The Journal Gazette
 
 
Tuesday, July 20, 2021 1:00 am

New kind of trust

FTC leader foresees unique challenge of Amazon

Christer Watson

Lina Khan was recently confirmed to lead the Federal Trade Commission. I strongly suspect she, and the agency, will be in the news frequently over the next several years.

Khan represents a leading, progressive set of ideas about the government's role in the economy. Her ideas specifically about Amazon gained attention and influence when she published a long paper in 2017, titled “Amazon's Antitrust Paradox.” It is worth understanding her arguments in detail since they appear to be both guiding the actions of the FTC and represent sophisticated thinking about modern capitalism.

In this paper, published by the Yale Law Journal, Khan argued that Amazon poses a unique and new challenge to antitrust law. The guiding principle of current antitrust law is to look at the prices companies charge consumers. If a company becomes an abusive monopoly, so the story goes, it will charge customers too much.

Khan points out how this logic misses new behavior in our economy; Amazon is the premier example. In fact, she writes, “it is as if (Amazon founder Jeff) Bezos charted the company's growth by first drawing a map of antitrust laws, then devising routes to smoothly bypass them.”

The odd situation starts by observing that Amazon has enormous size, both in annual sales ($386 billion) and in net worth ($1.8 trillion, fourth in the world), yet it has not shown consistent, enormous profits. Why?

Investors realized, correctly, that Amazon's investing in expansion throughout the 1990s, 2000s and 2010s was more valuable than profits.

One aspect of expansion was maintaining low prices, which drove many competing companies out of business or out of specific markets. As Amazon stock increased, investors could always profit by selling the stock.

The investing principle, widely accepted for certain companies, is growth over profits. As long as investors kept investing, the stock value would increase. And investors have kept investing because they can see Amazon's market share increasing across many markets.

The classic perspective on antitrust would conclude that, as long as prices are low, consumers are fine. That may be too simplistic, however.

Khan explained how this works with the example of e-books. Amazon famously sold many bestselling e-books for $9.99, which was below cost and, thus, a loss for the company.

However, for consumers to buy the well-priced e-books, they had to first buy the Amazon device on which to read them. Furthermore, the device is basically locked into Amazon purchases for e-books.

Contrast this situation with that of a more traditional retailer, such as Walmart. If Walmart offers a very strong sale on, say, socks, customers will tend to buy more of them. While in the store, a person might also buy other items, say a shirt. However, if a customer has purchased socks and a shirt on Monday, they are unlikely to strongly prefer Walmart for, say, milk the next Wednesday.

If a person buys a James Patterson book using Amazon's system, however, they must have the Amazon device that only works with Amazon's system. That means when the person wants to buy another book later, they are very likely to buy it from Amazon.

If Amazon is going to make money in the long run on this scheme, it has to raise prices eventually. However, prices are becoming harder and harder to monitor. Amazon somewhat famously changes prices millions of times a day. Furthermore, it is commonplace for retailers to offer discounts based on each person's shopping history. That means it will be very hard to know when prices increase.

Now e-books are not a terribly large or important market. The ideas in this example, however, may be widely applicable across many technology sectors. The general and popular idea is that investors are looking for growth over profits. Companies commonly aim to do this by offering low prices, or free services, to become the dominant platform. That platform can be an e-reader or a social network or a shopping platform or a search engine or a phone operating system.

Remember, this behavior can hurt consumers. In the long run, it leads to worse competition, worse prices, worse innovation and a worse economy. There is nothing pro-capitalism about it.

So we need a Federal Trade Commission that will be skeptical of this sort of behavior. It should look for evidence of monopoly abuse, especially in creative ways that only technology companies would have discovered. Khan, as FTC chair, looks like she will be that sort of person.

 

Christer Watson, of Fort Wayne, is a visiting assistant professor of physics at Purdue University Fort Wayne. Opinions expressed are his own. He wrote this for The Journal Gazette, where his columns normally appear the first and third Tuesday of each month.


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