Regulatory bodies on both sides of the Atlantic are encircling the big tech companies. Among them is consumer goods giant Amazon (US:AMZN), which is facing criticism from the American Federal Trade Commission, House Judiciary Committee as well as the wrath of the European Union Commission. But to tighten their grip on Amazon, these regulators face a difficult battle. Current competition laws are designed to protect the consumer, meaning Amazon – which has pushed down prices, pioneered online shopping and made life easier for its millions of customers – is on the right side of regulation. As Lina Khan argues in her Yale Law Journal article 'Amazon’s Antitrust Paradox', to regulate the big tech companies, competition laws needs updating.
In painstaking detail in the article, which catapulted Ms Khan from law student to 'Amazon's number one enemy', she argues that the antitrust laws drafted in the 1970s and 1980s are no longer appropriate for the modern market. She says they are designed to assess competition according to consumers' short-term interests, rather than the health of the market as a whole. Especially in the case of online platforms, antitrust laws should take into consideration the underlying structures and dynamics of markets.
Ms Khan writes that Amazon has established its dominance through two elements of its business strategy: integration across business lines and a willingness to lose money and invest aggressively. Both elements are aptly demonstrated by the $13-a-month Amazon Prime service, which offers customers free next-day delivery and access to the company's expanding content library. In 2011 it was estimated that each Prime member cost Amazon at least $90 (£69.50) a year in lost shipping and film revenue, meaning the company lost $11 per customer annually. But Prime is considered crucial to Amazon’s growth as an online retailer and it is estimated that customers increase their purchases from Amazon by around 150 per cent after they become Prime members. They also become more likely to buy from Amazon rather than other platforms. In this way, Amazon’s strategy allowed it to use predatory pricing methods without drawing the attention of pricing laws.
The paper also identifies vertical integration as a way in which Amazon has established its market dominance. Vertical integration occurs when multiple successive stages of production or distribution of a product are brought under the same company. Take Fulfillment By Amazon (FBA), a service that gives online vendors access to Amazon’s logistics system in exchange for a fee. Sellers who use FBA have an improved chance of being listed higher in Amazon search results than those who do not. This means that Amazon connects the success of the vendors that use its retail website to whether they also use its delivery system.
Comparable dynamics can also be found in Amazon’s online infrastructure. As its Marketplace holds a large proportion of e-commerce traffic, many smaller merchants find that it is necessary to use the site in order to attract buyers. But Ms Khan cites evidence that Amazon uses its Marketplace as a testing ground to spot new products to sell itself. Using sales data from merchants in this way allows the company to bolster its own retail revenues without taking on extra risk. If products do well, Amazon sells them in-house but undercuts the pricing of existing vendors.
The problem facing regulators is that the current antitrust laws in the US or Europe don't deal with vertical integration, e-commerce platforms or predatory pricing. Ms Khan therefore proposes two approaches for addressing the dominance of Amazon and its peers: strengthen the law against predatory pricing and police forms of vertical integration that companies can use for anticompetitive practices.
She notes that while predatory pricing is technically illegal, it is hard to win claims because courts require evidence that the apparent predator would be able to raise prices as well as regain its losses. On the other hand, a competition-based approach could introduce the ‘presumption of predation’ – that is, courts could operate on the basis that an aggressive pricing strategy was being undertaken by dominant platforms that have already been found to be pricing products below cost.
The second proposal is that regulators should include a company’s capacity to cross-leverage data in merger review. At the time of the paper’s publication, only mergers of a particular size required agency review – but in Ms Khan’s view this may not be a true indicator of the scale of data at risk. If this had been the case, Facebook’s (US:FB) purchases of WhatsApp and Instagram may have received greater scrutiny from antitrust agencies.
Ms Khan concludes that current law does not fully appreciate the risk of predatory pricing and how integration across distinct business lines can affect competition. This is perhaps most apparent in the context of online platforms such as Amazon – in part because platform markets often drive growth over profits, a strategy that investors have historically rewarded.
Further reading:
'Amazon’s Antitrust Paradox', Lina M. Khan
