What everyone’s getting wrong about Amazon

An empire built on practices that would have been illegal 50 years ago.
An empire built on practices that would have been illegal 50 years ago.
Image: Reuters/Michael Dalder
We may earn a commission from links on this page.

In this week’s cover story of the New Republic, Franklin Foer makes the case that Amazon has grown so large it must be stopped through government action. He writes, “[T]he company has achieved a level of dominance that merits the application of a very old label: monopoly.”

The article triggered a suite of prominent respondents arguing that Foer has it all wrong. “Amazon Is Not A Monopoly,” New York Magazine’s Annie Lowery replied, noting that Amazon holds only 15% of the e-commerce market. At Vox, Matthew Yglesias went one step further, noting that with non-existent profits and low prices, Amazon is “the reverse of a monopoly.” In the New York Times on Oct. 13 Joe Nocera asked, “Amazon Plays Rough. So What?”

The thrust of their collective argument is that Amazon might be big and ruthlessly competitive, but little about its level of control invites alarm, let alone antitrust scrutiny. Their claims are worth picking apart because they reveal important misconceptions about how to understand Amazon specifically and corporate power generally. In dismissing Foer’s argument, these commentators fall culprit to a narrow view of economic muscle—the same thinking that dominates antitrust thinking today, and that partially accounts for how Amazon amassed such swelling power in the first place.

The main criticism they launch at Foer’s analysis is that Amazon doesn’t meet the textbook definition of a monopoly. The Atlantic calculates that Amazon controls less than 1% of retail as a whole, while Yglesias protests that “[a] monopoly needs to involve a lack of choice and some kind of barrier to entry.”

First off, approximating Amazon’s command as a percent of everything sold (minus gas, food & drinks, building supplies) in America is insane. It dissolves the dominance Amazon enjoys in specific sectors—like books, but also in electronics like televisions and in industrial goods like valves. Saying that Amazon’s monopoly over books doesn’t matter because it doesn’t also have a monopoly in televisions is like saying that John Rockefeller’s monopoly over oil didn’t matter because he didn’t also have a monopoly over steel.

What’s more, these points misunderstand the nature and scope of Amazon’s power. It also assumes market share is the only measure of market power, and glosses over the significant structural advantages Amazon enjoys through its involvement in numerous related lines of business. For example, Amazon scoops troves of market insight from its third-party marketplace, which accounts for over 30% of the goods sold through the site. If, say, Amazon sees that Darth Vader cufflinks are popular on a marketplace seller’s site, it will start selling Darth Vader cufflinks directly—and then undercut the original seller on price. Or take Fulfillment-By-Amazon, its fulfillment and delivery service, which competitors rely on because Amazon can extract terms from FedEx unavailable to anyone else, or its cloud computing services, which Forrester Research estimates is involved in over 20% of e-commerce activity.

The significance of Amazon is not that it has blocked competitors outright. It has instead made them vulnerably dependent. As a report by Forrester Research noted in 2012, “Many companies that fear Amazon as a competitor in the eCommerce arena nonetheless use Amazon’s services.” The reason this power deserves antitrust attention is that it is shaping and controlling markets for the rest of the retail economy, much as the railroads did in the late 19th century.

The other major misperception around Amazon’s dominance is that the company has built it purely through greater smarts and superior service to consumers. As Nocera writes, “Even in the one business Amazon does dominate—books—it earned its market share fair and square, by, among other things, inventing the first truly commercial successful e-reader.” No doubt, Amazon is a bold and innovative company, and Jeff Bezos a visionary. But it’s important to note that Bezos has built his empire in part through practices that 50 years ago would have been illegal.

Take, for example, Amazon’s pricing practices. A major way Amazon has secured its dominance is through steeply discounting products and using books as “loss-leaders” to sell its other wares. For much of the 20th century, pricing laws limited how extensively retailers could slash prices, to prevent their short-term interests from degrading the long-term viability of producers’ goods. Predatory pricing laws forbade companies from cutting prices with the intent of driving out competitors, while practices like resale price maintenance placed the right to price goods in the hands of producers, not retailers. Predatory pricing laws also showed that officials understood that monopolization of an industry didn’t always yield immediate monopoly profits. Both the Justice Department and Federal Trade Commission took predatory pricing as a serious threat to fair markets. They also viewed more skeptically rampant acquisitions, like Amazon’s buy-up of more than 70 companies since 1998, as well as vertical integration, like Amazon’s dominance across lines of businesses in e-commerce.

In other words, Amazon’s growth is intimately tied to the erosion of antimonopoly laws. Due to changes in antitrust ushered in by the Chicago School, Amazon can get away with practices that we once clearly recognized as anticompetitive. Predatory pricing cases, for example, are practically impossible to win today, due to a far higher threshold that a court introduced in 1993. The license to use your advantage in one line of business to privilege another, too, is much easier to sustain today because of lax laws. While marveling at Amazon’s feats, it’s important to remember that it has established dominance in part through rough play that previous generations ruled illegal.

Following arguments by Barry C. Lynn and George Packer, Foer has invigorated a vital debate about Amazon’s size and influence. Dismissing it because the company doesn’t match a textbook definition of monopoly is naïve and ignores a more basic question about what it means for a growing portion of the economy to be dependent on a single private interest. Waiting for its market share to overtake some precise number before sounding the alarm misunderstands how power functions in a marketplace and how dominance alone can foreclose fair play and real competition. As Brandeis wrote, “For the essence of restraint is power; and power may arise merely out of position. Wherever a dominant position has been attained, restraint necessarily arises.” Amazon has a monopoly in books. It has also attained a dominant position in our economy unlike anything we’ve seen in the last 50 years. That alone should alarm us.