NOTE CONTENTS INTRODUCTION I. THE CHICAGO SCHOOL REVOLUTION: THE SHIFT AWAY FROM COMPETITIVE PROCESS AND MARKET STRUCTURE A. Predatory Pricing B. Vertical Integration II. WHY COMPETITIVE PROCESS AND STRUCTURE MATTER A. Price and Output Effects Do Not Cover the Full Range of Threats to Consumer Welfare B. Antitrust Laws Promote Competition To Serve a Variety of Interests III. AMAZON'S BUSINESS STRATEGY A. Willingness To Forego Profits To Establish Dominance B. Expansion into Multiple Business Lines IV. ESTABLISHING STRUCTURAL DOMINANCE A. Below-Cost Pricing of Bestseller E-Books and the Limits of Modern Recoupment Analysis B. Acquisition of Quidsi and Flawed Assumptions About Entry and Exit Barriers C. Amazon Delivery and Leveraging Dominance Across Sectors D. Amazon Marketplace and Exploiting Data V. HOW PLATFORM ECONOMICS AND CAPITAL MARKETS MAY FACILITATE ANTICOMPETITIVE CONDUCT AND STRUCTURES VI. TWO MODELS FOR ADDRESSING PLATFORM POWER A. Governing Online Platform Markets Through Competition 1. Predatory Pricing 2. Vertical Integration B. Governing Dominant Platforms as Monopolies Through Regulation CONCLUSION "Even as Amazon became one of the largest retailers in the country, it never seemed interested in charging enough to make a profit. Customers celebrated and the competition languished."
--THE NEW YORK TIMES (1)
"[O]ne of Mr. Rockefeller's most impressive characteristics is patience."
--Ida Tarbell, A History of the Standard Oil Company (2)
In Amazon's early years, a running joke among Wall Street analysts was that CEO Jeff Bezos was building a house of cards. Entering its sixth year in 2000, the company had yet to crack a profit and was mounting millions of dollars in continuous losses, each quarter's larger than the last. Nevertheless, a segment of shareholders believed that by dumping money into advertising and steep discounts, Amazon was making a sound investment that would yield returns once e-commerce took off. Each quarter the company would report losses, and its stock price would rise. One news site captured the split sentiment by asking, "Amazon: Ponzi Scheme or Wal-Mart of the Web?" (3)
Sixteen years on, nobody seriously doubts that Amazon is anything but the titan of twenty-first century commerce. In 2015, it earned $107 billion in revenue, (4) 5 and, as of 2013, it sold more than its next twelve online competitors combined. (5) By some estimates, Amazon now captures 46% of online shopping, with its share growing faster than the sector as a whole. (6) In addition to being a retailer, it is a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading provider of cloud server space and computing power. Although Amazon has clocked staggering growth--reporting double-digit increases in net sales yearly--it reports meager profits, choosing to invest aggressively instead. The company listed consistent losses for the first seven years it was in business, with debts of $2 billion. (7) While it exits the red more regularly now, (8) negative returns are still common. The company reported losses in two of the last five years, for example, and its highest yearly net income was still less than 1% of its net sales. (9)
Despite the company's history of thin returns, investors have zealously backed it: Amazon's shares trade at over 900 times diluted earnings, making it the most expensive stock in the Standard & Poor's 500. (10) As one reporter marveled, "The company barely ekes out a profit, spends a fortune on expansion and free shipping and is famously opaque about its business operations. Yet investors ... pour into the stock." (11) Another commented that Amazon is in "a class of its own when it comes to valuation." (12)
Reporters and financial analysts continue to speculate about when and how Amazon's deep investments and steep losses will pay off. (13) Customers, meanwhile, universally seem to love the company. Close to half of all online buyers go directly to Amazon first to search for products, (14) and in 2016, the Reputation Institute named the firm the "most reputable company in America" for the third year running. (15) In recent years, journalists have exposed the aggressive business tactics Amazon employs. For instance Amazon named one campaign "The Gazelle Project," a strategy whereby Amazon would approach small publishers "the way a cheetah would a sickly gazelle." (16) This, as well as other reporting, (17) drew widespread attention, (18) perhaps because it offered a glimpse at the potential social costs of Amazon's dominance. The firm's highly public dispute with Hachette in 2014--in which Amazon delisted the publisher's books from its website during business negotiations--similarly generated extensive press scrutiny and dialogue. (19) More generally, there is growing public awareness that Amazon has established itself as an essential part of the internet economy, (20) and a gnawing sense that its dominance--its sheer scale and breadth--may pose hazards. (21) But when pressed on why, critics often fumble to explain how a company that has so clearly delivered enormous benefits to consumers--not to mention revolutionized e-commerce in general--could, at the end of the day, threaten our markets. Trying to make sense of the contradiction, one journalist noted that the critics' argument seems to be that "even though Amazon's activities tend to reduce book prices, which is considered good for consumers, they ultimately hurt consumers." (22)
In some ways, the story of Amazon's sustained and growing dominance is also the story of changes in our antitrust laws. Due to a change in legal thinking and practice in the 1970s and 1980s, antitrust law now assesses competition largely with an eye to the short-term interests of consumers, not producers or the health of the market as a whole; antitrust doctrine views low consumer prices, alone, to be evidence of sound competition. By this measure, Amazon has excelled; it has evaded government scrutiny in part through fervently devoting its business strategy and rhetoric to reducing prices for consumers. Amazon's closest encounter with antitrust authorities was when the Justice Department sued other companies for teaming up against Amazon. (23) It is as if Bezos charted the company's growth by first drawing a map of antitrust laws, and then devising routes to smoothly bypass them. With its missionary zeal for consumers, Amazon has marched toward monopoly by singing the tune of contemporary antitrust.
This Note maps out facets of Amazon's power. In particular, it traces the sources of Amazon's growth and analyzes the potential effects of its dominance. Doing so enables us to make sense of the company's business strategy and illuminates anticompetitive aspects of its structure and conduct. This analysis reveals that the current framework in antitrust--specifically its equating competition with "consumer welfare," typically measured through short-term effects on price and output (24)--fails to capture the architecture of market power in the twenty-first century marketplace. In other words, the potential harms to competition posed by Amazon's dominance are not cognizable if we assess competition primarily through price and output. Focusing on these metrics instead blinds us to the potential hazards.
My argument is that gauging real competition in the twenty-first century marketplace--especially in the case of online platforms--requires analyzing the underlying structure and dynamics of markets. Rather than pegging competition to a narrow set of outcomes, this approach would examine the competitive process itself. Animating this framework is the idea that a company's power and the potential anticompetitive nature of that power cannot be fully understood without looking to the structure of a business and the structural role it plays in markets. Applying this idea involves, for example, assessing whether a company's structure creates certain anticompetitive conflicts of interest; whether it can cross-leverage market advantages across distinct lines of business; and whether the structure of the market incentivizes and permits predatory conduct.
This is the approach I adopt in this Note. I begin by exploring--and challenging--modern antitrust law's treatment of market structure. Part I gives an overview of the shift in antitrust away from economic structuralism in favor of price theory and identifies how this departure has played out in two areas of enforcement: predatory pricing and vertical integration. Part II questions this narrow focus on consumer welfare as largely measured by prices, arguing that assessing structure is vital to protect important antitrust values. The Note then uses the lens of market structure to reveal anticompetitive aspects of Amazon's strategy and conduct. Part III documents Amazon's history of aggressive investing and loss leading, its company strategy, and its integration across many lines of business. Part IV identifies two instances in which Amazon has built elements of its business through sustained losses, crippling its rivals, and two instances in which Amazon's activity across multiple business lines poses anticompetitive threats in ways that the current framework fails to register. The Note then assesses how antitrust law can address the challenges raised by online platforms like Amazon. Part V considers what capital markets suggest about the economics of Amazon and other internet platforms. Part VI offers two approaches for addressing the power of dominant platforms: (1) limiting their dominance through restoring traditional antitrust and competition policy principles and (2) regulating their dominance by applying common carrier obligations and duties.
THE CHICAGO SCHOOL REVOLUTION: THE SHIFT AWAY FROM COMPETITIVE PROCESS AND MARKET STRUCTURE