Categories
Antitrust Monopolization

Amazon’s Problem Is Too Much Competition, Not Too Little

Amazon has come under assault in recent weeks for failing to keep “thousands of banned, unsafe, or mislabeled” products sold by third parties off of its site. The New York Times, which has been acting as a mouthpiece for the Authors Guild in its crusade against Amazon, has focused on the sale of knock-off books. But The Wall Street Journal has shown that the problem extends across multiple product categories, and concludes that “Amazon has ceded control of its site.”

The great irony here is that this is proof that Amazon is being too open to competition, not, as Elizabeth Warren, the Open Markets Institute, and the Times have been arguing, too closed to it.

Unlike, say, Apple, which designs virtually every component of its phones, Amazon chose early on to platformize its business. When it created a useful cloud service to support its ecommerce website, Amazon opened the platform, called Amazon Web Services, to the market, turning it into a successful business in its own right. Amazon is doing the same thing with package delivery, allowing anyone with a car and an app to deliver packages for the company. And of course Amazon platformized its own ecommerce website, allowing third party sellers to list and sell products through Amazon.com.

Of course, Amazon could have taken a more traditional route. It could have kept its cloud services to itself. It could have continued to contract out its package delivery business to a single vendor, like UPS. And it could have remained the only retailer on its own ecommerce website. If it had, it is hard to see how Amazon would have come in for criticism from the big tech breakup crowd. Just as nary a peep has been heard about the fact that Apple insists, for example, on designing its own iPhone CPUs.

But Amazon instead did what competition advocates are supposed to want: the company threw open virtually every component of its business to competition. As a result, however, it has been attacked by Elizabeth Warren and others for failing to go even further, and to stop using its own platforms entirely. Under their approach, it is not enough, for example, to allow others to use Amazon Web Services. Amazon must stop using those services itself, otherwise in operating them there is a danger that Amazon will favor its own downstream businesses. Amazon might, for example, tank Walmart’s cloud access in order to get competitive advantage in retail. Similarly, Amazon should stop retailing products for its own account on Amazon.com, argues this group, because Amazon can alter the website to give its own products competitive advantage (by, for example, displaying them more prominently in search results).

So it is bitterly ironic to find Amazon now coming under assault for failing to exercise more control over the third party sellers who use its ecommerce platform.

The lesson here is two-fold. First, competition is no panacea. As policymakers learned in the mid-19th century, when economic liberalism first came on the scene, excessive competition means fakery, fraud, low quality, and boom and bust cycles that sow economic instability.

Second, antitrust and competition policy are not progressive projects. Progressives seek regulated environments. The big firm dictating standards and stamping out the chaos that is competition across all levels of its supply chain is itself a regulated environment. If a firm does not regulate the way progressives want, the solution for progressives is not to rip the firm apart as a petulant child would rip apart a disappointing toy, but to change the way that the firm behaves. Calling upon Amazon to do more to control what books third party sellers can sell through the company’s sites is a demand for less competition. If that sounds progressive, it is.

One more thing: The Times’s attack on Amazon for selling knock-off books highlights the political opportunism of writers–understood as an interest group–in recent antitrust debates. For at the same time that writers have wrapped themselves in the small-is-beautiful flag, attacking Amazon for destroying main street retail, they have seemed not to think twice about then turning around and attacking Amazon for failing to cast off from its website the small independent publishers of knock-offs that are competing directly, and successfully, with writers. At the end of the day, writers’ fight against Amazon is about protecting writers, not about promoting competition.

Categories
Antitrust

The Fundamental Unit of Competition Is Not the Firm

The fundamental unit of competition is the individual. In American economic lore, the best way to promote innovation is to minimize barriers to entry into markets and increase the rewards to market entry, to ensure that innovators can bring cutting-edge products to market, challenging old and creaky incumbents. In this story, the unit doing the entering is the firm–often visualized as a scrappy startup–and the market consists of one or more incumbent firms serving a particular consumer need with legacy technology.

But why can’t the startup be an individual person–an innovator–and the market be the interior of some great big bureaucratic firm, plus that firm’s own customers? You have an idea for a new product, you take it to your boss, your boss approves it, and the firm starts selling it to customers. There’s competition here, because you compete with other employees of the firm. If your innovation does well, you get promoted.

We all understand that competition of this kind–within-firm competition–works, because we’ve all experienced it, at least to some extent, at that vast bureaucratic organization known as school. You compete against your classmates for grades. And that drives ambitious students to work around the clock to succeed (at least, it was that way at my high school). Why can’t firms produce great innovators internally, in the same way?

One might object that the unit of competition must be the firm because only firms have the resources to implement an individual’s innovative ideas. An individual employee of a great multinational won’t have the resources he needs to develop an idea into a marketable product. By contrast, the argument goes, a startup can assemble the resources it needs to implement its vision simply by tapping funding, labor, and other markets.

But that doesn’t make sense at all. An employee at a big firm can call upon all of the resources of the firm, and the firm itself can seek additional financing, in transforming a bright idea into a marketable product. Indeed, you would expect that a large firm would be able to deploy resources in favor of an employee’s bright idea more efficiently than would a market, because the firm can realize economies of scale in providing resources to support the employee. The startup might need to hire its own accountant, lawyer, and so on, whereas the employee of the big firm could use the firm’s existing accounting and legal staffs for support, potentially filling excess capacity in those departments.

In other words, the big firm is itself a platform upon which competition can thrive, so long as the firm is organized in a way that promotes competition between employees in innovative thinking. While business schools do spend a lot of time studying how to promote innovation within firms, and the tech giants have wrestled with the problem of internal innovation quite a bit, neither antitrust legal scholarship, nor the industrial organization field in economics that serves as antitrust’s social scientific foundation, devotes any time–to my knowledge–to the problem of how to promote competition within firms.

One does find, in Arrow’s famous work on innovation, the following hint of appreciation of the possibilities:

There is really no need for the firm to be the fundamental unit of organization in invention; there is plenty of reason to suppose that individual talents count for a good deal more than the firm as an organization. If provision is made for the rental of necessary equipment, a much wider variety of research contracts with individuals as well as firms and with varying modes of payment, including incentives, could be arranged.

Kenneth Arrow, Economic Welfare and the Allocation of Resources for Invention, in The Rate and Direction of Inventive Activity: Economic and Social Factors 609, 624 (R. Nelson ed., 1962).

The failure to consider competition within firms reflects, in my view, a cultural blindspot borne of our American aversion to bureaucratic solutions, regardless whether they work. It is reasonable to suppose that sometimes, the best way to promote competition, and reap its benefits in terms of greater innovation, will come not by making it easier for startups to enter a market, but by insisting that the large firms that dominate the market organize themselves internally in ways that promote innovation. In such cases, rather than impose remedies aimed at promoting external competition, antitrust enforcers should impose remedies that promote internal competition.

One hint that failure to consider internal competition is essentially cultural comes in a study cited in F.M. Scherer’s great, dated, industrial organization textbook. The study shows that in the middle of the 20th century, innovation rates were comparable across countries that pursued different approaches to industrial organization. In British markets that were dominated by large bureaucratic firms, innovation tended to happen internally, within those large firms, whereas in less concentrated American markets, innovation tended to come from startups. Our preconceptions regarding where innovation is possible may be all that limits where our innovation actually comes from.

I’ve been perplexed by our arbitrary insistence that the firm is the basic unit of innovative competition for a long time. What got me thinking about this today is the story of the Australian rocket scientist who invented the black box used on airplanes. While working for a government aeronautical research laboratory, he was able to convince his boss to let him work on the project, albeit in secret because it did not directly contribute to the lab’s mission.

The story of the black box is not directly on point–it involves a government agency and an innovation that was not the product of competition between individuals within the agency–but it does show how an enterprising innovator can marshal resources within a bureaucracy to achieve the kind of from-scratch innovation that we typically associate with startups.

Categories
Antitrust Monopolization

When Writers are a Special Interest: The Press and the Movement to Break Up Big Tech

When Uber and Lyft brought competition to the Seattle taxi market, drivers fought back, asking the city to let them form a cartel to demand higher wages from rideshare companies. If that sounds anticompetitive, it is. But petitioning the government for protection from competition is also completely legal, because the courts expect that informed voters will make the right call about whether the petitioners need a bailout.

That system works well enough for cabbies, but not for another group that has been seeking government protection from competition of late: writers. In their role as journalists, writers give voters the information they need to make the right call about bailouts, but writers cannot be expected to do that dispassionately when they are the ones seeking government protection.

Over the past fifteen years, writers’ earnings have nose-dived thanks to competition from Google, Facebook, and Amazon directed at two of the main industries that employ writers: newspapers, which have lost advertising revenue to Google and Facebook, and publishers, which have lost the ability to dictate book prices as Amazon’s bookselling business has grown.

As a result, writers have quite understandably come to view these companies as a threat to their livelihood. Through the Authors Guild and the News Media Alliance, writers are calling for government protection from competition in the form of antitrust enforcement against Google, Facebook, and Amazon, and an antitrust exemption for newspaper cartels.

But writers’ views on big tech have also carried over into their reporting, making it hard for the public to judge whether government aid is warranted. I will focus on reporting by The New York Times that appears to me—as an antitrust scholar—to be colored by writers’ sense of professional vulnerability to the tech giants. But examples can be found in many other sources.

A Bully Pulpit

One expression of the strength of anti-tech feeling at the Times is the sheer volume of Times reportage suggesting that Google, Facebook and Amazon should be broken up or otherwise prosecuted under the antitrust laws.

In the first seven months of 2019, the Times published more than 300 articles mentioning Google, Facebook, or Amazon and antitrust, including an Op-Ed by a Facebook founder calling for breakup, an article discussing legal changes required to “take down big tech,” and another musing on what Amazon will do once its “domination is complete.”

That’s a lot of ink to spill on an issue that lacks either public or scholarly support. Polls show that the public has little interest in breaking up companies that either employ them, or sell them products at low or zero prices. And although I have decried Facebook’s treatment of app developers, to my knowledge no antitrust specialist has argued for the breakup of Google, Facebook, or Amazon. To the contrary, probably the two most prominent scholars in the field, Herbert Hovenkamp and Carl Shapiro, have urged caution. (Tim Wu, who has written on antitrust, but has much broader interests, has made the limited suggestion that Facebook should unwind its acquisitions of WhatsApp and Instagram.)

Grasping for Scholarly Support

The absence of scholarly support for antitrust action was highlighted by the oddest episode to date in the Times’ reporting on the tech giants. In 2017, the paper reported extensively on academic work by a law student that sought to make a legal case for antitrust action against Amazon. What surprised antitrust scholars about the publicity wasn’t just that the Times had bypassed experts in the field in favor of promoting student work, but that the work itself broke no new ground.

Firms violate the antitrust laws by taking steps to disadvantage rivals. But the student, Lina Khan, offered no evidence of such conduct. Her closest attempt—the argument that Amazon had run diapers.com out of business by charging very low diaper prices—fell flat because charging low prices is anticompetitive only if the prices charged are below cost. Otherwise, low prices are a sign of healthy competition. Khan offered no evidence of below-cost pricing.

By reporting this work, however, the paper created the impression that there is an antitrust case to be made against Amazon, one that the paper reinforced by publishing two Op-Eds by Khan and then a profile by David Streitfeld that went so far as to call her a “legal prodigy.”

Khan’s association with Barry Lynn, a journalist and head of the pro-breakup Open Markets Institute, for which Khan worked both before and after law school, highlights the close relationship between the Times’s reporting and writers’ grievances against the tech giants. Lynn has written to the Justice Department on behalf of organized writers calling for antitrust action against Amazon.

Creating the Impression of Crisis

Equally troubling is the paper’s reporting on the ongoing House investigation into big tech. The Times ran a front page story on the investigation under the headline “Antitrust Troubles Snowball for Tech Giants,” suggesting a groundswell of interest in antitrust action.

What the story did not disclose is that the Congressman leading the investigation, David Cicilline—whom the Times quoted extensively in that article—is a sponsor of legislation pushed by the News Media Alliance that would allow newspapers to cartelize for purposes of fighting Google and Facebook. Cicilline has, incidentally, hired Khan to help with the investigation.

Similarly, the Times recently gave front page coverage to a preliminary step by antitrust enforcers to consider an investigation into big tech, and suggested that a case would have merit. But the paper did not mention that the only major antitrust action brought by the Trump Administration to date was the politically-motivated, and failed, attempt to block AT&T’s acquisition of TimeWarner, owner of Trump rival CNN. Given the President’s animus toward Google, Facebook, and Amazon, the opening of an investigation tells little about whether a case would have merit.

The Giant that Didn’t Bark

Further suggestion that writers’ professional concerns are coloring their coverage of the tech giants comes from the conspicuous absence of Apple from the paper’s crosshairs. Under the standard measure of monopoly power, the ability profitably to raise price, Apple has far more power than Google, Facebook, or Amazon, earning twice what runner-up Google earned last year.

But it has been hard to find a critical word about Apple in the Times’s pages.

That may be because Apple has played the role of hero to a beleaguered trade. In 2009, as the Kindle was sowing panic among publishing executives, Steve Jobs entered into a cartel agreement with the major publishers to sell ebooks via iTunes at fixed prices several dollars above the prices Amazon insisted upon for the Kindle. The Justice Department frustrated these plans, however, suing to break up the cartel, and winning at trial against Apple.

Against this backdrop, other connections between the Times and advocates of breakup appear in a new light. Times writers have repeatedly appeared to cast Elizabeth Warren, who has called for breakup, as the Democratic frontrunner, even as she has lagged in the polls. And the Times endorsed Zephyr Teachout in her failed 2018 bid for New York Attorney General. Teachout, who made her name as a scholar of corruption, rather than antitrust, is, to my knowledge, the only current law scholar publicly to call for breakup of Google and Facebook.

I don’t think there is a writers’ conspiracy here. But just as you won’t hear a good word from a cabbie about Uber or Lyft—even if these companies have made life for the rest of us much easier—you won’t hear a good word from a writer about Google, Facebook, or Amazon. The difference is that when writers complain, America is forced to listen.

Categories
Annals of American Decline Antitrust Despair Regulation World

Why Progressives Once Fought Tariffs as They Fought Monopolies

The Nineteenth Century understood very well that tariffs have the same effect on consumers as do monopolies. Tariffs prevent foreign competitors from undercutting the prices of domestic companies, because the foreign competitors must now pay the tariffs, and that in turn allows domestic companies to raise prices. It is for this reason that in the Nineteenth Century the same Progressive movement that sought to prevent monopoly pricing, either through antitrust or rate regulation, also sought to replace tariffs with income taxation as the source for government revenue. And succeeded.

But what millions of Americans understood in the late Nineteenth Century is greeted as a bizarre and surprising result today.

Compare:

President Trump’s decision to impose tariffs on imported washing machines has had an odd effect . . . . It is hardly surprising that the tariffs drove up the price of foreign washers. Perhaps more unexpectedly, they also prompted American manufacturers to raise their prices.
Companies that largely sell imported washers, like Samsung and LG, raised prices to compensate for the tariff costs they had to pay. But domestic manufacturers, like Whirlpool, increased prices, too, largely because they could. There aren’t a lot of upstart domestic producers of laundry equipment that could undercut Whirlpool on price if the company decided to capture more profits by raising prices at the same time its competitors were forced to do so.

Jim Tankersley, Trump’s Washing Machine Tariffs Stung Consumers While Lifting Corporate Profits, N.Y. Times, April 21, 2019.

With:

Beginning as early as the 1860s, the Democratic Party challenged Republican power with a biting critique of the central element of the consumption-tax system — the tariff. . . . The Democratic Party developed a general attack on special privilege, monopoly power, and public corruption — one that harkened back to the ideals of the American Revolution and the early republic. Most important, the Democrats described the tariff as the primary engine of a Republican program of subsidizing giant corporations. In 1882, in his first public political statement, the young Woodrow Wilson declared that the tariffs had “Monopoly for a father.” . . . . In the face of these problems, millions of Americans . . . regarded the progressive income tax at the federal level as the next-best alternative . . . .

W. Elliot Brownlee, Federal Taxation in America: A History 77, 79 (3d ed. 2016).
To battles won that were then fought anew,
Our bodies hastened while our minds withdrew.
Categories
Antitrust Monopolization Regulation

The Big and the Bad

That firm size tells us little about propensity to innovate is nicely illustrated by contrasting AT&T and Verizon with Amazon. AT&T and Verizon have rightly been criticized for what looks like intentional underinvestment in broadband, made possible by their oligopoly power. Comes now Amazon, planning to invest billions to provide global broadband access via satellite, and Google, investing billions to build new undersea internet cables.

The big can do wrong, but they can also do right.

There is a Schumpeterian lesson here too. Schumpeter argued that market power is always in jeopardy from outside the market, and that is in evidence here. Who would have thought a few years ago that an online retailer would one day plan to use the profits generated from dominance in its own market to challenge the vicious telecom oligopoly?

It should also be clear that a broken up Amazon or Google, an Amazon or Google confined to one business, one market, and one level of the supply chain, would have neither the capital, nor the ambition, nor the legal right to attack the telecoms.

It is not size that is a problem, but the misuse of size, and the remedy for misuse is to encourage the good uses and suppress the bad. Which is to say: not to break up, but to regulate.

Categories
Antitrust Meta Monopolization Regulation

Chicxulubian Antitrust

There is a lot for industrial policy, including antitrust, to gain from reflecting upon evolution. Consider, for example, the theory that the demise of the dinosaurs in a catastrophic meteor impact at Chicxulub cleared the way for mammals to become the world’s dominant megafauna.

If we suppose that mammals are better creatures than dinosaurs — more advanced, more sophisticated, somehow — then the theory suggests that until the meteor impact the dinosaurs had short-circuited competition from mammals, preventing them from leveraging their superiority to overpower the dinosaurs.

Perhaps the short circuit was the mere fact of dinosaurs’ incumbency. Mammals couldn’t reach livestock size, for example, and compete with larger dinosaurs, simply because dinosaurs already occupied that niche, denying mammals the resources they would need to evolve into it. Similarly, antitrust and innovation economics have long recognized that there are first-mover advantages that can block competition. Indeed, the argument current today that Google and Facebook use their size to acquire startups before they can grow into serious competitors resembles the role dinosaurs’ incumbency may have played in obstructing the development of mammals.

But perhaps instead of confirming our fears about the anticompetitive character of incumbency, the story of dinosaurs and mammals undermines it. For there is no reason to assume that mammals really are the better — more advanced, more sophisticated, somehow — of the two groups. Perhaps if the advantages of incumbency could be eliminated, and dinosaurs and mammals, in fully-developed form, could be set against each other, dinosaurs would emerge victorious.

In that case the meteor impact did not operate the way some believe that using the antitrust laws to break up Big Tech would operate today. The cataclysm did not free up space for more innovative upstarts to develop and occupy the ecosystem, but rather wiped out a more advanced form, allowing less-developed upstarts to thrive, and then to turn around and use the advantages of incumbency to prevent the more advanced form from returning to its original position of dominance. The meteor laid low the dinosauric epitome of life, and mammals leapt into the space and prevented dinosaurs from coming back. It is hard, when looking at the dinosaurs’ descendants, the birds, with their obsession with beauty, long-term amorous relationships, and increasingly-well-documented intelligence, not to wonder what might have been.

In other words, there is no reason for industrial policymakers to suppose that periodically shaking up the business world using the industrial cataclysm of the deconcentration order must necessarily, through competition, lead to better firms. Some value judgment must be made by policymakers regarding whether what will come next promises to be better than what we have now. Competition is path dependent, a kind of roll of the dice, and there is no guarantee that a new roll will produce better forms than the last. The evolution of the mammals into man — an unmitigated disaster for the global ecosystem — stands as Exhibit One to that sorry fact.

Categories
Antitrust Monopolization Regulation

Boeing Shows Us Why Prices Are Too Important for Private Enterprise to Decide Alone

The sad tale of Boeing’s pricing of essential safety features for the 737 MAX 8 as product options is an object lesson in why pricing should always be a public-private project.

Many firms engage in price discrimination: charging different prices for the same product. The ideal way to do that is to generate reliable information on the willingness of each customer to pay, and then to charge higher prices to those willing to pay more and lower prices to those willing to pay less. But often firms can’t just discriminate in prices directly, either because discriminatory pricing would be politically sensitive, or because firms just don’t know how much buyers are willing to pay. So firms discriminate indirectly, by splitting the product into a base model and then selling optional additions.

By pricing the additions far above the actual incremental cost of adding the addition onto the product, the firm can seduce buyers into bringing price discrimination upon themselves. The buyer who is relatively price insensitive — and therefore has a high willingness to pay — will load up on options, and end up paying a far higher total price for the product than will the price-sensitive buyers, who will go with the base model. If this sounds like the business model of the car industry, that’s because car makers — particularly GM — pioneered this form of covert price discrimination in the mid-20th century.

Is covert price discrimination of this kind good for the economy? If a firm’s overhead is so high that the firm would not be able to cover costs, including overhead costs, at a competitive uniform price, then the answer may be yes. But if not, then price discrimination represents a pure redistribution of wealth from consumers to firms, by allowing firms to raise prices higher than necessary, to those consumers who happen to be willing to pay more.

Boeing’s decision to charge pilots extra to be able to read data from a key sensor used by an anti-stall system in the 737 MAX 8 is a classic example of covert price discrimination. The cost of enabling pilots to read data off the sensor was apprently near zero, but Boeing charged airlines thousands of dollars for that option in order to coax airlines with a higher willingness to pay to pay more for a 737 MAX 8. Predictably, budget airlines, like Lion Air, whose 737 MAX 8 crashed on takeoff, possibly because pilots could not read data off of the sensor, and therefore did not know that the plane’s anti-stall system was malfunctioning, did not choose that option.

If America had a general price regulator — an administrative agency responsible for approving the prices charged by large American businesses, including Boeing — then that regulator would be able to tell us today whether Boeing really needed to price discriminate in order to cover overhead, and therefore whether the high price Boeing charged for that safety option really was justified by its costs. Or whether Boeing’s price discrimination amounted to the charging of above-cost prices — prices that redistribute wealth from consumers to firms, not because the extra wealth is required to make the firm ready, willing, and able to produce, not because the extra wealth is necessary to give investors a reasonable return on their investment, but simply because Boeing, as a member of a two-firm global airplane production duopoly (along with Airbus), had the market power to raise price. And because Boeing thought it had more of a right to airline profits — and ultimately to the hard-earned cash of consumers — than do the airlines that buy planes from Boeing and the consumers that fly on them. If it turns out that the safety option was priced higher to extract monopoly profits from consumers, rather than to cover overhead, then we have in Boeing an example of how market power can inflict not just harm on the pocketbook, but actually take lives.

The existence of a general price regulator would have allowed us to pass judgment on Boeing, because what price regulators do is to extract information from big businesses about their costs, including overhead, and based on that to determine whether these firms need to engage in price discrimination to survive, and if so, how much price discrimination is required to cover costs. Regulators then approve price discrimination — called “demand-based pricing” in regulator-speak — if it is needed to cover costs, and reject it where it amounts to no more than an exercise of monopoly power.

Because we have no price regulation of airline production, we simply have no way of telling for sure what Boeing was doing when it decided to charge more for the safety option.

Indeed, the advantage of having a rate regulatory agency goes deeper than just ensuring that firms deploy price discrimination only when it is absolutely necessary to cover costs. Rate regulators have a long history of using their power to approve prices to insist that firms structure their covert price discrimination in a way that is maximally beneficial to consumers. That includes insisting that when firms break their products into base models and sets of options, they do so with a view to safety. Indeed, one of the great benefits of rate regulation is government say over what constitutes an acceptable product. When the airlines were regulated by the Civil Aeronautics Board, for example, the regulator insisted that the airlines maximize the number of direct flights they offer, with the result that today’s layover hell was largely unknown to mid-century fliers.

Boeing has an incentive to make safety features optional, because high willingness-to-pay airlines are more likely to cough up for safety options. But the extra profits that go to Boeing from being able to price discriminate against wealthy airlines come at the cost of delivery of unsafe planes to budget carriers. A rate regulator might well have insisted that that Boeing’s definition of a base aircraft model include far more safety features than it does today.

Of course, the Federal Aviation Administration, which has authority over flight safety, could have mandated that airlines purchase the optional safety features, but chose not to do so. But a rate regulator would have added an additional regulatory safety net, making it possible to stop dangerous pricing at the source — when the prices are chosen — rather than when airlines make decisions about which options to buy, as the FAA would have done.

Given that aircraft manufacturing prices are not regulated today, is our only option to throw up our hands in despair? No. We can still at least get to the bottom of the question whether Boeing priced that option as an exercise of monopoly power, or out of a need to cover costs, through the unlikely vehicle of the antitrust laws. I have argued that the Sherman Act should be read to provide a right of action to any buyer to sue for a judicial determination whether a firm is charging above-cost, and therefore unnecessarily high, prices.

Now would be the perfect time for the world’s airlines to bring that antitrust case.

Categories
Antitrust Deliberate acts against interest Monopolization Regulation

Amazon, MFNs, and Second-Best Antitrust

Antitrust advocates are hailing Amazon’s decision to stop requiring third-party sellers to offer products on Amazon at the lowest prices they charge for their products anywhere. But the decision is decidedly second-best: consumers would be much better off were government to regulate Amazon’s fees, and allow the platform to keep those “most-favored-nation” (MFN) rules.

The elimination of MFNs, argue antitrust experts, will promote competition between Amazon and other ecommerce platforms, by allowing third-party sellers to pass on savings to consumers from doing business on lower-fee platforms. If Barnes & Noble, for example, charges a bookseller less to sell books on the Barnes & Noble website, the bookseller will now be free to charge a lower price for its books on the Barnes & Noble website than the seller charges for the same books on Amazon. That in turn will drive business to the Barnes & Noble website, giving Barnes & Noble a reward for lowering its fees and innovating in cost reduction.

That would be the right way to think about MFNs, if the choice were only between laissez faire and antitrust. But there is in fact a third option, which strictly dominates both of the others. Namely, to regulate Amazon’s fees. If Amazon were required to obtain federal government approval of the fees it charges third-party sellers for use of its platform, then regulators could insist on low fees, and even force Amazon to innovate in cost reduction by mandating fees that are below current costs (preventing Amazon from turning a profit unless it innovates). That would unleash all of the benefits that greater competition between platforms promises to provide.

But it would also preserve advantages that platform competition simply cannot offer. Consumers, after all, like knowing that the price they get on Amazon is the best price available anywhere for the product. Anyone who has wasted hours on one travel website after another trying to find the best airfare knows how much time and effort is required to get the best price when such guarantees do not exist.

Indeed, through MFNs, Amazon effectively leveraged its size to impose a law of one price for consumer products across the internet, and that had huge consumer benefits. Amazon is so big that virtually all products of any interest to consumers are sold through its website. By imposing MFNs, Amazon ensured that consumers wouldn’t need to engage in wasteful and time-consuming searches for the best internet prices when they went to buy online. By going to Amazon, consumers could be sure to find any product available on the internet at the best possible price. Amazon used its size to make life easy for consumers, by turning the internet into a one-stop shop.

We must think of Amazon’s MFNs as accomplishing something that we might ideally want a government regulator to accomplish: making it impossible for anyone, anywhere on the internet, to get ripped off by being charged a higher price for a product than a price available for the same product somewhere else. The MFNs, in other words, were an internet-wide guarantee against price discrimination, that nemesis of all consumer welfare.

While the MFNs did prevent third-party sellers from passing the gains from buying on cheaper platforms on to consumers, the MFNs’ elimination of price discrimination was also valuable to consumers. To give but one example, consider that price discriminating firms frequently use search costs to distinguish between high and low willingness to pay buyers: they offer lower prices only to those who signal their inability to pay more by engaging in wasteful searches for better prices. The poor must clip coupons to get lower prices — or waste time searching for better prices on seller websites or obscure platforms — whereas the rich sail through checkout lines. The MFNs spared consumers such indignities.

Their demise undermines the public benefit of one internet price that Amazon was able to provide to consumers thanks to the firm’s size. And that’s why government regulation of Amazon’s fees is better than either laissez faire or the antitrust solution of simply eliminating the MFNs.

A fee-regulated Amazon would be unable to take advantage of the MFNs to charge higher fees, or to fail to continue to invest in innovations that would reduce the cost of providing platform services, thus the concerns about MFNs that antitrust and competition policy are intended to address would also be addressed by fee regulation. But fee regulation would not require elimination of the MFNs, and would therefore preserve the huge benefits to consumers that come from the guarantee of always being able to find the lowest internet price in one place: Amazon.

Thus fee regulation would realize all of the benefits of competition, while inflicting none of the costs on consumers. As in so many areas, we must therefore understand the antitrust victory here to be only relative at best. Society might be better off as a result of the demise of Amazon’s MFNs, but only if the gains to consumers in the form of more platform competition happen to outweigh the losses to consumers from the demise of the guarantee of one internet price and the associated return of price discrimination. But even if society is rendered better off by the demise of the MFNs, it certainly is not rendered as much better off as it would be were policymakers simply to step in to regulate Amazon’s fees and allow MFNs, and the Internet of one price, to prevail.

Antitrust is a decidedly second-best policy here.

Categories
Antitrust Monopolization Regulation

The Original Progressive View of Antitrust

Much of the popular discussion of the trust question has proceeded upon the assumption that trusts are the result of some sort of immoral conduct which should be made illegal. But the same facts which led to the grant of exclusive franchises (legal monopolies) in the case of local public utilities, have led also to a belief that many of the monopolies which have grown without formal legal grant may likewise be beneficial if subjected to proper public control. The courts in this country, as well as many economists who specialize on “trusts,” have long since come to the conclusion that the anti-trust laws, even if desirable, do not in all cases furnish a sufficient solution of the monopoly problem, and that accordingly governmental price-fixing may be a desirable supplement. But neither the courts nor the teachers of “trusts” seem fully to realize that the determination of a “fair price” is not a search for some objective fact, but that it involves the adoption of a policy; and that the policy cannot be adopted intelligently without a drastic revision of accepted economic theory as well as the accepted theory of private ownership; and that the officials charged with the formation of the policy must perforce resort to some theory as to the proper distribution of income and as to the channels into which industry should flow.

Robert Lee Hale, Economic Theory and the Statesman, in The Trend of Economics 189, 193 (Rexford Guy Tugwell, ed., 1924).

Commentators regard the [Alcoa] case as one of the most powerful statements in antitrust jurisprudence for the robust efforts to constrain dominant firms. Discussions of the case often place [eminent progressive jurist] Learned Hand at the center of attention and ascribe to Hand the views espoused in the court’s decision. Hand believed otherwise. He disliked the antitrust laws from his earliest days in public life. In a representative statement of his views, Hand wrote to a friend in 1914:

“I do not agree by any means that the Sherman Act is of value or that the progressive party should take its position against monopoly. . . . I have always suspected that there are monopolies possible which depend for their maintenance wholly upon economic efficiency and which it would be an economic blunder to destroy.”

. . .

In a separate memorandum [in the Alcoa case], Learned Hand noted: “There are two possible ways of dealing with [monopolies]: to regulate, or to forbid, them. Since we have no way of regulating them [because regulatory legislation has not been put into place], we forbid them. I don’t think much of that way, but I didn’t set it up; and now the ordinary run of our fellow-citizens — some, even of the ‘rugged individualists’ — regard the Sherman Act as the palladium of their liberties.”

Andrew I. Gavil et al., Antitrust Law in Perspective 475, 477 (3d ed. 2017).
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Antitrust

When Kentucky Outlawed Profit, Holmes Overruled Kentucky

Section 198 of the Kentucky Constitution of 1891:

It shall be the duty of the General Assembly from time to time, as necessity may require, to enact such laws as may be necessary to prevent all trusts, pools, combinations or other organizations, from combining to depreciate below its real value any article, or to enhance the cost of any article above its real value.

The Constitution of the Commonwealth of Kentucky. Adopted September 28, 1891. Frankfort, Ky.: E. Polk Johnson, Public Printer and Binder. 1892.

Justice Oliver Wendell Holmes:

In our opinion it cannot stand.

International Harvester Co. of America v. Kentucky, 234 U.S. 216, 223 (1914).