All Commentary
Tuesday, July 11, 2017

Is Amazon an Enemy of Democracy?

It is always interesting to see what kind of reactions a big merger announcement brings out, and Amazon's bid for Whole Foods is no exception.

It is always interesting to see what kind of reactions a big merger announcement brings out, and Amazon’s bid for Whole Foods is no exception. The prospect of better, faster and cheaper last mile delivery or pickup points for groceries will excite the long-time Amazon subscriber. These exact same points will trouble a competitor in the business. An analyst has the chance to emit opinions about how Amazon overpaid for a failing business. An investor is left only to read the market’s reaction and try to understand what it signals: Amazon’s stock prices rose; grocer stock prices took a plunge.

It didn’t take long for doomsday-saying trustbusters to rear their heads as well. As usual, they warn that Amazon’s dominant position in online retail is dangerous. With this advantage, Amazon can monopolize online grocery shopping or even offline retail. It is peculiar, but it appears that incumbent competing grocers have no similar advantage to meet consumer needs.

Last year, grocery market giant Walmart bought a promising e-commerce competitor of Amazon. No mention is made of this in the antitrust campaign against Amazon-Whole Foods. And never mind that although Amazon is big in e-commerce, this market is only a fraction of total retail. Or the fact that Whole Foods itself is not a market giant by any standard. The bottom line is that “Amazon is crushing competition” and “monopolizing commerce in the United States,” according to Barry Lynn, director of New America Foundation’s Open Markets program. He frames the issue as Jeff Bezos versus Americans and democracy. The Amazon scenario is strikingly reminiscent of Microsoft’s internet browser case.

The Amazon scenario is strikingly reminiscent of Microsoft’s internet  browser case.

The Trustbusters 

In Barry Lynn’s view, Amazon’s growth toward its promise as an “Everything Store” is an unstoppable invasion of our homes, an aggressive takeover of companies, and overwhelming extortion of consumers. If this were true, then we’d have reason to worry.

Lynn states that Amazon “already dominates every corner of online commerce, and uses its power to set terms and prices for many of the most important products Americans buy or sell.” What these most important products are and how Amazon sets the prices for them is not explained. It is understood that such a practice is harmful. But we only hear price complaints from other businesses, not from consumers themselves.

Amazon is now exploiting its online commerce monopoly to extend domination over retail. It is expected to do so with the same “underhanded” tactics of lowering consumer prices and offering better services. This is pulling the wool over consumers’ eyes. Sometime in the unspecified future, Amazon will recoup monopoly profits by price gouging.

This scenario is strikingly reminiscent of Microsoft’s internet browser case. Back in the first days of the digital revolution, Microsoft had roughly 90 percent market share in operating systems. However, it used to serve only a fraction of internet browser users, the browser of choice being Netscape Navigator.

Funnily enough, Netscape would be a monopoly by the same market-share standards used to attack Microsoft. Not only did it “control” three-quarters of the market, it also charged a whooping monopoly price of $50. Microsoft integrated its own Explorer browser into the Windows operating system and offered it for a cheaper “predatory” price (free with Windows).

Trustbusters described this as “product tying,” bundling a bad browser with a good OS. Netscape complained it was being foreclosed from a market which it was “dominating.” As part of a settlement, Microsoft was allowed to keep bundling Explorer with Windows. But for some reason, this practice was not a way to compete for users.

For trustbusters, this integration was an attempt to extend monopoly over the internet browser market. Critics are quick to point out that it worked: in the following years, Explorer gained market share over more than 90 percent. But even if we conceded that this rapid growth was due to monopolized power, how can we reconcile that with the subsequent demise in the face of smaller competitors?

The economy is not a battlefield of violent warlords.

Lynn laments that the “digital revolution was supposed to make Americans more free.” This promise has gone unfulfilled in his world, but it’s unclear exactly how. Listening to him, it sounds like there were twenty years of viciously monopolistic disservice to consumers, with no other browser options available. And then, out of nowhere, Explorer has “benevolently” been discontinued by our monopolistic masters.

One only wonders if Microsoft is an example of Lynn’s “two decades of bad antitrust enforcement.” Would breaking up Microsoft, as proposed at first, have been better for us? Would it have saved the digital revolution’s fruits that we no longer reaped? Could we have had browser choice or even affordable online shopping, were it not for this monopoly?

The beauty of the market is that each may decide for himself without being subject to mob rule.

Amazon vs. American Democracy? 

The irony should not be lost here. New America’s Open Markets program advances an understanding of market relations in terms of feudal plunder. But the economy is not this battlefield of violent warlords. Amazon thrives only by the voluntary and continuous support of its consumers in the face of alternatives. To Barry Lynn, it is tempting to say that the success of one company must come at the expense of its competitor. Failure of competitors translates into less choice. And what is choice if not the basic building block of democracy?

As Lynn would have us believe, it is either Amazon or democracy, with no way for both to win. Is business like a presidential race, though, with choices being whittled down to two mutually exclusive bad apples? Once a political race is won, one choice is imposed on the “losing” half. A smaller minority gets a chance to speak, only to be effectively ignored.

Should the economy be a democratically-run affair? A majority dictating the basket of goods for everyone would certainly be hell. This can be glimpsed in those sectors where political choices bear most weight, like education, healthcare, finance.

Yahoo, Blockbuster, and Nokia can all attest that the race in business is never won. Moreover, today’s majority winner is not forced on the other half of consumers. In business, every day is election day. Unsatisfied customers’ protests are loud and clear: it reverberates through the profit margins. Even 5 percent of consumers get a say because their dollars are worth as much as anyone else’s. That is why you don’t see them marching in the streets, picketing a business and chanting “not my store.” Whatever their store is, they are free to patronize it.

This is the beauty of a market economy, that each may decide for himself and not be subject to mob rule. Not even to monopoly rule. Contrary to what the antitrusters loaded vocabulary suggests, no one is being ruled in the marketplace. The withdrawal of a consumer’s voting dollar is effective.

Whether moved from organic food to fast food or saved, business gets the message where it hurts. Imagine this protest of withdrawal under a democracy. Say 51 percent of the population withdrew their votes on election day. Are they “saved?” No, they’re still subject to the winning majority’s rule in the following years.

The Myth of Amazon’s “Monopoly” 

So what should Americans be afraid of, exactly? Barry Lynn suggests a grim prospect in Amazon’s monopoly future. When consumers will want to buy something, they’ll first think of Amazon as a convenient, affordable and good quality merchant. “Amazon is seeking to become the company when you say to yourself, ‘I’m going to go buy something’ you think Amazon.” In this dystopia, the “Everything Store” extends its monopolistic grasp to the final frontier of the consumer’s mind. It is unclear if this comes before or after Bezos monopolizes interplanetary commerce with his Blue Origin arm.

Matt Stoller, a fellow at the same Open Markets program, opines:

“There are so many ways that Amazon can use its power that it’s simply impossible to figure out what it will do.”

Of course, if only successful entrepreneurship were easy to imagine from an armchair, we’d have less expert analysts warning us about the impending dangers to democracy and even more “monopolies” like Amazon to cater to our lesser needs. Although the danger is imminent, its real-life consequences are still ambiguous for trustbusters.

For over a century, antitrusters have failed to deliver on their doomsday-sayings.Stoller does advance a few scenarios but fails to impress how they diminish our well-being. What is more unconvincing is the conclusion that these imaginary consequences would not be harmful in themselves. They are problematic only in the context of Amazon being a monopoly. “If Amazon were just one of many stores that would be one thing,” Stoller admits, “but Amazon is quickly becoming the dominant way to buy and sell.” This would beg disbelief simply by seeing the numbers.

E-commerce is 8.5 percent of total retail sales. Whole Foods’ grocery market share was dwindling to under 1.3 percent and Amazon is barely in the picture with 0.19 percent. When and how it could rise in the double digits, the league of Kroger and Walmart is not explained.

The ominous specter of monopoly in Microsoft at least had a 90 percent market share to flaunt. Amazon’s monopolization of groceries sounds more like Casper the friendly ghost. But Stoller insists that “Wall Street sees the writing on the wall.” He conveniently leaves out Aldi’s and Lidl’s investments to expand into the US from abroad. Are they selectively blind or just stubborn and suicidal?

The New Republic’s Alex Shephard chimes in to add, “If Amazon now controls the pricing in the book industry, just imagine what it can do in the broader world of retail.” That’s a big misleading if, and all this vague conjecturing is getting tiresome.

For more than a century, antitrusters keep failing to deliver on their doomsday-sayings. The same democracy-in-peril narrative permeates all resounding antitrust cases. The Time Warner-AOL or Comcast-NBCU mergers were also recently reported as harmful to our democracy, and media continues to grow and diversify.

Lina Khan, another Open Markets Fellow, tries to reinforce Amazon’s impending tyranny. She claims that it “would be naive to view this deal as simply about groceries.” Falling back on the same trustbusting vocabulary, Khan launches a barrage of scare stories.

She tells us that in 2016, Amazon “had over $63 billion in revenue from online sales in the United States – or more than the next 10 top online retailers combined.” That is still far from a monopoly control of the total $394.86 billion of online sales. Moreover, she makes no discussion about the profits of Amazon’s operation or the investments made to run it, as compared to those next 10 top retailers. Nor does she mention the 70 percent growth of active “fulfilled by Amazon” sellers. These are other businesses who better serve their own customers via Amazon’s investments. In 2016 alone, there were “over 100,000 sellers with sales of more than $100,000” going through Amazon.

Consumers have a better experience with Amazon’s personalized, diversified and robust services.

We are also presented with a hard-hitting claim that Amazon “controls 74 percent of e-book sales.” This indicates that Amazon is not a monopoly in this market, as a quarter is serviced by competitors. If they invest in expanding their own business, Amazon’s “control” will slip out of its hands unless it continues to offer even better service. But again, what’s left out is more telling.

Amazon sells many more e-books because Amazon essentially discovered this market. Amazon made reading e-books with its comfortable and affordable Kindle device possible. Competitors were late to the game. It’s also noteworthy that Amazon itself suffered a similar fate in its attempt to enter the smartphone market with the failed Fire phone. Such details that don’t reinforce the image of an all-engulfing monopoly are best left out, though.

Market Success Does Not a Monopoly Make 

One last claim that proves problematic for Khan’s case is that Amazon “captured 43 percent of all internet sales in the United States, with half of all online shopping searches starting on Amazon.” This remark is curious because it wasn’t always like that.

Amazon is gaining ground in online searches not only against other retailers but also other “monopolies” such as Google or Yahoo. The survey that gives these numbers also hints at why Amazon succeeds: consumers have a better experience with Amazon’s personalized, diversified and robust service.

Amazon’s 43 percent of online sales begs the question of when a company becomes a monopoly. When it prices its services below costs? Whose costs, anyway? When it imposes the dreaded monopoly prices that Khan warns us Amazon will do in due time? Or when it acquires a certain percentage of a market? Which percentage is that, the 74 percent of e-book sales or 43 percent of internet sales? All these questions are never answered by antitrusters. They spin whichever story they want the public to fear on a case by case basis.

Amazon’s success is in the hands of the people and the dollars they spend. 

Let’s remember that Whole Foods itself encountered antitrust opposition on the Wild Oats merger. Although the two of them together were only 1.5 percent of grocery sales in 2006, trustbusters employed the old tool of “redefining the relevant market” and narrowed it down to “premium and organic supermarkets.” Through this exercise, one can make a monopoly out of any company, but only on paper. Even so narrowly defined, the organic food market could not be monopolized. It is precisely this segment that Whole Foods started to have trouble with. Like any other market, once a profitable niche was discovered, the other competing grocers started getting into it. Unfortunately for trustbusters, tracing the boundaries of a relevant market does not exclude real world competitive pressures. The Whole Foods-Wild Oats merger case illustrates that.

It is telling that trustbusters don’t revisit these past monopolies that were once supposed to put an end to our democratic way of life. This ever-growing threat of monopoly is a narrative as old as capitalism itself. It usually starts with the false premise that lax regulations cultivated gargantuan companies.

Now is the time to take immediate and firm action if we want to stop their domination “before it’s too late.” The traditional account of the Sherman antitrust law’s enactment follows this same pattern. But it is troubling that among all these “what-if” scenarios that trustbusters espouse, none of them imagine a world where they could be wrong.

What if a monopoly does not arise to subjugate consumers? What if we are just punishing businesses for being efficient? What if we destroy a company that brings immense benefit to consumers, all while wasting taxpayer money? These questions get brushed under the rug.

The New America Foundation’s argument does not stray far from old-fashioned trustbusting. A recent relaxation of antitrust laws and a narrow view of monopoly has given rise to titans like Amazon. As Lina Khan puts it, Amazon now threatens to extend its “fiefdom” over all commerce. The obvious solution to this is strong government intervention. This tired refrain’s underlying assumption is that a bunch of bureaucrats, who have never grown a business and don’t answer to market feedback, somehow know how to organize enterprise better than the entrepreneurs themselves.

Matt Stoller says that there’s only one “force that can stop Amazon from organizing and regulating basically all American retail commerce – our democratic institutions and our political system. We the people.”

The Constitution’s strong opening becomes a bromide in Stoller’s hands. Government has long gone past its mandate in forming a more perfect union. Now more than ever we are reminded daily how government divides the American people.

The issue isn’t democracy endangered by Amazon, but entrepreneurship endangered by government.

Although not in the way he intends, Stoller is right on one point, however. Amazon’s success is in the hands of the people, in the dollars that they hold and in how they choose to spend them. As we’ve seen, business is much more sensitive to consumer needs than “our democratic institutions” are. In fact, these democratic institutions are often the cause of monopolies in the real sense of the word: government-favored enterprises against which it’s illegal to compete.

For Lina Khan, blocking Amazon’s bid for Whole Foods is not enough, though. The government needs to “go even further” and “recover our anti-monopoly tradition.” Congressman Ro Khanna also echoes this sentiment. Citing United States v. Von’s Grocery Co. as “good law,” he calls for a return to what the Supreme Court described as “[protecting] competition against increasing concentration through merger.” We must abandon the “free-market absolutism” and go beyond consumer welfare. Other considerations must be given weight. Job loss, wages, innovation are a few.

It isn’t clear how Khan would prefer to balance these out, as innovative labor-replacing capitalization is at odds with job loss and wage rates. Should consumers show some solidarity and accept longer delivery times? This would enable Amazon to employ less efficient delivery services. The good old Pony Express comes to mind as a good job-creating alternative. Or should consumers pay double to cover the employment of additional, but unnecessary warehouse workers with higher salaries? If consumers don’t want to play ball, maybe the government should play for them, but where do we draw the line?

As far as Amazon’s stifling of innovation goes, our best bet is to close down its cloud services arm. It would be a one-two punch, opening up this market to forward-looking startups, and cutting off an important source of profit for Amazon itself.

But when it comes to antitrust, even Congressman Khanna points out that the impact on competitors is, as usual, most important. Turning to the merger blocked in United States v. Von’s Grocery Co., we find that this celebrated epitome of the rigid, structural understanding of the market tells a different story.

It is wholly unconcerned with the competitive process. Justice Stewart pointed out in his scathing dissent that the Supreme Court made an “exercise in sums” on the assumption that competition is invariably proportional to the number of competitors. He concluded that the decision was an attempt to “roll back the supermarket revolution.” The Court did not mean to protect competition. It was saving inefficient competitors at the expense of the public.

This is the original anti-monopoly tradition proposed by Lina Khan and Congressman Khanna. It’s not the tradition of the common law. It’s not even that confusing view of 1890, when the antitrust law was enacted. This is Theodore Roosevelt’s trustbusting tradition, in which monopoly is a matter of size and competition is a matter of numbers. It turns out that the issue isn’t democracy endangered by Amazon, but entrepreneurship endangered by government and consumers harmed by politics.

What is surprising is that trustbusters are finally admitting their protectionist intent openly. They don’t want antitrust to hide behind the consumer welfare justification any longer. Antitrust is not for protecting consumer interests, but for protecting competitors from more efficient businesses. As Barry Lynn of the Open Markets program puts it, Walmart and Target are “in a corner, their backs are against the wall. They’re going to call Uncle Sam because that’s the only thing that is going to save them from death.”

Antitrust is exactly the right instrument for saving competitors from disruptive entrepreneurs. And in the view of these trustbusters, it should be used at any cost to the consumers. To paraphrase a so-called robber baron of the 19th century, “the public be damned.”