penises into space, you better watch your money because you’re probably getting ripped off.
“The market is a discovery process.”
Yes, so let’s stop the price fixing and find out.
Jon Murphy
Oct 3 2023 at 1:52pm
I was reading the FTC’s complaint against Amazon. It’s a little difficult to tell what, exactly, they think Amazon is doing. Part of that is because the complaint is heavily redacted, but a lot of it is they do not seem to have a theory of behavior for Amazon (or rudimentary economic understanding of monopoly, for that matter). There’s a lot of circular reasoning and what unredacted evidence they present is not evidence of monopoly power.
The whole thing is long and I read it quickly. But my initial feeling is their argument in incoherent.
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