When the average American logs onto Amazon.com to make a purchase, seldom do they think about the company’s supposed economic influence or control over the economy. For Amazon shoppers like myself, its prices are the enticing carrots that keep them coming back. There are many people, however, who feel that Amazon carries an unfair advantage over its competition, and that, although it creates lower prices for shoppers, its business model must be regulated in order to curtail its economic influence. One such voice, which is causing a stir in the antitrust conversation, is Lina Khan, whose work on the issue was recently discussed in an article in The New York Times (NYT) titled: Amazon’s Antitrust Antagonist Has a Breakthrough Idea.
Ms. Khan, as she is referred to throughout the NYT article, is a graduate of Yale Law School, where she first became interested in the antitrust debate. Historically, there are two schools of thought on antitrust laws. On one hand, there are those who believe that the government should focus antitrust laws on the interest of the consumer (i.e. lower prices and better efficiency). On the other hand, there are those like Ms. Khan, who suggest that focusing only on lower prices for consumers is a “short-sighted view” of antitrust regulation, and that government should instead limit a corporation’s economic power. In this essay, I will highlight Ms. Khan’s argument for the latter view, and contrast that with my own opinion. Before we can delve into the debate, a short description of Amazon is necessary.
Amazon is an online commerce company. Founded in 1994 by Jeff Bezos, Amazon sells products literally from A to Z (as the arrow in its logo suggests). Amazon employs more than 500,000 employees and offers some of the lowest prices in each of the product categories in which it competes. Many retailers do business on Amazon as well, using its platform and influence to sell their own merchandise. Moreover, Amazon produces movies, TV shows, and consumer products such as the Kindle, Fire TV, and Echo. Amazon is a big company with over 170 billion dollars in revenue in 2017. Evolving from an idea which began in someone’s head to such a powerhouse, Amazon should be celebrated for the great American success story that it is. So what are some of Ms. Khan’s objections to this success?
The NYT article lists a number of Ms. Khan’s reasons why Amazon’s influence should be stymied, but the main crux of her argument is that Amazon “undermines fair competition” because it owns the platform that many of its competitors also depend on to do business, namely its online presence. Ms. Khan also argues that Amazon enjoys an unfair advantage from “its shipping and warehouse infrastructure.” She goes on to argue that Amazon, therefore, is limiting innovation, product quality, and variety.
When viewed from a philosophical viewpoint, these arguments may sound logical, but they don’t hold water from an economic viewpoint. There is something in macroeconomics called production function, which is a measure of the economy’s value of total potential output or Growth Domestic Product (GDP) based on three important inputs: quality of labor in the workforce, capital, and technological innovation. The equation looks like this:
Production function = (labor) + (capital) + (technology)
The government has an interest in ensuring that these three inputs are always in good standing, hence why there is so much focus, for example, on keeping the unemployment rate low. Now, let’s analyze how antitrust regulations designed to curtail Amazon’s performance— as argued by Ms. Khan—would not be a good idea.
First, Antitrust regulations would lead to massive job loss at Amazon, thereby negatively impacting the economy’s GDP. See formula above. The NYT article makes reference to A&P, a strong supermarket chain that was targeted 60 years ago by antitrust laws because of its size and strong competitive advantage. This attack placed a lot of undue restraints on A&P, and I don’t think it’s a coincidence that, not too long ago, A&P went bankrupt. Amazon might not go bankrupt if it were targeted as well, but many of the half million people would lose their jobs if Amazon got handcuffed by the antitrust police. As Amazon grows, the Principle of Increasing Costs necessitates that it grows its workforce as well. The opposite holds if Amazon shrinks. The company started with 1 employee 24 years ago, but today has over half a million people on its payroll. Restricting Amazon’s growth would consequently place many of those people out of work.
Secondly, antitrust regulations would reduce Amazon’s capital investments, further impacting the GDP. Not much needs to be said on this issue because the logic is simple. If Amazon does not have an incentive to continue to grow, it will not invest in more capital that will allow it to grow. The loss of capital investment leads to reduced efficiency and, ultimately, a decrease in total output by the economy. Government interventions, though well-intentioned, cannot thwart the regular workings of economics.
Lastly, and perhaps most dangerously, antitrust regulations will limit technological innovations at Amazon, which again impact the GDP. One of the arguments put forth by Ms. Khan is that Amazon limits product quality, variety, and innovation. But if you consider Amazon’s contribution to society in the past 20 years, you will find that product quality, variety and innovation have been at the center of its mission. 20 years ago, one could not afford to take more than 1 or 2 books on an extensive trip for want of room in the suitcase. Today, I can carry hundreds of books in my back pocket, thanks to the Kindle—that’s product quality! Today, someone can order a computer on Amazon and have it delivered to their doorsteps the very same day—that’s innovation! And if I’m in an eclectic mood, I can go on Amazon.com and get a book, some groceries, a pair of Jeans, and download a movie simultaneously, with a click of a button—that’s product variety! Given these facts, Ms. Khan’s claim is unfounded.
Those who support Ms. Khan’s call for tighter antitrust regulations against Amazon, often point to its competitors who are claimed to be victims of its behemoth-like presence. It is true that some companies have been made obsolete by Amazon, but that is not a reason to punish it. Companies go in and out of business all the time. It is part of the risk of doing business in a free market environment. At the end of the day, the consumers decide which company deserves their hard earned dollars. The company, on the other hand, must always be innovating in order to retain a large share of the consumer’s buying decision.
Ms. Khan’s arguments are misleading because they do not find their foundation in economic theory. Once one understands the economic implications of further antitrust regulations on Amazon, one will see that further antitrust encroachment is not the way to go. Instead, I believe that other companies should study Amazon for the best practices that it offers. By doing so, the competition, which today might complain of Amazon’s “unfair influence”, might be able to find ways to set themselves apart from their rival.
Take a look at other posts in this series:
Economics Series Part 2: Companies Brace for Impact Ahead of U.K’s Brexit
Economics Series Part 3: President Trump and The Federal Reserve are Going Head-to-Head. Here’s Why.
Why Am I Writing about Economics in a Leadership Blog?
-Led by the Book