Superpredators: HOW AMAZON AND OTHER CASH-BURNING GIANTS MAY BE ILLEGALLY CORNERING THE MARKET.

AuthorSussman, Shaoul

Earlier this year, the Institute on Taxation and Economic Policy, a liberal think tank, reported that Amazon, one of the most valuable corporations in the world, paid no federal taxes on a supposed $11.2 billion in profits in 2018. Many Americans felt outraged, and shortly thereafter Senator Elizabeth Warren introduced a plan to force companies like Amazon to pay their "fair share" of taxes.

But in this case, the outrage was somewhat misplaced. We should not be astonished that Amazon pays no taxes, for the simple reason that it doesn't actually turn a profit. While the company used accounting techniques to show a positive cash flow on paper, its zero-dollar tax bill more accurately reflects the nature of the business.

Today, many firms, not just Amazon, have adopted a growth strategy based on rapid expansion and negative cash flow. They are propped up by investors and by low interest rates that provide cheap and easy access to capital. They can't be unprofitable forever, the thinking goes, and they must have an exit strategy, even if they don't share it publicly. Until then, they continue to hemorrhage cash in their quest for an ever greater market share. The orthodox narrative on Wall Street is that these firms are reinvesting what would otherwise be profits, instead of sharing them with investors and shareholders. This narrative suggests that we are witnessing one of the greatest wealth transfers in the history of capitalism. By investing all their profits back into the firm, these companies are essentially transferring wealth from their investors to us, the consumers.

However, it's unclear how, or even whether, that's actually happening. Selling below cost is a classic way for aspiring monopolists to seize market share from smaller competitors who can't afford to consistently lose money. This technique, known as predatory pricing, is bad for consumers, and the economy as a whole, because it drives companies out of the market not because they're less competitive or efficient, but because they don't have enough funds to survive without turning a profit. That's why predatory pricing is illegal under federal antitrust law.

Today the U.S. economy is rife with spectacularly valuable corporations that fail to turn a profit, relying on the continuing faith of investors. It's not just Amazon: Uber, Netflix, and WeWork are some of the many other examples. To the average person, these companies appear to be using superlow prices to gain market share. But if predatory pricing is illegal, how can this be happening?

The answer is that what the average person thinks about Amazon's business strategy doesn't matter, because the Supreme Court has all but defined predatory pricing out of existence. Taking cues from the conservative law and economics movement, the Court has held that the strategy is irrational as a matter of economic theory, because for it to pay off, the monopolist will have to recoup today's losses by raising prices dramatically in the future. But that won't work, the logic goes, because when they do, competitors will swoop in and offer the same service or product at lower prices, frustrating the entire scheme. Under that thinking, the Court has set up rules making it nearly impossible to prove that predatory pricing is happening.

But the Court and most antitrust scholars have been making a systematic mistake. The prevailing doctrine assumes that there is only one way for a company to recoup its losses once it has cornered the market: raising prices. It ignores the other half of the profit equation: costs. This is a serious error, because giants...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT