Amazon & Antitrust: How Big Is Too Big?

A couple weeks ago, I retweeted this article about Facebook’s plan to integrate its messaging platforms, and an Irish watchdog’s subsequent investigation. I initially questioned why it matters that they’re integrating the backends of the three platforms if Facebook already owns all three. Since then, I’ve been exploring the world of antitrust regulation, especially as it pertains to the world’s largest tech companies. This issue has garnered more and more attention over the past several months, as NPR’s Planet Money podcast recently did a three-part series on antitrust and presidential candidate Elizabeth Warren laid out a plan to split up Amazon, Facebook, and Google.

Modern antitrust law has been around since about the 1970s and focuses primarily on ensuring consumer welfare. In other words, these laws are centered around price and quality. When a company has little to no competition, that company has a monopoly. If a company has a monopoly, they can raise prices, restrict output, and reduce quality. In this scenario, consumers have no choice but to either buy the more expensive, lower-quality product, or forgo the product completely. The consumers bear the burden. This is exactly what happened when Rockefeller’s Standard Oil Company thrust antitrust issues to the forefront of the collective American consciousness in the late 19th and early 20th centuries, resulting in sweeping antitrust legislation.

But is that antitrust legislation—which helped to dismantle Standard Oil—now broken?

As recent issues with tech companies like Facebook have demonstrated, the concept of consumer welfare may be shifting. Instead of a focus on prices as an indicator of consumer welfare, Senator Warren and some antitrust experts argue that perhaps regulators should adopt more of a focus on things like data protection and privacy as a marker of consumer welfare. Further, proponents of regulation argue that these companies are becoming too big and too powerful, and many of their business tactics are anticompetitive. Just as the rise of the platform model has changed the nature of Porter’s Five Forces, it has similarly changed the nature of monopolies and competition.

Let’s look at Amazon and how it differs from brick-and-mortar retailers like Wal-Mart. Wal-Mart, Kroger, and Costco all have private label brands that piggyback on the momentum of successful products. All of those retailers are well within their rights to create a generic, private label version of, say, Lucky Charms. They can even take their own private label brand and position it more prominently on the shelves, relegating the real Lucky Charms to a dusty corner. This is not necessarily anticompetitive because brick-and-mortar retail is more competitive and less concentrated than e-commerce. In 2016, Wal-Mart had the greatest market share of any grocery retailer at 17.3%. It’s a substantial piece of the pie, but the other 82.7% is split among dozens of other retailers, meaning that if a consumer goes into a Kroger store looking for Lucky Charms and all they see is Kirkland’s Luck o’ the Irish (this is an entirely fictional example, by the way), they have the option of going to the Target down the street.

Tech, on the other hand, tends toward more of a winner-takes-all scenario. Most consumers rely on one platform much more heavily to meet specific needs. Want to find out who Chrissy Teigen is married to? Google it. Need to buy some dog food? Go to Amazon and it’ll be on your doorstep in less than 48 hours. Feeling compelled to share a picture of your adorable nephew with your friends? Post it on Facebook! Google’s market share among search engines has remained steady at around 90% for over a decade, Amazon’s market share of e-commerce was a whopping 49.1% in 2018, and Facebook’s market share among social platforms as of February 2019 was 69%.

In 2017, Yale Law student Lina Khan wrote a paper on antitrust and Amazon which made waves all across the internet. Khan argues that Amazon, like Kroger, can create a private label (Amazon Basics) version of whichever products are selling well and move their Amazon Basics product to the top of the search results, while moving their primary competitors to the bottom.

Let’s say I take a risk on manufacturing and selling water bottles. When selling through brick-and-mortar retailers, my inventory of water bottles and the risk associated with it transfers to the retailers before they’re sold. If they don’t sell, the retailer eats most of that loss. If my water bottles do sell, then the retailers I sell through can essentially take my idea and make their own private label water bottles, but at least they assumed some risk in the process. And as a manufacturer, I have dozens of other retailers I can sell my water bottles to.

What if I want to sell my water bottles online? I’ll go to Amazon, the world’s largest online marketplace. I never sell my inventory to Amazon, so they don’t assume the same risk that the brick-and-mortar retailer above did. If my water bottles don’t sell, my company is going under. What happens to Amazon? Nothing. And if they do sell, Amazon can create an Amazon Basics version of my water bottle and appropriate the value without taking on any risk at all. At that point, I don’t have many options. There’s no other online marketplace that has the traffic Amazon does. It’s a lose-lose for me and my beloved water bottles. The long-term implications of this, Khan claims, is that it is a deterrent to undertaking risk, and that is bad for competition.

bezos copy

Khan probably believes that if there’s a John D. Rockefeller & Standard Oil of the 21st century, it’s Jeff Bezos & Amazon. She writes, “The thousands of retailers and independent businesses that must ride Amazon’s rails to reach market are increasingly dependent on their biggest competitor.”

A spokesman from Amazon responded to Khan’s argument, stating, “We operate in a diverse range of businesses, from retail and entertainment to consumer electronics and technology services, and we have intense and well-established competition in each of these areas. Retail is our largest business today and we represent less than 1 percent of global retail.” He added that Amazon making its own products means lower prices, better products, and more competition. He also pointed out that private label is a relatively tiny portion of Amazon’s business.

So, is antitrust broken? Should tech giants like Amazon be split up? You tell me.

11 comments

  1. Great post! I think this is definitely a question on all of our minds, but as an investor I like to pretend it’s not a problem. Yes, Amazon is a behemoth and certainly has its hands in any digital cookie jar imaginable and it has sparked a lot of innovation. However, I agree with you that maybe, just maybe, they’re doing too much. Even though the barriers to entry in digital business are low, Amazon still essentially has a monopoly when you consider all of the infrastructure it has invested millions in over the years. But, on the question of data privacy and anti-trust, I think that’s where regulation should step in. I have no problem leaving digital breadcrumbs across multiple companies via my interactions with them, however when one company can assemble a full profile of me based on all of my data they combined across the UI’s I interact with, thats a problem for me. Great, thought-provoking post!

  2. Great post and commentary, clearly did your research here! AT&T had to divest its assets after nearly a century of leading the telephone industry, but later became a monster once the Telecommunications Act of 1996 allowed business to compete against one another…the company has expanded into numerous businesses since. Amazon continues to rise to the top in a range of businesses, but at the end of the day it is ultimately the consumers’ choice…it’s not Amazon’s fault that competitors in some these low barrier to entry businesses have not evolved with technology. Attempting to breakup Amazon, Google, and Facebook is quite the daunting task…especially when candidates rely on Google/Facebook to advertise!!! Just look at Facebook recently pulling down Warren’s ads criticizing Facebook..these behemoths can control anyone that attempts to take them down.

  3. Interesting and timely post as anti-trust has been gaining a lot of attention in the news recently. You made some great points and appreciate you sharing both sides of the story by ending it with Amazon’s comment. I think its important that to remember where amazon started, allowing people to sell their books online and this giant has come a long way. It is a classic business school example of how companies have moved away from their core and evolved beyond Porter’s view into many other sectors. This also demonstrates the need for laws to evolve with the time. Our polices tend to be more reactionary than forwarding looking, I think that situations like these could have been avoided. The de-coupling out these companies is difficult now, but we saw signs of this way before it was too late.

  4. Yes, Amazon does have its eggs in pretty much every possible basket in the market. Their market share across industries, however, is fairly small. As they continue to grow (which they will no doubt), I would worry about Amazon becoming the only online retailer available. That is where I would draw the line. In this new age centered around personalization and convenience, I don’t think consumers will be able to look past their reliance on Amazon services enough to see that regulation is necessary. If we wait until we become too reliant on Amazon as a society, it will become extremely difficult to break it apart.

  5. Great post ! I know very little about the details of monopoly and antitrust law but my understanding is that if you build a better product and you have a significant market share based on that fact (it being a better product) then I think it’s okay. I think companies tend to run into trouble when they use their existing size and power to actively do something that could be seen as anticompetitive. So for example Google is a clear winner in both search and in Android OS (~80% of phones are Android). These two things alone are fine, however last year Google was fined $5bn by European antitrust regulators because they were said to be blocking competitive search engines on the Android OS. In other words they were using their significant size and power in one area to affect competition in the other. I think Amazon’s retail platform will be fine as long as they are not found to be actively designing their algorithms to promote their own products ahead of more relevant competitive products – though again, I’m certainly not an expert.
    What is really interesting to me is the data side. I don’t know if antitrust law as it’s written can cope with the data concerns in their current form. Is using data from one product to better another product seen as anticompetitive? Or is data just a resource, something like a manufacturing plant that allows economies of scale but doesn’t actively harm competition? … I think that’s where congress would have to step in, and my biggest concern there is that the majority of senators seem to be fairly illiterate when it comes to technology legislation. Certainly an interesting space to watch and a great blog topic !!

  6. I absolutely love how these tech companies wiggle around monopoly laws. It’d be hilarious if it wasn’t also so revealing about our anti-trust system. Google claimed it wasn’t a monopoly because it thinks of itself as a “tech company” not a “search company”, and in tech, they have so much competition. It’s the same nonsense the spokesperson from Amazon said at the bottom of the post “we represent less than 1% of global retail”. They’re always so careful with their framing choices. Global retail, not US retail, not US retail in certain goods, just the ever broad “global retail”.

    Also, I’m surprised no one has brought up Amazon Web Services (AWS). I think that’s the easiest target by far. Alas, I don’t expect that the 75-year-old senators who didn’t understand Facebook
    or Google would even begin to understand the concept of cloud computing.

  7. I’m not sure antitrust is broken, but I do think it should be rewritten for a new age. I do think it’s silly that Amazon is in online retail, cloud computing, device manufacturing, audio and video streaming, etc. All these businesses are about using one outsized revenue streams in one area, and using it to compete in a bunch of others.

  8. With the recent acquisitions by Amazon, such as PillPack, it does make me wonder if they will eventually enter the online pharmacy space. It seems as though when they tend to enter a new space, they either have acquired a company already in that industry or partner with an existing company that is thriving in it. To start, I would say they would not have as big of an impact, but as Amazon continues to develop and grow I’m afraid what seems to be a monopoly will start to get a little out of control. Amazon is great by all means and I use many of its services, but I wouldn’t like to see it being at the forefront of every ad, or option I see online. We see data being captured via cookies and then utilized with other third party apps to present us with the latest updates on a product or service we may have seen on a website or Google search and I really am not sure how laws can start to draw a fine line with how data can be captured and used to lure us into purchasing products from specific types of companies.

  9. Great Post! Amazon definitely does move their own “recommended” or self made products at the top of all my searches. Personally, I think it’s okay to self promote, that said I do always refilter my searches. While it’s great to find a deal I think quality is my most important factor in a purchase. Either way I’m interested in seeing how this plays out and if new regulations will pass.

  10. Awesome post! This is a real grey area in my mind. On one side, Amazon is clearly trying to take the world over. Yet, their size has allowed for great efficiency with various business processes that have become essential to our everyday lives. I think it will be interesting to see how this all plays out especially with 2020 on our radar.

Leave a Reply to dancreedon4 Cancel reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: