New type of trust | Columns
Lina Khan was recently confirmed as head of the Federal Trade Commission. I strongly suspect that she, and the agency, will be in the news frequently over the next several years.
Khan represents a leading set of progressive ideas about the role of government in the economy. Her ideas specifically on Amazon gained attention and influence when she published a lengthy article in 2017, titled “Amazon’s Antitrust Paradox.” It’s worth understanding its arguments in detail as they seem to both guide the actions of the FTC and represent a sophisticated reflection on modern capitalism.
In this article, published by the Yale Law Journal, Khan argued that Amazon poses a unique and new challenge to antitrust law. The guiding principle of current antitrust law is to examine the prices that companies charge consumers. If a business becomes an abusive monopoly, according to the story, it will overcharge customers.
Khan points out how this logic misses new behaviors in our economy; Amazon is the first example. In fact, she writes, “It’s as if (Amazon founder Jeff) Bezos has mapped out the growth of the company by first mapping out antitrust laws, then devising routes around them. sweetness. “
The bizarre situation begins with the observation that Amazon is enormous in size, both in terms of annual sales ($ 386 billion) and net worth ($ 1.8 trillion, fourth in the world), but it doesn’t has not posted huge consistent profits. Why?
Investors rightly realized that Amazon’s investment in expansion during the 1990s, 2000s, and 2010s was more valuable than profits.
One aspect of the expansion was to keep prices low, which caused many competing companies to either close their doors or exit specific markets. As Amazon’s shares rose, investors could still profit from selling the shares.
The principle of investment, widely accepted for some companies, is growth over profits. As long as investors continued to invest, the value of stocks would increase. And investors have continued to invest because they can see Amazon’s market share increasing in many markets.
The classic antitrust view would conclude that as long as prices are low, consumers are fine. It may be too simplistic, however.
Khan explained how it works with the example of e-books. Amazon has sold many best-selling eBooks for $ 9.99, which was below cost and, therefore, a loss to the business.
However, in order for consumers to buy e-books for a good price, they first had to purchase the Amazon device on which to read them. Additionally, the device is basically locked into Amazon purchases for eBooks.
Compare this situation with that of a more traditional retailer, such as Walmart. If Walmart has a really good sale on, say, socks, customers will tend to buy more. In the store, a person can also buy other items, for example, a shirt. However, if a customer bought socks and a shirt on Monday, they’re unlikely to strongly prefer Walmart for, say, milk the following Wednesday.
However, if a person purchases a James Patterson book using Amazon’s system, they must have the Amazon device that only works with Amazon’s system. This means that when the person wants to buy another book later, they are very likely to buy it from Amazon.
If Amazon is to make long-term money from this program, it will eventually have to raise its prices. However, prices are becoming more and more difficult to control. Amazon changes its prices millions of times a day. Additionally, it is common for retailers to offer discounts based on each person’s purchase history. This means that it will be very difficult to know when the prices will go up.
Now, e-books are not a very large or large market. The ideas in this example, however, can be widely applicable in many areas of technology. The general and popular idea is that investors are looking for growth rather than profits. Companies usually aim to do this by offering low prices, or free services, to become the dominant platform. This platform may be an e-reader or a social network or a shopping platform or a search engine or a telephone operating system.
Remember that this behavior can harm consumers. In the long run, this leads to worse competition, worse prices, worse innovation, and a worse economy. There is nothing pro-capitalism about it.
So we need a Federal Trade Commission that will be skeptical about this kind of behavior. He should look for evidence of monopoly abuse, especially in creative ways that only tech companies would have uncovered. Khan, as president of the FTC, seems to be that kind of person.
Christer Watson, of Fort Wayne, is Visiting Assistant Professor of Physics at Purdue University in Fort Wayne. The opinions expressed are his own. He wrote this for The Journal Gazette, where his columns normally appear on the first and third Tuesday of each month.