Amazon, E-Commerce and Monopolies

A couple of interesting comments in response to my post yesterday on Matthew Yglesias and Amazon.

First, JW writes:

I’m not sure I agree with your point…I think the reason e-commerce and Amazon are less scary is that it is harder to charge monopolistic prices because entry is so easy. If Amazon starts charging monopolistic prices, Walmart.com will just start running ads that say “Amazon is charging monopolistic prices, come to us, we guarantee our prices will be lower.” When you say “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” then that’s a good thing, no? Amazon is making a profit *not* because they are a monopolist in that description, but because they sell things cheaper than everybody else. We’re not worried about monopolists who gain advantages through cheaper prices, are we?

We are generally in agreement here that monopolists who are essentially taking advantage of lower prices are not a bad thing. But two caveats. Most importantly, the ease of entry into e-commerce markets is overrated. (Its significant that the example JW uses of someone competing with Amazon is Walmart, not a fledgling retailer.) First-mover advantage has not gone anywhere and indeed, thanks to viral effects, might have become even more pronounced; offline capital still counts in an online economy i.e., entry barriers are even lower for those with offline capital to spend. (This is most visibly seen in blogging.) Second, what might make Amazon’s practices problematic is what it might do to competitors in an effort to be able to offer the lower prices it does. These practices are what might attract anti-trust scrutiny. So it is not the end state only that matters but the damage done to markets before hand that will attract the FTC and Justice Department (if things ever get to that pass).

Then, Malcolm S. writes:

I think it is a little more complicated. Amazon is huge, but still small compared with their main competitor. Amazon isn’t going after the small retail stores, they are unintended collateral damage, Amazon is after Walmart. And Walmart still has roughly 7X Amazon’s revenues. That there is finally competition for Walmart seems good to me, but Amazon will have to remain very low margin to compete. We can start to wonder about Amazon gearing up for Monopoly when Walmart has been defeated, until then we are moving away from the pure monopsony that Walmart had become, where they were the only game in town if you wanted to sell product.

Malcolm’s point reinforces my response to Yglesias yesterday: Amazon is interesting in cornering the retail market and not interested in going after retail suppliers. Whether ‘even’ this is viable will depend a great deal on the race to the bottom that lies ahead for Walmart and Amazon. Consumers might do well as a result, but one fears for Walmart and Amazon employees: after all, the biggest savings are always made by cutting corners when it comes to labor. Someone remind me: are their employees unionized?

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.