Is Amazon getting too big?
(Illustration by Paul Reid for The Washington Post)
Amazon’s
general counsel, David Zapolsky, had a lot on his mind last month when
he and four members of his legal team visited the offices of New
America, a liberal-leaning think tank in Washington. The retail
juggernaut was days from announcing its $13.8 billion purchase of Whole
Foods, a deal that would not only roil the grocery industry but also
trigger a government antitrust investigation into the strategies and
practices of the “Everything Store.” And, as Zapolsky was no doubt
aware, no organization had been more dogged in raising those concerns
than New America — and, in particular, a 28-year-old law student named
Lina Khan.
Earlier this year, the Yale Law Journal published a 24,000-word “note” by Khan titled “Amazon’s Antitrust Paradox.”
The article laid out with remarkable clarity and sophistication why
American antitrust law has evolved to the point that it is no longer
equipped to deal with tech giants such as Amazon.com, which has made
itself as essential to commerce in the 21st century as the railroads,
telephone systems and computer hardware makers were in the 20th.
It’s
not just Amazon, however, that animates concerns about competition and
market power, and Khan is not the only one who is worrying. The same
issues lie behind the European Union’s recent $2.7 billion fine against
Google for favoring its own services in the search results it presents
to its users. They are also at the heart of the long-running battle in
the telecom industry over net neutrality and the ability of cable
companies and Internet service providers to give favorable treatment to
their own content. They are implicated in complaints that Facebook has
aided the rise of “fake news” while draining readers and revenue from
legitimate news media. They even emerge in debates over the corrupting
role of corporate money in politics, the decline in entrepreneurship,
the slowdown in corporate investment and the rise of income inequality.
And
just this week, Democrats cited stepped-up antitrust enforcement as a
centerpiece of their plan to deliver “a better deal” for Americans
should they regain control of Congress and the White House.
For
Amazon, which prides itself on its relentless consumer focus, the
suggestion that its spectacular growth might not be in the public
interest poses a particular challenge. Since it was published, Khan’s
“note” has drawn more than 50,000 readers online — an extraordinary
reach for a law review article. Her work has been cited by the
Economist, the Financial Times, Forbes, Wired, the Wall Street Journal
and the New York Times, and she has appeared on major broadcast media.
Last spring, she was invited to join some of the most prominent
academics in antitrust law to speak at an economic conference at the
University of Chicago.
Khan is amazed and a
bit amused by all the attention. Born in London, where her Pakistani
parents met as college students, she grew up in a well-to-do New York
City suburb before heading off to Williams College, where she was editor
of the school newspaper. Looking toward a future in journalism, she
moved to Washington and soon found herself working as a researcher at
New America in its Open Markets Program on issues relating to economic
power. (Khan cut her teeth writing about the dangers of industry consolidation for the Washington Monthly magazine.)
Thinking
a law degree would allow her to be a more effective advocate, she
headed off to Yale Law, where she impressed instructors with her keen
mind, thorough preparation and passion for economic justice. In her
second year, she began researching the history of antitrust law to
understand why it has failed to provide much of a check on corporate
power. “Amazon’s Antitrust Paradox” was the result.
“I
was blown away by what she produced,” said David Grewal, a professor
who advised Khan on her project. “It didn’t read like a student note. It
was equal to the best legal scholarship, combining scholarly elegance
with an activist agenda and enormous attention to detail.
“Most of my colleagues would give their little finger for a piece that got that much attention,” Grewal said, only half joking.
Next
year, after the bar exam and a wedding, Khan will return to Yale for a
postgraduate year before heading off for a clerkship with Judge Stephen
Reinhardt on the U.S. Court of Appeals for the 9th Circuit in
California, a “feeder judge” to clerkships on the Supreme Court.
Lina Khan is the author of the Yale Law Journal article, "Amazon's Antitrust Paradox." (An Rong Xu/For The Washington Post)
‘The Antitrust Paradox’
Next
year will mark the 50th anniversary of the publication of Robert Bork’s
“The Antitrust Paradox,” a book that even its critics acknowledge
changed the direction of antitrust law.
Although
a longtime law professor at Yale, Bork was a charter member of the
“Chicago school” of law and economics, which argued that judges should
use rigorous analysis of economic consequences in deciding antitrust
cases. Previously, much of antitrust doctrine was based on somewhat
vague political notions that big was bad — that large corporations with
large market shares inevitably used their power to drive rivals from the
market, raise prices, buy favorable treatment from legislators and
regulators. In 1963, the Supreme Court even went so far as to declare
that any merger that achieved more than 30 percent share of any market
should be considered unlawful.
Relying on
economic theories that competition — or the threat of it — could be
counted on to discipline dominant firms, Bork argued that rather than
helping consumers, most antitrust enforcement was likely to do the
opposite, stifling innovation and preventing companies from realizing
efficiencies of scale and scope that could be passed on to consumers in
the form of lower prices, more choice and greater convenience.
Chicago
school economics was a marriage of the latest in economic modeling and
free market ideology. In considering whether a proposed merger or
business practice would harm competition, courts and regulators narrowed
their analysis to ask whether it would hurt consumers by raising
prices. And since Chicago theory pretty much assumed away the ability of
even a dominant firm to raise prices, the answer was almost always no.
And
so began a 30-year stretch in which the government blocked relatively
few mergers and prosecuted almost no companies for monopolizing
competition.
“The Chicago school runs
deep, and the courts still partake of the Borkian Kool-Aid,” said Steven
Salop, an antitrust expert at the Georgetown University Law Center who
has long argued that antitrust enforcement is too permissive.
At
the Chicago conference this spring, Richard Posner, a federal appeals
court judge who, with Bork, is considered a pioneer of Chicago antitrust
analysis, asked mischievously, “Antitrust is dead, isn’t it?”
There
is little debate that this cramped view of antitrust law has resulted
in an economy where two-thirds of all industries are more concentrated
than they were 20 years ago, according to a study by President Barack
Obama’s Council of Economic Advisers, and many are dominated by three or
four firms. What’s now at issue is whether the outcome has benefited
society.
Research by John Kwoka of
Northeastern University, for example, has found that three-quarters of
mergers have resulted in price increases without any offsetting
benefits. Kwoka cited industries such as airlines, hotels, car rentals,
cable television and eyeglasses.
And even
former antitrust officials acknowledge that their approval of Google’s
purchase of YouTube and ITA Software and Facebook’s acquisition of
Instagram and WhatsApp look naive in hindsight, eliminating the kinds of
companies that might have someday challenged the tech sector’s most
dominant firms.
“The current market is
not always a good indication of competitive harm,” said Khan in laying
out for me her critique of the way the government goes about analyzing
proposed mergers. “They have to ask what the future market will look
like.”
Economists, meanwhile, complain
that antitrust analysis has failed to fully incorporate the insights of
modern game theory, information theory and behavioral economics that go a
long way to explaining why consumers, companies and markets don’t
behave the way Chicago school theory says they should.
As
Nobel Prize-winning economist Jean Tirole has demonstrated, Chicago
antitrust theory is ill equipped to deal with high-tech industries,
which naturally tend toward winner-take-all competition. In these, most
of the expenses are in the form of upfront investments, such as software
(think Apple and Microsoft), meaning that the cost of serving
additional customers is close to zero. Customers naturally gravitate to
the platform with the largest network of customers (think Facebook). Or
their success depends on having the most customer data (think Google).
They
also often have two sets of customers who need each other, such as
credit card companies that serve merchants and cardholders, or Internet
service providers that link content producers with content consumers.
What
this “post-Chicago” economics shows is that in such industries, firms
that jump into an early lead can gain such an overwhelming advantage
that new rivals find it nearly impossible to enter the market, while
even experienced ones find it difficult to stay in the game.
To
varying degrees, Amazon displays all these characteristics, and by its
breadth and complexity, confounds traditional antitrust analysis. What
began as an online book retailer now sells just about everythingunder the sun—
not just online but, more recently, also through physical stores and
pickup depots. In hundreds of high-volume categories, Amazon is not only
a retailer but also produces its own branded line of merchandise.
Through
its online marketplace, customers can buy from Amazon but also from
millions of competing retailers who typically pay a 15 percent to
20 percent commission and now account for half of all unit sales on the
Amazon platform — and a quarter of Amazon’s total profits. Many of these
“third-party sellers” pay additional fees to store their inventory in
Amazon warehouses, use Amazon robots and personnel to fulfill customer
orders, or rely on Amazon to deliver their goods to customers across the
globe through its fleet of 25 planes and 4,000 trucks or its deeply
discounted delivery contracts with UPS and FedEx.
This
remarkable business machine, offering 350 million items for sale, is
fast approaching the point where it can claim nearly every household in
America as a customer. And through its $99-a-year Prime program, Amazon
uses free delivery and access to its premium video service to bolster
loyalty of customers who each spend an average of $1,500 per year. (The
experience of my own household surely attests to this.) By one estimate,
at current growth rates, half of all American households will be Prime
customers by 2020.
This description of
Amazon’s business is drawn largely from its public filings and reports
from market analysts. As is its custom, Amazon declined to comment or
answer questions for the record. Jeffrey P. Bezos, the company’s founder
and chief executive, is the owner of The Washington Post.
“Amazon
has brought us to a new and better place,” Khan said. “So did the early
railroads and steel company giants. But I don’t think Amazon is the
problem — the state of the law is the problem, and Amazon illustrates
that in a powerful way.”
Amazon.com started by selling books online. Now it sells just about everything online — and is building stand-alone bookstores, too, including this one in New York. (Spencer Platt/Getty Images)
Amazon’s business boom
Is
Amazon so successful, is it getting so big, that it poses a threat to
consumers or competition? By current antitrust standards, certainly not.
Here
is a company, after all, known for disrupting and turbocharging
competition in every market it enters, lowering prices and forcing
rivals to match the relentless efficiency of its operations and the
quality of its service. That is, after all, usually how firms come to
dominate an industry, and there is nothing illegal about that. But under
the antitrust law, once a firm is dominant, its actions and business
practices become subject to more rigorous scrutiny, to make sure it is
not abusing its dominant position. And like all dominant firms, Amazon
disputes its dominance.
Much is made of
the fact that more than half — 55 percent — of Americans begin their
online shopping trips on Amazon. But as Amazon is quick to point out,
online sales still account for less than 10 percent of all retail sales,
which is the more relevant figure as the line between online and
bricks-and-mortar disappears. By that standard, Walmart is still nearly
four times Amazon’s size.
Retailing,
however, is a sector, not a product market, the usual frame of reference
for antitrust analysis. And other than books, Amazon’s original market
where it maintains a commanding 40 percent market share, Amazon doesn’t
have anything close to monopoly-like market shares.
In
clothing, for example, where it has made a big push, Amazon accounts
for 20 percent of online sales but less than 7 percent overall. Amazon
will soon dethrone Best Buy as the largest seller of consumer
electronics, but even there, its overall share will be only 20 percent.
Amazon’s purchase of the parent of Diapers.com has helped give it a 43
percent share of the online baby products market, but that translates
into less than 20 percent of overall sales in that category.
Amazon has acquired Whole Foods in a
record-setting $13.7 billion deal. In its review of the deal, the FTC is
looking into allegations against Amazon of tampering with comparison
prices. (Amazon founder and CEO Jeffrey P. Bezos owns The Washington
Post).
(Jhaan Elker/The Washington Post)
Even with the Whole
Foods purchase, Amazon will have only a 2 percent share of the
$600 billion-a-year American grocery market, well below the more than
20 percent market share for Walmart and 7 percent for Kroger. That is
why most antitrust experts think there is little chance that the
government will try to block the deal.
But in her article, Khan argues that these metrics do not capture the “architecture” of Amazon’s emerging market power.
If
Amazon is so small and its growth so benign, she asks, then why does
the prospect of Amazon’s entry into a market dramatically drive up its
own stock price while driving down those of its rivals?
Why,
she asks, have so many large and successful bricks-and-mortar retailers
been unable to make significant inroads into online retailing while so
many small retailers feel they have no choice but to use Amazon’s
platform to reach their customers?
Antitrust
analysis generally assumes dominant firms often exercise their market
power by raising prices, but what if Amazon exercises its market power,
Khan asks, by squeezing the profit margins of its suppliers? What if its
strategy is to keep prices low in markets it dominates to gain entry
into new markets that will generate still more sales and profits?
How,
she asks, can antitrust regulators analyze the structure of a market,
and Amazon’s bargaining power in it, when so many of Amazon’s
competitors are also its customers or suppliers? Why did Sears stock
rise 19 percent on the day that it announced its Kenmore line of
appliances would be sold through Amazon? Why do Walmart, Google, Oracle
and UPS all consider Amazon their biggest threat?
And if Amazon is not a monopolist, Khan asks, why are financial markets pricing its stock as if it is going to be?
“Antitrust
enforcers should be . . . concerned about the fact that Amazon
increasingly controls the infrastructure of online commerce and the ways
it is harnessing this dominance to expand and advantage its new
business ventures,” Khan wrote in her law review article.
As
Khan sees it, Amazon’s strategy and business practices are “neither
anticipated nor understood by current antitrust doctrines,” and the
language and tools by which regulators and judges now analyze the
company’s business practices “totally miss the game.”
“What’s
the difference between behavior designed to increase market share and
behavior to drive out competitors?” Khan asks. “The problem is they look
a lot alike.”
In May 1998, U.S. attorneys general filed an antitrust suit against Microsoft, which lurks in the background of the current debate. (Michael Williamson/The Washington Post)
Antitrust’s old guard
It
probably won’t surprise you to learn that most antitrust practitioners
reject accusations from a third-year law student that the legal
precedents and analytical tools they have developed and mastered over
the years are inadequate to the task of protecting us from the
predations of Big Tech.
“Lame argument,”
huffs Timothy Bresnahan, an economics professor at Stanford who, as
chief economist for the Justice Department’s antitrust division, helped
bring the monopolization case against Microsoft.
“I
don’t lie awake at night worrying that there are so few creative people
in this country that one company might turn out to be the best at
everything,” said a former head of the antitrust division.
A
former member of the Federal Trade Commission put it this way: “The
antitrust law I believe in is that we want to give as much latitude as
possible to innovate and deliver better products at lower prices, and
only stop them when we see some evidence of conduct that excludes others
from competing.”
They also scorn Khan’s
suggestion that the consumer welfare standard that underlies most
antitrust analysis should be broadened to a public interest standard
that takes into account the impact of dominant firms on workers,
communities and the political process. As they see it, such vague and
subjective standards would merely invite political and ideological mischief.
But if you push them, most of these old antitrust hands will also acknowledge that the law has not fully come to grips with the competitive dynamic in the era of online platforms and networks.
“I
think there is a fair bit of flexibility in the law to allow us to
adjust and adapt to modern markets and technologies,” said Diana Moss,
president of the American Antitrust Institute.
Moss
cited recent cases that looked beyond consumer prices to take in issues
such as innovation, bargaining power and arrangements that lock
consumers into existing products. The real problem, she said, is in
getting more judges and enforcement agency officials to pay attention to those issues.
Indeed
without the focus on prices, judges would be forced to make more
subjective judgments about the intent behind a company’s action or
speculate about whether new companies would, or could, enter a market in
the future. While judges are reluctant to wade into such murky waters,
particularly in markets where the technology and business strategies are
rapidly evolving, it is precisely in those industries that a more
holistic approach is required.
Lurking in the background of the current debate is U.S. v Microsoft, the biggest antimonopoly case to come along in a generation. While the Chicago school’s antitrust adherents view the Clinton-era prosecution of the software giant as a flagrant overreach against a successful innovator, defenders of the antitrust law cite it as proof that current law has been successful in dealing with high-tech monopolists. And, indeed, if the trial judge’s ruling had been fully upheld, that might be the proper conclusion.
But,
in fact, a federal appeals court subsequently narrowed that ruling and
rejected the trial judge’s order that the company should be broken up,
as John D. Rockefeller’s Standard Oil Trust had been nearly a century
before. In the end, the case was settled by the Bush administration on
terms considered largely favorable to Microsoft.
The
ambiguous legacy of the Microsoft case — and the relative weakness of
American antitrust law — was highlighted last month when the European
Union imposed a record fine on Google for using its virtual monopoly in Internet search
to favor its own comparative shopping sites. The Federal Trade
Commission had looked at the same issue several years before and closed
its investigation without taking serious action. One reason: It was not
clear that, even if Google is favoring its own site (which it denies),
such practices are illegal.
That wasn’t
always the case. Back in the pre-Chicago days when big was bad, the
Supreme Court had ruled that Eastman Kodak could not leverage its
monopoly in the film market to gain advantage in the market for film
developing. But in more recent cases, the Supreme Court and two appeals
courts, relying on Chicago law and economics, raised the bar, declaring
that there must be a “dangerous probability” of obtaining a second
monopoly for a dominant firm’s behavior to be illegal.
Some
observers point to the E.U.’s Google case as an example of the
difference between the American and European approach: They protect
competitors; we protect consumers. This often-used distinction betrays a
cultural smugness on the part of Americans, one based on the view that
our approach fosters the kind of creative destruction that results in
great leaps of technological, managerial or financial innovation, while
theirs allows second-rate rivals to accomplish through politics what
they could not accomplish in the marketplace.
To
me, this view betrays a naive belief that in our open market system,
every person and every company has the same opportunity to succeed.
Although government cannot and should not try to neutralize all the ways
in which success breeds more success, neither should we assume that
success in the marketplace is solely due to hard work, ingenuity and
superior execution. Leveling the playing field is a legitimate policy
goal. A good economic system is not only efficient but also conforms to
common intuitions of fair play.
The logic
and intent behind America’s century-old antitrust laws is that even
innovation- and productivity-inducing competition needs to be managed to
ensure a healthy ecosystem in which a relatively few corporate giants
don’t use the economic advantages they have won to tilt the playing
field even further in their favor.
“I
think we have to go back to the original spirit of the antitrust laws,”
said Luigi Zingales, an economist at the University of Chicago’s
business school known for his skepticism about government regulation. “A
narrow, purely economic approach has been unable to capture the
concerns people have about the concentration of economic and political
power.”
Amazon’s $13.8 billion purchase of Whole Foods has not only roiled the grocery industry but also triggered a government antitrust investigation into the strategies and practices of the “Everything Store.” (David Paul Morris/Bloomberg)
When to step in
While
Amazon is not yet a threat to competition, it is well on its way to
becoming one, which is probably why the company is taking these
arguments — and those who make them — more seriously.
Amazon is reported to be in the market for an antitrust economist, and
in the wake of the Whole Foods announcement, it has engaged the services
of two former heads of the Justice Department antitrust division, one
Democrat and one Republican.
I can’t tell
you exactly at what point the government should step in to block Amazon
from buying another company or curtail some of its business practices. I am, however, fairly confident in saying that it
ought to be well before Amazon achieves a 40 percent market share in
books, groceries, clothing, hardware, electronics and home furnishings.
And it ought to be before Amazon pulls even with UPS in shipping, Oracle
in computing and Comcast in media content. Khan’s reasonable insight is
that if we don’t yet have the tools to identify when companies have
reached that competitive tipping point, then someone ought to invent
them.
And as for those “bad old days” when government officials still had the wisdom and the
courage to call a monopolist a monopolist, let’s remember it was the
government’s aborted prosecution of IBM, the most innovative and
respected company of its day, that made Microsoft possible; the
prosecution of Microsoft that made Google possible; and the breakup of
AT&T that made Apple and wireless telephony possible.
“Google,
Apple and Amazon have created disruptive technologies that changed the
world, and every day they deliver enormously valuable products,” said
Sen. Elizabeth Warren (D-Mass.) in a speech last month at New America.
“But the opportunity to compete must remain open for new entrants and
smaller competitors that want their chance to change the world.”
There
is nothing in economic theory that makes it inevitable that successful
disrupters will be disrupted. Indeed, what history demonstrates — and
what a 28-year-old law student now reminds us — is that it sometimes takes a little public power to keep private power in check.
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