Can a business become too successful? Can it serve its customers too well? It can, if you are a government economist or bureaucrat — or a less efficient rival with political connections.
There are increasing calls for large technology firms such as Amazon, Google and Facebook to be brought to heel by the government, and even to be forcibly broken up to prevent any one unit from becoming too powerful. But, when markets are allowed to remain free, it is consumers that have the ultimate power, and traditional models of monopoly and competition tend to rely on economic fallacies, rather than focusing on what truly benefits consumers, which should be the ultimate standard.
The latest antitrust cries came when Amazon announced its $13.7 billion bid in June to purchase organic grocer Whole Foods. This, despite the fact that Whole Foods has just a 1.3 percent market share, compared to 7 percent for Kroger (parent of Ralphs) and about 14 percent for No. 1 Walmart, not to mention significant new competition from German-based Aldi and Lidl, which are both just breaking into the U.S. market.
A lot of the fear comes from Amazon’s ability to disrupt other industries, from online book-selling to cloud computing, but the idea that it is destroying vast swaths of brick-and-mortar retail business is overstated, to say the least. Amazon has doubtless had a significant effect on retail sales, and now accounts for 43 percent of all online retail sales in the U.S., though even this statistic is misleading, as half of those sales comes from third-party sellers using Amazon’s platform, and online sales still only make up a little more than 8 percent of all retail sales. In fact, Moody’s Investors Service recently concluded, Amazon is actually the weakest of the main U.S. firms, based on operating results.
“Borders, JCPenney, Macy’s — these brands failed, or are failing, not really because of Amazon, but because they never really responded well to the changes in consumer habits and expectations that the internet represents,” Bloomberg and Businessweek technology reporter Brad Stone explained to USAToday in June.
Nevertheless, Rep. David Cicilline of Rhode Island, the top Democrat on the House antitrust subcommittee, called for a congressional hearing on the deal. Marc Perrone, president of the United Food and Commercial Workers International Union, claimed the deal would threaten jobs, and wrote in a complaint to the Federal Trade Commission, “Regardless of whether Amazon has an actual Whole Foods grocery store near a competitor, their online model and size allows them to unfairly compete with every single grocery store in the nation.”
In other words, because Amazon has painstakingly, over as number of years, developed a more efficient business model and a better distribution network by offering consumers greater choice of products, cheaper prices and quick delivery, and by better adapting to the way many consumers wish to make their purchases in this digital age, this constitutes “unfair competition.” Maybe in the eyes of Amazon’s less-efficient competitors, but not in the eyes of consumers.
Fortunately, the FTC found no evidence of consumer harm and declined to intervene, and the deal closed last month. Others, like Staples and Office Depot, who attempted a merger in 2016, have not been so lucky.
Interestingly, the big tech firms seem to have taken the “monopoly” moniker away from Walmart, which remains the largest retailer and grocer in the nation — and the largest private-sector employer. But Walmart was not always the big (box), bad behemoth it is today. It began as a single “five and dime” store in Arkansas, and only grew to its present size by providing customers with more goods at cheaper prices and, like Amazon to follow, by developing an impressive distribution system to facilitate these goals.
But, to many people, size matters. “Google, Facebook, Amazon are increasingly just supermonopolies, especially Google and Facebook,” venture capitalist Roger McNamee, co-founder of Elevation Partners, bemoaned on CNBC’s “Squawk Alley” in June. “The share of the markets they operate in is literally on the same scale that Standard Oil had … more than 100 years ago — with the big differences that their reach is now global, not just within a single country.
The Standard Oil reference is, perhaps, fitting, but not in the way McNamee intended. The Standard Oil case, in which the U.S. Supreme Court in 1911 upheld a lower court’s ruling that the Standard Oil Company of New Jersey should be broken up due to anticompetitive behavior, has often been held up as one of the biggest successes of antitrust law — even though the facts belie the ruling. Standard Oil grew its share of the kerosene market from 4 percent in 1870 to nearly 90 percent during the 1880s, but it did so through substantial innovation and cost cutting — for consumers as well as the company itself.
Standard Oil used byproducts from kerosene that its competitors ignored, selling gasoline for fuel and tars for paving, not to mention selling lubricating oil and petroleum jelly. As a result, the price of refined kerosene dropped from 26 cents per gallon in 1870 to less than 6 cents by 1897.
And when Standard Oil made mistakes, it was punished. The company failed to invest in the Texas oil boom, and delayed switching production from kerosene to gasoline. As a result, the dominant “monopolist” fell from a 90 percent market share during the 1890s to 64 percent in 1911, when the Supreme Court issued its ruling. Far from failing to compete, or preventing others from competing, Standard Oil simply did so better than its rivals — for a time.
Oftentimes, it comes down to political pull. As economist Dominick T. Armentano has noted, about 90 percent of all antitrust litigation has been brought by competitor firms — not unbiased third parties (if any such groups can be said to exist, either within or outside of government). Moreover, the “history of antitrust regulation reveals that these laws have often served to shelter high-cost, inefficient firms from the lower prices and innovations of competitors,” Armentano maintains. (Think Netscape going after Microsoft for having the gall to give away its Internet Explorer browser for free with its Windows software, and subsequently breaking Netscape Navigator’s dominant hold over the market. Note that IE has since fallen significantly behind Google’s Chrome browser, and also faces substantial competition from Mozilla’s Firefox.)
In an article I co-authored a number of years ago for the American Institute for Economic Research with Benjamin Powell, now economics professor and director of the Free Market Institute at Texas Tech University, we noted how notions of “monopoly” and “antitrust” can mean whatever government regulators want them to mean. “In antitrust law, there is no way for a firm to know if it is breaking the law before it hears the judge’s verdict,” we observed. “If a firm’s prices are higher than everyone else’s, that implies monopoly power; if other firms’ prices are the same, it implies collusion; if prices are too low, this signifies cutthroat competition and predatory pricing. Each one of the above scenarios can be prosecuted under antitrust laws.” Moreover, pretty much anything can be deemed a monopoly, depending on how narrowly you define the market.
But if U.S. regulators are bad, they still pale in comparison to their counterparts in the European Union, who recently slapped a record $2.7 billion fine on Google for having the audacity to rank its comparison-shopping service, Google Shopping, higher than those of competitors like Nextag, PriceGrabber and Shopping.com for searches made using its own search engine and displayed on its own internet sites.
The fact is that no one is holding a gun to consumers’ heads, forcing them to use Facebook and Google products, or shop on Amazon.com. They do so voluntarily because they feel it makes them better off. This does not stop regulators with a myopic focus on market share or the unrealistic neoclassical economic theory of “perfect competition” — or politicians wooed (or bought) by rival firms who are losing to their competition — from exaggerating the “market power” of large companies and playing off the fears that somehow, someday in the future, the big firms will screw the consumer.
Or they could simply suffer the fate of Myspace. Because even in cases where a single company does possess an extraordinary market share at a certain point in time, “the mere phenomenon of monopoly is without significance or relevance for the operation of the market and the determination of prices,” renowned Austrian economist Ludwig von Mises asserted. “It does not give the monopolist any advantage in selling his products.” This is because even a firm that dominates a market and has no immediate competitors must continue to innovate in order to prevent others from recognizing and seizing an opportunity to steal their market share.
The far greater concern are the government-protected monopolies, shielded not only from current competition, but also from potential competitors by licensing requirements, tariffs, the regulation of prices and business practices, or other forms of special-interest favoritism. Unlike the market monopolist, these arrangements truly do reduce or eliminate the need to continually innovate, and close off all alternative choices to the consumer. That is a power — and a harm — that no free-market “monopolist” can compete with.
Adam B. Summers is a columnist with the Southern California News Group.