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Wednesday, September 27, 2023

The FTC Attacks Amazon

Real competition is anti-competitive, apparently.

Image Credit: Thomas photography via Wikimedia | CC BY SA 4.0

The Federal Trade Commission (FTC) is the permanent government bureaucracy responsible for enforcing antitrust laws in the United States. Accordingly, the main role of the FTC is to prevent the formation of monopolies and anti-competitive behavior.

The agency’s latest target is one of the most popular businesses in the United States: Amazon. The FTC—partnered with several state governments—has released documents detailing Amazon’s apparently illegal anti-competitive behavior.

The paperwork is nearly 200 pages long, so addressing all of the complaints in the report is beyond what I can do in one article, but I wanted to address two major areas where the FTC’s case against Amazon is very weak.

Ambigopoly Strikes Again

Back in March, I answered an “Ask an Economist” question about antitrust laws and free market regulation of monopolies. In order to decide if something is a monopoly, I noted, we must first have a definition of monopoly. In that article I borrowed a pretty standard textbook definition of monopoly which read as follows: “a market structure characterized by (1) a single seller of a well-defined product for which there are no good substitutes and (2) high barriers to the entry of any other firms into the market for that product.”

This is pretty standard for all economics textbooks, and the primary issue with this definition is the associated ambiguity. What does it mean for a product to be a close substitute for another product? Similarly, the textbook I’m currently using for Intermediate Microeconomics authored by Goolsbee, Levitt, and Syverson calls monopoly “a market served by one firm.” This definition doesn’t escape our ambiguity problem. What constitutes a market? As I say in the prior article:

“Is a smartphone a ‘good’ or ‘close’ substitute for a computer? Is college football a close substitute to the NFL? What about the NBA? Is a grocery store a substitute for a restaurant? Is Twitter a substitute for Facebook? Is Zoom a substitute for transportation? The point of these questions is that it isn’t clear. If you define a good narrowly enough you could argue all firms are monopolies.”

The FTC filing against Amazon recognizes this problem explicitly. It claims that Amazon has a monopoly in two markets. I’ll focus on one. Apparently Amazon has a monopoly on the “online superstore market”. Notice how important these words are for the FTC. If you remove the word “online” then clearly Amazon has no monopoly. There are lots of superstores. If you remove the word “superstore,” again there is no monopoly. Amazon does not have a monopoly on online stores.

Only when the FTC defines Amazon’s market in a sufficiently narrow way can they even make a case that there is a monopoly. The FTC spends several pages trying to defend this arbitrary market definition.

To give a few examples, the FTC claims “online superstores are not reasonably interchangeable with brick-and-mortar stores.” The problem with this claim is it’s clearly false. Personally, I decide to go to Walmart rather than buy from Amazon all the time! It must then be reasonable to consider them interchangeable. The FTC tries to defend this claim by highlighting some differences between Amazon and stores like Walmart. But this is also a problem for two reasons.

First, all products and stores have differences. At what point is a difference too different? Ambiguity strikes again.

Second, many of the apparent differences the FTC lists are false. For example, the paperwork claims, “brick-and-mortar stores also cannot tailor or personalize a consumer’s shopping experience in the same way an online superstore can. Physical stores have the same layout for any shopper browsing their selection at any given time.”

Superficially there is truth to this. Physical stores do have the same layouts, but this doesn’t imply customers face the same layouts. Physical stores can and do structure their layout to target specific groups of customers. Beer and chips are arranged on Sunday to target football fans. Meanwhile, health foods might be placed next to yoga mats. The physical layout of the store is technically the same, but a customer shopping for yoga mats faces a different layout (health foods nearby) than a customer shopping for beer (chips nearby). The arrangement of physical atoms is irrelevant!

This is not to say there aren’t some differences between Walmart and Amazon. Again, there are differences between any and all shopping experiences and products. The question is, for how many purchases on Amazon does the consumer have no alternative? Since Amazon’s dominance is relatively new, it seems funny to imply a lack of alternatives.

Similarly, the FTC claims “online superstores are not reasonably interchangeable with other online stores that lack breadth and depth of product selection.” To justify this, they claim “online stores with a limited product selection lack breadth. A shopper who must visit multiple online stores to compile a set of desired goods across different product categories faces higher shopping costs than a shopper who can search for and complete those cross-category purchases at a single online superstore.”

Again, I myself (and you dear reader) shop in product-specific websites all the time. For example, I often get books from Abebooks and Thriftbooks rather than Amazon. How difficult is it to hop from one platform to another? Not very. In fact, sometimes shopping around product-specific stores may involve a lower cost to find products when compared to a super-store which advertises products in categories you didn’t intend.

Again, my claim isn’t that Amazon is the same as Thriftbooks. The question is how different is too different? Ambiguous definitions are a poor building block for federal regulations.

The Meaning of Competition

The second major weakness of the FTC filing is a mainstay problem of antitrust. Antitrust law, implicitly and explicitly, takes the textbook model of “perfect competition” as the benchmark for what healthy competition should look like.

Perfect competition has a lot of features. To name a few, a perfectly competitive market would have a large number of sellers (more ambiguity—what constitutes “large”?) selling an identical product to customers with perfect information. This scenario makes for a useful simplification for understanding, but a very poor benchmark for the real world.

Ironically, this sort of market is, as Nobel-prize-winning economist F.A. Hayek pointed out, anything but competitive. What could be less competitive than a large number of identical firms producing identical products at identical prices?

One criticism the FTC makes is that Amazon leverages its Prime service to force suppliers to use Amazon distribution networks. The problem with this is obvious—Amazon Prime is only valuable for suppliers to use because it provides value to the customer. Amazon Prime is proof of successful competition. Without Prime, could Amazon even compete with, say, Walmart? I don’t think so.

So yes, Amazon is able to leverage its Prime subscription in various strategic ways, but the Prime subscription itself is only desirable because of consumer valuations. Therefore, insofar as Amazon has power here, it’s derived directly through the value created for consumers. Prime is critical for sellers on Amazon because customers prefer Prime goods.

The FTC is careful to not say Prime itself is a problem to be eliminated, but insofar as Prime is offered because it can offer Amazon strategic positions, attempts to thwart Amazon’s strategic use of Prime will eliminate it.

Satisfaction with Prime is very high—consistently polling at 79% or above in approval among customers. Despite this, the FTC also claims consumers are essentially being tricked by Amazon Prime. The FTC claims Prime tricks customers into not seeking competitors by making them feel like they need to get their money’s worth.

Essentially the FTC is accusing Prime of taking advantage of the sunk cost fallacy, but in reality Prime does make Amazon products relatively cheaper. How would the FTC be able to decide whether consumers were being tricked or just taking advantage of relatively cheaper products? They couldn’t.

In fact, consumers need not even be aware of the economic reason they buy certain products! Customers don’t need to know that “demand curves slope down” in order to buy more of a good when it is cheaper.

The criticism that Amazon is being anti-competitive by making customers feel like they get their money’s-worth by using Prime condemns all kinds of competitive practices by businesses. Bulk food store memberships, discount sales, and coupons could be criticized under the same logic! Again, this makes sense when you realize the benchmark of “perfect competition” has essentially no competitive elements.

Prime is an example of successful competition by Amazon. Ironically, insofar as the FTC seeks to curb the advantages to Prime, they will, in effect, curb the competitive success generated by Prime and valued by customers. Real competition is anti-competitive, apparently.

To sum up, the new FTC case against Amazon is rooted in familiar problems with antitrust cases—ambiguity and an inappropriate benchmark for competition remain at the heart of these complaints. I can only cover so much ground here, but if you’re interested in learning more about some of the issues with the case, I recommend following the International Center for Law and Economics’s own Brian Albrecht. Brian has analyzed this case with more technical detail and dedicates many Twitter threads and Substack posts to antitrust issues in theory and practice.

  • Peter Jacobsen is a Writing Fellow at the Foundation for Economic Education.