Is Amazon a monopoly?

by Tom Startup on June 30, 2017 at 9:22 am in: Featured, From the blogs, Innovation, Openness, United States
by Tom Startup on June 30, 2017 at 9:22 am in: Featured, From the blogs, Innovation, Openness, United States

Jeff Bezos: “Alexa, buy me something from Whole Foods.” Alexa: “Buy Whole Foods…buying complete.”  Bezos: “No! Wait!”  Or so went the joke doing the rounds on Twitter last week.  News that Amazon wants to buy Whole Foods, an upmarket US grocery firm, sent a shockwave through the usually sleepy world of food retailing.  On the day it was announced the share prices of supermarket chains such as Walmart and Sears took a hammering.  Then there were reports that the Amazon purchase, and expectations of subsequent falls in foods prices, was causing Fed officials to reconsider the outlook for inflation.  On the face of it, this response is extraordinary.  Amazon currently has around 0.2% of the US grocery market, and even with the purchase of Whole Foods, that share will only rise to 1.4%, while Walmart, the industry leader, has around 15%.

Yet investors sense that the decision by Bezos to enter the world of bricks-and-mortar groceries could, as it did previously in online retailing, publishing and tablet computers, unleash a wave of disruption.  Analysts believe that the purchase of Whole Foods will enable the firm to leverage its huge purchasing power to give people fresh food, in a store near them, at a discount.  Now opponents are accusing Amazon of abusing its monopoly power, even calling for the Federal Trade Commission to block the purchase.

This matters not just for grocery customers, but for the wider economy.  The growth of large firms such as Amazon, Google and Facebook is part of a broader trend towards market concentration, with invidious effects.  According to a new paper from David Autor, a professor of economics at MIT, the rise of “superstar firms” in the US economy is behind the much-documented fall in the labour share of GDP in the economy (see Chart). 

If so, then the growth of firms such as Amazon is contributing to the impoverishment of workers, in the US and abroad.  Elsewhere, market concentration has been blamed for falling productivity.  Like it or not, our economic fortunes depend on the type of economy being forged by Amazon and its sort.

Source:  OECD.

Lina Khan, of the New America think tank, has accordingly written an op-ed in the New York Times arguing that Amazon has unacceptable monopoly power and that the purchase of Whole Foods should be blocked.  Highlighting that the company has already accrued a 43% share of online retailing and 74% share of the e-book market, she compares the 21st century firm to a 19th century railroad:

“By integrating across business lines, Amazon now competes with the companies that rely on its platform. This decision to not only host and transport goods but to also directly make and sell them gives rise to a conflict of interest, positioning Amazon to give preferential treatment to itself…. And like the railroads of yore, Amazon dictates terms and prices to those dependent on its rails”

In other words, the culprit is the vertical integration of its platform:  providing a means for the sale and distribution of products, while simultaneously competing against firms that use it.

Douglas Rushkoff, a professor of digital economics at CUNY/Queens, agrees.  He also pinpoints the problem in Amazon’s creation and exploitation of its online platform:

“But in a digital economy, the platform is the business. Netflix content sells its platform. Apple’s devices sell its supposed “ecosystem.” Amazon’s book business, like Uber’s cab business, was just an easy foothold—the low-hanging fruit of an existing but inefficient marketplace—through which to establish a platform monopoly. From that beachhead, the company then pivots to other verticals.” 

So even if Amazon is not a dominant player in grocery retail, its access to an unparalleled infrastructure for purchase and distribution gives it an unfair advantage in that market.

John Naughton, of the Guardian newspaper, thinks the problem lies with the antitrust authorities, who, basing their views on the 1978 book The Antitrust Paradox by Robert Bork, wrongly assume that Amazon’s low prices must mean that there’s no monopoly problem.

“Crudely put, the implication of the Bork view is that no matter how big or dominant a company becomes, if there’s no evidence that its dominance is harming consumers, then there’s no antitrust concern. And the digital giants that now dominate the landscape have driven a coach and horses through this loophole.”

Amazon has so far eschewed the aggressive pursuit of profits in favour of revenue growth, innovation, and market dominance.  This has meant low prices for consumers and so the authorities have, in his view mistakenly, seen no reason to act. 

But Ryan Radia, a research fellow at the Competitive Enterprise Institute, a US think tank, disagrees.  Firstly, he argues that if Amazon were a monopoly, it should be making big profits.  But Amazon has lost money about half the time and its current profit margin is a wafer-thin 1.7%.  Secondly, he thinks that we should welcome the innovation and disruption Amazon will bring since it will almost certainly benefit consumers:

“Through impending innovations like on-demand drone delivery, Amazon surely aspires to make online shopping more popular still. But we’re far better off letting Amazon try to reshape the retail sector through innovation instead of thwarting the firm’s evolution through governmental restraints justified by hypothetical fears.”

All of which raises the question:  is a monopoly that doesn’t behave like a monopoly really a monopoly? 

The old view of monopolies as slow-moving businesses that ratchet-up prices to exploit their captive consumers certainly doesn’t apply to Amazon.  Its genius has been to incessantly innovate and expand by keeping prices low to grow its customer base and move into new markets.  That hasn’t hurt consumers, yet.  But the fact that Amazon’s share price keeps rising, despite lacklustre profits, shows that investors believe that the promise of staggering future profits still lies ahead. 

And there is now a growing consensus among economists that the impacts of such market concentration for the wider economy are serious and damaging, both because prices do eventually rise and because (as in the case of Google, as highlighted by the European Commission) they use their market power to block competition. That, after all, is also what Microsoft did to Netscape in the 1990s, triggering off antitrust cases on both sides of the Atlantic.

So it would be foolish for antitrust authorities to continue to wait before reining companies like Amazon in.  But the irony is that the grocery market is probably the market where the case for Amazon breaching monopoly laws is least persuasive.  A cozy oligopoly for many years, it is exactly the sort of situation where Amazon’s disruption is likely to be beneficial.  Amazon very likely needs its wings clipped, but blocking the purchase of Whole Foods is probably the wrong target. 

by Tom Startup | 29/06/17

Edited by Bill Emmott

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