Economy 30-10-2023 15:01 14 Views

Is There a Problem? vs. Is this Competitive? 

More years ago than I like to admit, I began my doctoral studies in the UCLA Economics Department. Looking back on what is now almost a half-century, I remain grateful for the amazing thinkers I was exposed to, especially in my major field of Industrial Organization, particularly Armen Alchian, Harold Demsetz and Ben Klein.

This is especially the case since America’s current antitrust authorities seem dead-set on reviving the “big is bad” policies that my teachers were first to rail against. In fact, my reading about the FTC’s current case against Amazon reminded me of a very useful suggestion I picked up from them in dealing with antitrust.

What is that suggestion? Don’t start by asking whether the behavior in question is competitive. That seemingly counterproductive idea is actually quite valuable, because as I have written before, the standard most commonly used to evaluate such questions — the perfect competition model — assumes away many real-world issues firms face. And those facing situations or circumstances that don’t arise under the model’s assumptions will be misjudged by that approach.

Instead, ask if there is a real problem that needs to be dealt with, even if it is not countenanced by the perfect competition model. If the answer is yes, then consider what sort of options might be employed to deal with it. If what is being utilized seems like an efficient way to solve the problem, given the alternatives, producers doing so will have benefits that exceed their (assumed away in perfect competition) costs. When such firms act as rivals, consumers will also benefit from lower prices as a result, as was recognized by antitrust decisions under the “consumer welfare” approach that until recently had been dominant.

Some such actions are so inconsistent with the perfect competition model, if that was the standard used, they could be deemed not competitive. And if the “questionable” acts were termed non-competitive, such cost-reducing, consumer-friendly acts could be judged to be monopolistic and therefore restricted. And consumers would be harmed in the name of protecting them from monopolistic harms. 

The best current illustration of what I gleaned from my tutors comes from David B. McGarry in his recent “The FTC’s Case Against Amazon is a Case Against American Consumers.” He focuses on the FTC’s claim that Amazon is a monopolist using illegal business practices to fortify its market dominance, implying harm to consumers. In particular, he examines its allegation of two forms of asserted unfairness — “Amazon’s policies that discourage sellers from offering lower prices elsewhere,” and that “tie the benefits of Amazon Prime to the company’s in-house fulfillment services.”

It is true that neither of those issues would arise in a perfectly competitive market, so that if “not perfectly competitive” implied “monopolistic,” the FTC might have a case. But ask whether there isn’t an innocent, clearly defensible reason. 

As McGarry points out, the value of Amazon’s reputation for offering low prices is considerable, making its rebuttal quite sensible. “Just like any store owner who wouldn’t want to promote a bad deal to their customers, we don’t highlight or promote offers that are not competitively priced.” Note the “any” in the above sentence. Do you know of any store owner who would do what the FTC demands, as proof that Amazon is not monopolistic? Further, the FTC’s implication of harm to Amazon’s customers runs up against Amazon’s 13-percent lower prices than online rivals according to a 2022 study, including a 6-percent price advantage against Walmart and a 16-percent price advantage against Target, the next two largest online retailers. 

Amazon’s offering lower prices compared to online rivals undercuts the FTC’s assertion that it is a proof of its monopolistic abuse, yet it is completely consistent with Amazon’s pro-consumer explanation. 

Similarly, the FTC’s attack on Amazon Prime’s fulfillment as another unfair monopolistic abuse runs up against logic. As McGarry points out, “two-day shipping has been a foundational perk for the platform.” And Amazon does not limit Amazon Prime sellers to its own fulfillment service, but does demand similarly high delivery standards for other delivery methods. Consequently, “curating a marketplace in which many or most products in any given search can reach the customer within two days is central to Amazon’s success — i.e., its usefulness to its users,” and so, “the company wishes justifiably to maintain a sterling reputation for reliability.” 

It also runs up against facts. “JPMorgan Chase estimated a $139-a-year Prime membership’s worth as much as $1,000,” which hardly qualifies as a major ripoff of consumers. Further, a 2023 poll reported that “91 percent of platform users described themselves as ‘satisfied,’ while 63 percent described themselves as ‘very satisfied,’ so those putatively abused seem pretty unaware of the fact. 

The FTC also “has gerrymandered market definitions to exclude the abundant competition Amazon contends with,” repeating mismeasurement errors my professors also emphasized as red flags, because if it can torture the market definition to create the illusion that there are few competitors for Amazon, it will be presumed to be monopolistic even if it is not.

The FTC attack on Amazon seems to be an illustration of what not to do with Antitrust, if the goal is to advance consumers’ interests. It identifies problems that are nowhere to be found in the perfect competition model, but that do aid Amazon in providing the best product to consumers,  and is treating effective solutions as if those solutions were the problem. Rather than making a strong case for its suit, the FTC makes a strong case that its supposed expertise on consumers’ behalf is weaker than the common sense any American could understand.

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