Economics: Antitrust - Do Low Prices Really Harm The Consumers?

  (Drivebycuriosity) - There is a campaign against Amazon. President Biden appointed Lina Khan, a "progressive" activist who became famous with an anti-Amazon pamphlet, to chairperson of the powerful Federal Trade Commission (FTC), America´s antitrust authority. "Lina Khan, has an explicit beef with Amazon and has stated publicly, absent any formal hearing, that the company is guilty of antitrust violations and should be broken up." (yalejreg.com wsj.com). 

Instead of fighting against price hikes Lina Khan and other Big Tech crusaders fight against low prices. Biden protege Khan laments that Amazon is too cheap which is bad (yalelawjournal reason).  She claims that Amazon will become a monopolist because their "too low" prices will drive competitors out of business and will hinder potential competitors to emerge.

Recently the Wall Street Journal had a piece which picks up on Khan´s thesis and expands it. They claim that Amazon uses the high profits from their booming cloud business (AWS) to subsidize their Prime business which will "harm consumers in the long run" because others could not compete anymore (wsj.com ).

The critics are wrong. Amazon`s low prices - made possible by being very efficient & productive - did not  prevent potential competitors, quite the contrary, their number has been rising year over year. Since Amazon started in the late 1990s the number of competitors has been swiftly climbing all the time. Amazon`s success story inspired myriads of copycats to offer similar services. Today there are thousands of companies selling online, including giants like Walmart, Target, Best Buy & Costco, who all developed large online departments, and there also exist a lot online platforms like Overstock, Shopify, Wayfair, Etsy & Ebay, who all are copying Amazon`s success. The online giants Facebook & Google also want a piece from Amazon´s pie and provide online shopping on their websites.

 

Shopify.revenues  source

 

Despite Amazon´s too low prices the e-commerce platform Shopify, founded 2006, grew into a giant with a market capitalization of more than 80 billion dollar ( stratechery) .

 

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Etsy, another online shop,  multiplied annual revenues with the factor of 24 since 2012.

The Wall Street Journal is wrong as well. How do they  prove that AWS subsidizes Prime? Yes, almost all Amazon profits come from the cloud business, but where does this money flow? Amazon still invests billions in many foreign markets, like India, where politicians & courts prefer local retailers, which causes Amazon high costs ( deccanherald). Investments in other fledgling markets like Brazil, Mexico, Spain, Turkey or Poland cause high losses as well ( searchaws). Amazon invests also tons of money in loss making "hobby projects" like the grocery chain Amazon Fresh and the cashierless convenience stores Amazon Go ( cnbc). And the company is also expanding into healthcare. How do these projects harm the consumers?

Even if Amazon would subsidize Prime the consumers would benefit by being able to buy very convenient, fast & cheap - with compliments from AWS. Amazon`s low prices force the competitors to be as efficient & productive as Amazon. The consumers are the winners.

Khan & Wall Street Journal claim that Amazon could become a monopolist by cutting prices so low that other shops cannot compete anymore (price dumping). Does anyone believe that Amazon can get so cheap that Walmart, Target, Best Buy and the rest of the US retail would go out of business? If Amazon would really attack a competitor like Shopify with extremely discounted prices - as some naive trustbusters believe ( recode) - competitors like Walmart, or another big corporation (including hedge fund), could buy the e-commerce platform. Amazon would rather go bankrupt then squeeze Walmart, Target & Co. out of the market.

If Amazon would indeed become a monopolist and would then hike prices again (to cover the losses caused by price dumping), the new profits would immediately attract new competitors. Rising profits attract automatically others who want a share from the pie. There are myriads of investors, including big funds, who are happy to put their money on the next Amazon. Hedge & pension funds and SPACs, who command over billions of dollars, would take advantage of the alleged monopoly gains and would start their own online shops (and destroy the alleged monopoly profits this way).   

In 2010 Amazon bought Quidisi, the mother of the competitor Diapers.com, from the companies founder Marc Lore. Lore used the money to start a new company, the e-commerce site Jet.com, which got bought by Walmart and became Walmart´s e-commerce department (wikipedia ). Apoorva Mehta, a former Amazon employee, used his insider knowledge to start in 2012 Instacart, an online grocery with annual revenues around $1.5 billion. There is no way that Amazon can stop others to compete against them.

Amazon makes the US economy more efficient and curbs the inflation. Millions depend on Amazon`s fast reliable deliveries and benefit from low prices. But Khan and other progressives want to stop the company for ideological reasons.