Monday, July 2, 2018

Product Dumping, Amazon Style

Robinson Meyer produced an interesting little article describing the work of a young legal scholar who has taken aim at Amazon as an example of what should be an illegal monopoly.  The work appeared in The Atlantic under the title The Trustbuster in the paper edition, and as How to Fight Amazon (Before You Turn 29) online.  The young person referenced is Lina Khan who is working at the Open Markets Institute, an “anti-monopoly think tank based in Washington, D.C.”  Meyer reminds readers of how powerful Amazon has become in a number of market arenas, and then describes the practices that Khan believes are monopolistic.

“First, Khan says, Amazon has been willing “to sustain losses and invest aggressively at the expense of profits.” This isn’t a controversial assertion: Amazon has posted an annual profit for only 13 of the past 21 years, according to The New York Times. Historically, it has plowed any profits right back into cheaper prices and R&D into everything from robotics to image recognition. Second, Amazon is integrated vertically, across business lines. In addition to selling stuff online, Amazon now publishes books, extends credit, sells online ads, designs clothes, and produces movies and TV shows. It is also one of the world’s largest providers of cloud storage and computing power, renting server space to Netflix, Adobe, Airbnb, and NASA.”

“These two practices—predatory pricing and integration across business lines—may sound normal. But under old readings of U.S. antitrust law, they are illegal.”

Amazon, and many other market giants have been allowed to grow almost without bound because self-interested capitalists and their bespoke politicians enthusiastically endorsed a particular view of antitrust law espoused by Robert Bork which designated higher consumer prices as the only criterion to be considered as an indication of monopoly.

“….in 1978, a Yale Law professor named Robert Bork promoted a clean new theory of antitrust law, inspired by the libertarian Chicago school of economics.”

“Bork decreed that all antitrust suits should be judged by one question: What will most lower prices for consumers? The answer, he said, was almost always more mergers. When companies merge, they get rid of redundant business units, lower their operating costs, and become more efficient, ultimately passing this efficiency on to consumers as lower prices.”

“Bork’s views become interesting in light of Amazon. Bork thought vertical integration was fine: Since he believed markets were perfectly efficient, he assumed that a lower-cost competitor would always butt in and fight off a would-be monopolist. And predatory pricing? It is “a phenomenon that probably does not exist,” he wrote. The Chicago school, he said, had proved that companies would always pursue short-term profits over long-term growth.”

What is of interest here is to put into perspective the reality that Amazon was able to sell items at a loss for many years and use its revenue to further its long-term business interests.  If China had sold books at a loss in the US in order to control the publishing industry and drive rival book sellers out of business, there would have been hell to pay.  China is often accused of using government subsidies to finance below-cost sales of its products.  Trump recently placed a tariff on solar panels because China was accused of that practice—often referred to as “dumping.”

What Amazon has done is actually the same “dumping” strategy.  Amazon grew in power by selling at a loss because a threatening global power was subsidizing it as well.  This entity was not a rival nation.  Rather, it was the even more dangerous US financial industry.  By continuing to boost Amazon’s stock price even though it was losing money, Amazon received a subsidy that allowed it to pursue its goal of market dominance.

Amazon clearly has monopolistic power in certain markets, no matter how one might choose to interpret the legality.  Perhaps, if enough Lina Khans continue to beat the drum, we can arrive at an antitrust approach appropriate for our age.  

And we can conclude that the Chicago school of economics was once again wrong.

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