June 25, 2021
Breaking up Amazon? 2021’s Worst Idea, by Victor Menaldo
The House Judiciary Committee has been working feverishly on several blockbuster bills intended to rein in Big Tech. It just approved three of the most far-reaching. The so-called Augmenting Compatibility and Competition by Enabling Service Switching, or Access, Act, compels the largest digital platforms to become interoperable with each other. The Platform Competition and Opportunity Act prohibits most mergers between rivals, or even the Vanilla acquisitions of smaller, complementary firms by larger tech players. The American Choice and Innovation Online Act would bar the biggest platforms from conduct that confers advantages on their own products or services.
The last of the trio of anti Big Tech bills put Amazon, in particular, in the crosshairs: digital platforms that have a market capitalization above $600 billion are not allowed to sell their own private labels. It does not apply to Costco or Walmart, for example, even though both have digital markets and both sell their own merchandise. And for some reason it pretends that Amazon does not face substitutes. Merchants can’t bail and leave for Shopify? BigCommerce? Even Ebay? Really?
The Platform Competition and Opportunity Act also targets Amazon, along with Google and Facebook. Mergers they once took for granted are off the table, even if there is evidence that a larger scale would lead to lower costs that might be passed on to consumers. Or even if there is good reason to believe that such a merger would lead to new products favored by consumers. Consider Amazon’s acquisition of Whole Foods: Prime members earn generous discounts for shopping at Whole Foods and the stores are replete with Amazon lockers where customers can pick up their online orders. Had this bill been the law before the merger, Whole Foods would still be nicknamed Whole Paycheck. And it would have been harder during the pandemic for city dwellers to have sheltered in place and practice social distancing.
These bills are a bad idea. They’re a solution in search of a problem. We have an evidence-based antitrust framework centered on microeconomics and the study of industrial organization. It understands why firms are structured the way they are and how they compete, including sometimes striking deals with other firms up and down their respective supply chains without necessarily raising each other’s costs or, worse, passing higher costs onto consumers. Inspired by first principles and disciplined by systematic data on quantities, prices, and innovation, regulators have largely avoided punishing large, superstar firms in both the tech and non-tech world. They have come to recognize that these companies earn outsized profits because they outcompete and out-innovate their rivals—and that they themselves may face disruption by more innovative entrants.
Our current system recognizes that markets for all manner of goods and services have rewarded scale economies, running the gamut from smartphone manufacturing, on the “supply side”, to netizens’ information sharing habits, on the “demand side”. Amazon, Google, and Facebook have managed to establish appealing, many-sided markets with a global reach that brings together consumers, advertisers, developers, and device makers. Their digital platforms enjoy so-called network effects, direct and indirect, with an ironic twist: many of them provide free services to users by exploiting their own digital footprint, serving both personalized content and ads. This amplifies the value an additional user or advertiser already obtains in that there are already so many users plugged in to start with.
These new bills also misunderstand what a monopoly is. A monopoly is a technical term that means there are no substitutes for a product. This therefore allows a firm to price considerably above its costs by, quite literally, reducing the supply of a good or service by half. But the products sold on Amazon are not unique and Amazon, as outlined above, is not the only game in town. This is true for both buyers and sellers. Amazon competes with brick-and-mortar retailers such as Walmart and Target, which are improving their online shopping in response. Amazon sells over 350 million products on its platform, providing consumers with endless choices, sometimes at very affordable prices. In polls that try to capture consumer surplus – the difference between what users would be willing to pay for goods and services versus what they actually pay – Americans value their use of search engines such as Google at almost $20,000 a year – bagging them amazing savings for a product that’s already free. Other platforms, including Netflix, charge prices that actually subsidize their users quite generously after properly accounting for these companies’ costs of capital.
Responsible for a huge swath of spending on R&D, digital platforms also continue to be a wellspring of innovation. The numbers are mind boggling: in 2019, Alphabet (Google’s parent) spent $26 billion on this, and Facebook spent $13 billion. More broadly, their yearly capital expenditures on things like equipment are formidable, if not absurdly high, also running in the billions of dollars. Amazon makes the largest investments by far. Big spending like this allows Big Tech to tinker with better products that will be used by new users, or used by the same user base for longer.
Once upon a time, American antitrust was aimed at protecting small businesses, reducing large firms’ economic clout and size, and eliminating monopolies full stop – even if they reached that status by innovating their way to the top. During the 1980s, however, policymakers and judges began to care primarily about whether firms found ways to increase their rivals’ costs or otherwise raise barriers to entry. It’s been all about whether their behavior translates into higher prices through chicanery and subterfuge, not innovation. For example, when an exclusive deal forged between an upstream producer and downstream distributor makes it harder for a rival to gain access to a critical input at an affordable price.
Regulators have come to realize that the number and size of firms is an outcome of the competitive process. How concentrated a market becomes may reflect prices, which invite or discourage entry, firms’ opportunity costs – alternative uses of their time, labor, factories, and machinery – and their access to capital. Over the long run, market concentration may reflect the most efficient scale that companies reach when they operate at the minimum of their long run average total costs; to achieve that scale, firms may grow larger, or shrink, or acquire other firms.
Amazon represents a scale that simply makes sense in the digital age. Stock markets have rewarded its business strategy. Consumers have demonstrated unusual loyalty. It’s one of the most trusted institutions in America. It created over 400,000 jobs since the pandemic and now boasts over 1,000,000 employees. Our legislators should be finding ways to encourage the type of business environment that gives birth to more Amazons, not arbitrarily punish large and successful companies that innovated their way to the top—and, in doing so, reduce prices for consumers across all manner of goods and services.
