Biden's Executive Order on Competition - Econlib
amazon, Biden, competition, Learned Hand, Lina Khan, predatory pricing
Categories: Business Economics Competition Monopoly Regulation
RELATED CONTENT By Wolfgang Kasper
Economic competition takes place in markets—meeting grounds of intending suppliers and buyers.1 Typically, a few sellers compete to attract favorable offers from prospective buyers. Similarly, intending buyers compete to obtain good offers from suppliers. When a contract is concluded, the buyer and seller exchange property rights in a good, service, or asset. Everyone interacts voluntarily, motivated by self-interest. In the process of such interactions, much information is signaled...
For as long as I can remember, I’ve been hearing stories about what we might call the predatory-pricing two-step, which goes like this:
0. Small companies sell goods at low prices and all is right with the world.
1. Big company enters a market, lowering prices below cost in order to bankrupt competitors.
2. Having established a monopoly, the big company raises prices above where they were in t0 and makes fat profits forever.
Are there any documented cases of this plan being carried to fruition? I’ve heard allegations of step 1 being done, but can’t think of a single example where this resulted in the ability to charge high prices unchallenged for long periods of time.
Off the top of my head, I can’t think of a single instance where predatory pricing was successful. One needs deep pockets to make it work. A few firms and countries tried the scheme, but they’re all gone now.
The problem is when the firm tries to earn monopoly profits. First, since the market was already competitive, barriers to entry are low. So, as soon as the firm tries to raise prices, others enter the market (and usually at lower costs than before since the predatory firm caused previous firms to go bankrupt and sell their resources to fire sale prices). So the predatory firm had to lower prices again and incur additional losses.
But, even if they were to secure high barriers so that other firms couldn’t initially enter the market, the Law of Demand still kicks in. As long as prices remain relatively high, the demand for the good becomes more elastic. As the demand becomes more elastic, the firms monopoly profits start to disappear and people develop and seek out alternatives.
Even with a big country like China, we see the pattern of failure repeat. China had a monopoly on rare earths which they acquired by pricing everyone out of the market. In 2010, China tried to raise prices on rare earths to pressure Japan during a dispute over some islands. As soon as prices rose, new deposits of rare earths entered the market and China lost its monopoly. They were forced to back down
Let’s not forget that Amazon doesn’t just sell goods to consumers. It provides a platform for third parties to sell goods to consumers, too (often competing with Amazon’s own offerings). In fact, more than half of sales on Amazon are sold by third party vendors (62 percent in 2020). Amazon has provided lots of opportunities to small merchants that would not have existed without their online platform.
Most consumers get drawn into Amazon complacency and don’t try to price shop anywhere else. I observed during the pandemic that Amazon was often not the cheapest place to shop whether it was an Amazon shipped product or one from the market place. I often found that manufacture’s on-line stores, Wal-Mart, or Target had lower prices than Amazon.
I am agnostic about anti-trust action against Amazon. Some of the larger platforms such as Facebook and Google are more problematic given their acquisitions that went pretty much unchallenged by the FTC and DOJ (Instagram, WhatsApp, YouTube, etc.). Those seem to me more violative of antitrust rules than what Amazon does.
What you call “complacency” many of us call “desire for convenience.” I don’t worry that I may often not get the lowest price at Amazon. It’s just so convenient. And the zero price delivery often does mean I’m getting close to the lowest price gross of delivery fee.
It might be worth a look at other margins when it coems to Amazon. Wait times for “2-day” delivery seem to have risen, even before the pandemic.
But on the whole, I’m skeptical about the Amazon predatory pricing of consumer products narrative. Amazon offers simplicity and convenience, but someone willing to forego that can certainly find other ways to order things on line.
I do wonder about other elements of Amazon’s business, such as web hosting, etc, where they really are one of a few dominant market players. If there are anticompetitive practices going on at Amazon, that is more where I would expect to find them.
Beyond occupational licensing, the Biden Admin is also looking at limiting noncompete agreements, which I think are both bad and anticompetitive.
Amazon offers simplicity and convenience, but someone willing to forego that can certainly find other ways to order things on line.
Maybe if equal competitors to Amazon existed. But there are various products only sold by third-party suppliers at Amazon* that would likely have been available at more than one online store had Amazon not been such a behemoth.
* – If they are sold elsewhere a trip a few pages down the Google and DuckDuckGo search results didn’t find them.
Today or tomorrow Amazon will raise prices. This is the nature of an monopolistic firm. Strategy will shift from market power to profit maximization. Otherwise, there is no explanation for the extreme market cap it is traded in the stock market.
I recommend that you reread my article. I dealt with the issues you raise.
The explanation is AWS.
But that doesn’t make her case: reduced discounts are still discounts and “less generous” is still somewhat generous. In short, prices at the end of the process were still lower than before Amazon entered.
You’re right David. But I think Khan is implying that it was wrong for Amazon to reduce the discounts, instead of maintaining them at the previous level of generosity.
Someone might look at your statement and say “If it weren’t for Amazon being so dominant after buying Quidsi, we could’ve had even cheaper diapers than we do now. The prices might be lower than before Amazon, but not as low as they could’ve been.”
I think you probably should’ve said something about this in the post… unless I’m missing something that already deals with it implicitly.
Here’s what I would say to the “it could’ve been even lower” people: when Quidsi was shut down in 2017, one of Amazon’s spokeswomen said, “We have worked extremely hard for the past seven years to get Quidsi to be profitable, and unfortunately we have not been able to do so.” In other words, Quidsi was not profitable “for the past seven years” – despite the diaper discounts of the past, and the lower level of discounts since then.
If Quidsi was unprofitable even with the more “generous” discounts, then price changes make plenty of sense. I know that if I were a business owner and was in the red despite my generous discounts, I would wonder whether I was being too generous. Aha! I knew $0.50 per pizza was too cheap!
Just my $0.02 😀 the post is still very good regardless