Welcome back to this series on Amazon, Inc. If you missed the first installment, “Stop Using Amazon (Part I of IV),” I recommend reading it first for an introduction to this topic. Last week, I critiqued Amazon for its relationships with its employees. This post, however, will analyze how Amazon engages with other businesses and expands its own business.
Amazon is willing to employ just about any means to crush its competition and expand its business; its titanic size is one of its most effective weapons.
First, it is important to understand the rise of Amazon. Amazon.com dates back to 1994 when it was established as an online bookseller. With a business model based on investing in the future, the company didn’t turn a profit for its first seven years, accumulating $2 billion in debt (Khan). Even today, Amazon hovers around zero returns. However, lack of profits have not soured investors, and Amazon stock continues to climb. This trend suggests investors have confidence that Amazon will eventually turn a profit, something that will be discussed later in the blog. For now, though, suffice it to say that Amazon’s investors give it a huge advantage over its competitors (especially small ones) whose investors demand profits.
Amazon has been reinvesting its potential profits for over two decades now (instead of returning them to shareholders as dividends). The result has been–as the above graph depicts–massive growth. As mentioned in the last post, Amazon has expanded its business to incorporate web services, food delivery, home care, movie production and distribution, home appliances, sellers’ platforms, manufacturing, movie reviews, gaming sites, audio books, delivery services, and so much more (see picture below). Amazon currently controls just under half of online shopping: by 2013, it had sold more goods online than its next twelve largest competitors (Khan). Amazon currently controls around as much of the book (not just e-book) market as Rockefeller’s Standard Oil controlled of the oil market when it was broken up in 1911 (LaVecchia and Mitchell). Around half of online shoppers go directly to Amazon to shop (that is half of people don’t search Google, Yahoo, etc. for items to purchase) (Khan). In 2016, Amazon generated 30 percent of growth in the entire U.S. retail market (Meyer).
These examples and statistics are not intended to–in and of themselves–comprise an argument against Amazon. None of the above mentioned things are explicitly illegal, nor even are all of them directly harmful. In theory, the free market uses competition to drive companies to be more efficient, convenient, and inexpensive. Amazon is all of these things and more.
The problem, however, is that, if current trends persist, in a matter of decades, the free market will no longer have power over Amazon, because competition will become virtually nonexistent. If Amazon continues to be efficient, effective, and inexpensive, it will be so by choice. No society should let a profit-driven corporation have that choice.
To be fair, this country has anti-trust laws in place to stop companies from gaining too much power. However, those laws can do very little against Amazon, due to a variety of reasons, most of which stem from the Reagan Administration and the economic thought during the late ’70s and ’80s. While there is not the space to fully examine the evolution of antitrust law over the course of the 20th century, interested readers should peruse Lina Khan’s article “Amazon’s Antitrust Paradox” (cited throughout this post–link at bottom). What follows is a much briefer account of Khan’s analysis.
Antitrust law rose in the early 20th century in response to corporate malpractice and abuse of small businesses and citizens. The theory–called economic structuralism–held that companies that grew too large gained influence in the market that allowed them to unfairly compete, undermining the free market. Regulators sought to control the size of businesses so that one did not grow drastically larger than any other. Simultaneously, they were wary of strategies large businesses could use to crush small ones. One such strategy is predatory pricing, in which a large company intentionally sets prices lower than the cost to produce goods to force a smaller rival to do the same. While both companies lose money, the larger one has more revenue and can sustain the losses longer. Eventually, the large company returns its prices to normal and seizes the business its (now defunct) smaller competitor used to control (Khan).
In the ’70s and ’80s, however, a new theory emerged partly in response to a series of Supreme Court cases which appeared to hinder competition instead of promote it. The new theory–called the Chicago School after the institution where it emerged (the University of Chicago)–held that the only time a company was violating anti-trust laws was when it charged the consumer more than could be reasonably expected. Thus, until consumers started paying too much, no antitrust action could be taken. This new theory caught on quickly, especially because it was easy to measure, simplifying complicated court cases into math problems (Khan). Amazon’s prices are cheap, and as such, it is almost immune to anti-trust action.
Nonetheless, over the past few decades, it has become clear Amazon is not playing fair. Despite not raising prices, it has gradually expanded its power in markets as diverse as grocery shopping, fashion, and home supplies using strategies that, at one time, would have set the Federal Trade Commission (FTC) on it faster than Amazon Prime Expedited Shipping can deliver a package of Doritos to your front doorstep.
One of Amazon’s favorite weapons is predatory pricing. For example, in 2009, Amazon set its sights on the diaper and baby-care industry, targeting one of the fastest growing e-commerce businesses in the world: Quidsi (Khan). After approaching Quidsi about a buyout (and getting turned down), Amazon slashed the cost of diapers and other such supplies by around 30 percent on its website. Amazon also directed its software to track Quidsi’s prices and guarantee Amazon prices were always lower. By 2010, Quidsi investors were getting scared (unlike Amazon investors, most investors are concerned when a company doesn’t turn a profit) and talks opened with Wal-Mart about a possible sale. Amazon executives went once more to meet with the founders of Quidsi. While the meeting was taking place, Amazon unrolled a new program called “Amazon Mom” which offered steep discounts on the products Quidsi and Amazon competed over. By Quidsi’s calculations, Amazon was losing over $33 million every month on diaper sales alone under the new prices. As Quidsi’s profits plummeted, Amazon stuck by its offer of $545 million (very low). Amazon’s response to Wal-Mart’s offer of over $600 million was to threaten to “drive diaper prices down to zero.” In an attempt to save the little business it had left, Quidsi sold to Amazon in 2010, despite the lower price (Oremus).
Over the next few years, Amazon rolled back the Amazon Mom program, increasing prices back to their former levels. Customer forums saw comments by users saying they would return to Quidsi (Khan). Of course, that was no longer possible, as Quidsi was now a subsidiary of Amazon. By 2016, Amazon had grown its share of the online baby products market to 43 percent. It achieved this share not because it offered better service, nor better products, nor better prices (in the long run). Amazon took control of the market simply because it was big Because Amazon didn’t charge customers a higher price than could be reasonably expected, the government couldn’t do a thing. This story is by no means unique, and although this post will not cover all the examples, interested readers may research Amazon’s acquisition of Zappos and its use of pricing algorithms to track and match competitor prices.
Amazon’s size is problematic because of its ability to squeeze smaller would-be competitors out of the market before they can compete. This problem is exacerbated by the fact that Amazon’s size further stimulates its expansion. In other words, as Amazon grows, it gains the ability to grow faster, which allows Amazon to threaten to monopolize not one industry, but dozens. One example of this effect is Amazon’s growth in the shipping industry. As an online store, Amazon needs shipping. Given the volume of shipments it demands, securing a contract with Amazon provides massive amounts of revenue for shipping companies. Thus, they are willing to give Amazon a good deal, sometimes a deal that is so good, the companies can’t really afford it (e.g. UPS once gave Amazon 70 percent off of regular delivery prices), except that without the revenue from Amazon, their entire operation would be compromised (UPS received one billion dollars from Amazon in 2015). In order to stay profitable, shipping companies are forced to raise prices for other customers (a phenomenon called the “waterbed effect”) (Khan).
Amazon saw this opportunity to begin offering its own shipping services, called Fulfillment-by-Amazon, in which independent sellers on Amazon.com can pay Amazon to store and ship their goods. As UPS and other shipping agencies raised prices for non-Amazon customers, small business-people were forced to use Amazon’s services (which, despite the premium Amazon charged, were cheaper than paying the shipping companies). Thus, Amazon created a shipping business based on the demand created from its hard bargains in the e-commerce business (Khan). Amazon took this one step further by beginning to purchase its own trucks and lease airplanes, foreshadowing a day when Amazon can ship its goods (and all its competitors’ goods) all by itself (Khan).
Beyond shipping, Amazon engages with its competition in many other ways that tether competition to the company while exploiting the companies that engage with Amazon. The most blatant example of this abusive relationship is the interaction between Amazon Marketplace and Amazon Basics (Amazon’s own manufactured goods). Some of the goods sold on Amazon.com are made by Amazon (or a subsidiary). However, independent sellers are also allowed to sell on Amazon.com through Amazon Marketplace. At first glance, Amazon Marketplace is a boon for independent sellers. Instead of trying to forge their own websites and gain popularity, businesses can sell their goods on the largest e-commerce website in America and access easy delivery services and a whole host of Amazon’s features. In fact, the positives to becoming part of Amazon Marketplace can hardly be refused, considering refusing the services would immediately forfeit the ability to market to around half of online shoppers–those who don’t look anywhere but Amazon for retail goods.
However, once sellers buy into Amazon, problems mount very quickly. Amazon frequently demands surprise fees from small businesses or asks them to move their entire business to Amazon. If companies refuse, things can get nasty quickly. When Birkenstock, a shoe manufacturer refused to comply with Amazon’s demands, the company insinuated that it would flood the website with counterfeit Birkenstock products. One sporting goods store that was leaving Amazon was told that Marketplace could become a “wild, wild, West.” Sure enough, counterfeit products masquerading as the store’s merchandise appeared all over Amazon.com, and nothing was done about them (LaVecchia and Mitchell).
Further, when Amazon opened its own manufacturing business, Marketplace became a sort of testing ground for new products. Amazon gained the ability to monitor the sales of third-party merchants. When it saw a certain product was selling well, it could produce a near-identical version of the product and then simply list it higher on Amazon.com than the original product. Customers looking for the product would buy Amazon’s version, the first one that showed up (LaVecchia and Mitchell). Two examples of this practice are Amazon’s copying of Rain Design’s laptop stand and Amazon’s own version of Pillow Pets.
Using influence in one market to stimulate business in another one used to be a violation of anti-trust law. Theory held that vertical mergers (one company operating on different levels of production—e.g. Amazon both selling goods and distributing them) could unfairly augment a company’s power. However, under modern interpretation, because Amazon isn’t charging its customers any more for its goods than its flailing competition, anti-trust regulators can do nothing.
Here lies one of the most important questions in this post: if Amazon isn’t using its market power to exploit consumers, then what is the problem? Why can’t the world just buy stuff from Amazon because it is convenient and cheap and ridiculously fast? Even if Amazon is squeezing out competition, it isn’t hurting consumers, right?
The answer has two parts. First, even though consumers may not get hit in their wallets, that is not the only way to measure welfare. To complete my blanks from last time, from 2000 to 2015, the number of independent local realtors fell by 108,000 (40 percent relative to population). The number one reason? E-commerce—not big-box stores or health insurance but e-commerce, and half of e-commerce is Amazon (LaVecchia and Mitchell). As one of the readers to the previous post correctly pointed out, Amazon cannot be blamed for the technological revolution that is affecting far more than just e-commerce. However, the decrease in local merchants is still problematic. Recent research suggests that economies dominated by a few large businesses have “lower levels of voter turnout, interest and knowledge of politics and current evernts, local newspaper readership, participation in associations, and engagement in protest activity” (LaVecchia and Mitchell). Consumers choosing to buy from Amazon and companies like it could be undermining the civic participation.
Another measure of consumer welfare is exposure to new ideas. A group of writers called Authors United sued Amazon in 2015 for suppressing less popular, independent books, suffocating the flow of new ideas through books (Vara). One of Amazon’s innovations when it first entered the book market was to sell bestsellers at $7.99, a few dollars cheaper than all its competitors. To make up for lost profits, Amazon raised the prices on other less-mainstream books, resulting in fewer new works entering circulation, an admittedly small but nonetheless troublesome development.
The second part of the answer is more concrete. In reality, the original question is based on a false premise: that Amazon will continue to sell things at current prices. In 2015, researchers estimated Amazon was losing $1-2 billion annually on Prime memberships. Now the old question of Amazon’s stockholders and their willingness to invest in the company despite a lack of profits returns. The only logical reason investors would stick by a company that is not profitable is if they believed it would be profitable in the future. Being profitable in the future requires one of two things: either Amazon decreases its business costs, probably by eliminating manual labor, or it raises prices. Given that Amazon already operates in a very favorable business climate, it seems unlikely (but not impossible) business costs could be reduced that much. On the other hand, Amazon has already shown signs of raising prices. One of the best markets to analyze for insight into how Amazon behaves once it has quashed its competition is the book market: Amazon’s first industry, and the one where it has most power. Even as early as 2013, publishers noted that Amazon had been raising book prices (or, rather, reducing discounts, as Amazon rarely sells items at the list cost) (Streitfeld). Modern economic thought suggests that once Amazon raises prices, it opens itself to competition, but that does not seem to be the case. For example, when Amazon revealed it was raising the cost of Prime from $79 to $100 annually, 95 percent of Prime members said they intended to renew their memberships anyway. This past year, Amazon once more raised the cost of Prime.
The bottom line is that Amazon is going to raise prices at some point, if only so it can afford to lower prices in the markets it has yet to conquer. When that moment comes, the critical question will be whether there is anyone left for consumers to turn to. Fortunately, there are still local business owners, and Amazon is a ways (if a rather short ways) from conquering the free market. The question now is whether we will act now when we can or complain later when there is nothing we can do.
Make sure you check back next week for the third establishment in the series, which will address Amazon’s relationship with government (local and national). It should be neither as long nor as complicated as this post, although it may be just as frustrating.
Like last week, I will leave you with a little puzzle. Like, share, and comment below (with your answer, if you choose, or with other thoughts and questions).
Which one of these is not like the other?
Nonetheless, what do all these institutions have in common?
Khan, Lina. “Amazon’s Antitrust Paradox.” Yale Law Journal, Jan. 2017, https://www.yalelawjournal.org/note/amazons-antitrust-paradox#_ftnref211.
LaVecchia, Olivia and Stacy Mitchell. “Amazon’s Stranglehold: How the Company’s Tightening Grip is Stifling Competition, Eroding Jobs, and Threatening Communities.” Institute for Local Self-Reliance, Nov. 2016, https://ilsr.org/wp-content/uploads/2016/11/ILSR_AmazonReport_final.pdf.
Meyer, Robinson. “When Does Amazon Become a Monopoly?” The Atlantic, 16 June 2017, https://www.theatlantic.com/technology/archive/2017/06/when-exactly-does-amazon-become-a-monopoly/530616/.
Oremus, Will. “The Time Jeff Bezos When Thermonuclear on Diapers.com.” Slate, 10 Oct. 2013, http://www.slate.com/technology/2018/07/facebook-bug-led-to-blocked-users-being-unblocked.html.
Streidfeld, David. “As Competition Wanes, Amazon Cuts Back Discounts.” The New York Times, 4 July 2013, https://www.nytimes.com/2013/07/05/business/as-competition-wanes-amazon-cuts-back-its-discounts.html.
Vara, Vauhini. “Is Amazon Creating a Cultural Monopoly?” The New Yorker, 23 Aug. 2015, https://www.newyorker.com/business/currency/is-amazon-creating-a-cultural-monopoly.