Matthew Yglesias Does Not Seem to Understand E-Commerce

Matthew Yglesias is skeptical of people who think e-commerce giant Amazon has a creepy, monopolistic plan to take over the world of retail. He quotes Jay Goltz, ‘proprietor of a small retail store’ as saying it is ‘impossible to make money competing with Amazon…because Amazon itself isn’t making money’:

Why would a company choose to operate without a profit? Because it wants to provide great value? Check. Because it wants everyone to love the brand? Check. Because it wants to gain market share? Check. Because it wants to put everyone else out of business, so that it can one day flick a switch to raise prices and make a fortune? CHECK!…Gaining market share by not taking a profit makes the most sense if you are planning to raise prices later when you have less competition.

Yglesias acknowledges this Amazon strategy is widely talked about, but still, he wonders:

But it’s hard to see how that plan would work. Part of the genius of the Internet is that it makes it much easier for brands to directly market their wares to people. It’s easy to see how Amazon might put K-Mart out of business, but the only way for them to put Samsung out of business would be to actually manufacture mobile phones and televisions. And if Amazon ever starts trying to charge outrageous markups on Samsung’s products, people would just buy directly from Samsung. Amazon would probably be more efficient at delivering things quickly, but then any price premium Amazon charges would be in effect an upcharge for fast delivery not a monopoly rent. And most of the time delivery speed just isn’t that big a deal.

My guess is that Amazon’s growth-first strategy really is exactly what it looks like—a strategy to pursue growth-first that shareholders tolerate because Jeff Bezos is executing it really well and he has a compelling vision. But “drive the competition out and then raise prices” is very much a meatspace business strategy. In a world where physical location doesn’t matter very much, it’s hard to see how you could pull it off. And even if you could pull it off, you’d still have to just assume that the Justice Department and the FTC would for some reason fail to enforce the anti-trust laws.

There are several problems with this optimism.

First, Yglesias is comparing apples and oranges. The threat from Amazon is not to primary manufacturers but to the retail business. Why would Amazon ever want to put those who manufacture the goods it retails out of business? Amazon’s primary value as a retailer selling everything under the sun is in making it unattractive to shop anywhere else. This does not mean customers will not buy elsewhere if the price is right; it is just that with economies of scale, very few competitors will be able to compete with Amazon. Monopolistic behavior is thus still available to those who practice e-commerce; physical location is irrelevant, here, yes, but not in the way that Yglesias imagines. It does not insulate against the acquisition of monopoly.

Second, suppose we grant Yglesias’ assumption that Amazon would need to hurt Samsung in order to live up to its supposed monopolistic threat. Amazon could still do so by providing a clearinghouse for Samsung competitors and marketing them aggressively, by making Samsung look less attractive (with aggressive markups), by monopolizing retail spaces and reducing Samsung’s distribution capabilities. It is not the case that the ‘only way’ Amazon could hurt Samsung is by manufacturing the same items that Samsung does.  That assertion shows a lack of understanding of Amazon’s capabilities, many made possible by its operational medium.

Lastly, I find Yglesias’ faith in the FTC and Justice Department quite touching.

2 thoughts on “Matthew Yglesias Does Not Seem to Understand E-Commerce

  1. Thanks, this was a good post. One area in which Amazon does seem to want to replace the existing manufactures is book publishing (which you might remember I’m interested in this as one of the many feckless self-published authors at there). The Kindle and the eBook and the fight over eBook prices with big publishers still in the courts (I think, yes?) are all about that. I also think I’ve heard that Amazon has gone beyond enabling self-publishing to planning to actually sign and publish titles themselves. I don’t think any of this is necessarily a bad thing, in fact I see advantages to writers and readers (writers can make more money per copy while selling at a lower price to readers). But I don’t see it as the New Jerusalem either. Traditional publishers still offer some assurance of quality, because they are selective, compared to the e-publishing free for all. That doesn’t seem to me to offer sufficient “value added” to keep these publishers in business under their current model, however. P.

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