Amazon’s financial shell game let it create an “impossible” monopoly

🌈 Abstract

The article discusses the paradox of Amazon's monopoly power, which was not supposed to emerge according to pro-monopoly economists. It examines how Amazon was able to use predatory pricing and cross-subsidization to build a durable monopoly, despite the predictions of economic models. The article also highlights Amazon's monopsony power over its sellers, the lack of transparency in its financial disclosures, and how it exercises control over both buyers and sellers on its platform.

🙋 Q&A

[01] Amazon's Monopoly Power

1. What were the predictions of pro-monopoly economists regarding Amazon's ability to attain monopoly power? According to the article, pro-monopoly economists believed that it would be impossible for Amazon to attain monopoly power, even if it became a monopoly in the sense of dominating sales of various goods. They predicted that if Amazon tried to take over a category by selling goods below cost, rivals could just wait until the company got tired of losing money and put prices back up, and then those rivals could go back to competing.

2. How did Amazon defy these predictions in the real world? The article states that in the real world, Amazon was able to use its access to the capital markets to embark on scorched-earth predatory pricing campaigns. When companies like diapers.com refused to sell out to Amazon, the company committed large sums of money to selling products below cost, driving those competitors out of business.

3. What argument did Lina Khan make in her 2017 paper "Amazon's Antitrust Paradox"? The article mentions that Lina Khan, now the chair of the FTC, published a landmark paper in 2017 arguing that Amazon had all the tools it needed to amass monopoly power, contrary to the views of the antitrust establishment.

[02] Amazon's Monopsony Power

1. What is the key evidence of Amazon's monopsony power over its sellers? The article states that merchants can't live without Amazon, as the majority of US households have Prime and 90% of Prime households start their ecommerce searches on Amazon. This gives Amazon significant bargaining power to extract huge concessions from its suppliers, with Amazon able to levy a 45-51% "junk-fee" on its platform sellers.

2. How does Amazon's "most favored nation" rule impact its sellers? The article explains that Amazon's "most favored nation" rule punishes suppliers who sell goods more cheaply in rival stores or on their own site, forcing them to dramatically hike their prices on Amazon and everywhere else.

[03] Amazon's Financial Disclosures

1. What does the article say about Amazon's financial disclosures? The article states that Amazon claims its non-AWS units have a 1% profit margin, but it does not break out profits and losses by segment in its financial disclosures, as required by SEC rules. The article argues that this lack of transparency allows Amazon to obscure the profitability of its retail operations.

2. How does the article characterize the SEC's role in allowing this lack of transparency? The article criticizes the SEC for not enforcing its own rules that require companies to make detailed per-segment disclosures of profits and losses. It argues the SEC has allowed companies like Amazon "near total managerial discretion" to group their finances in a way that obscures the true profitability of different business units.

[04] Amazon's Control Over Buyers and Sellers

1. How does the article describe Amazon's control over its "marketplace"? The article argues that Amazon's "marketplace" is not like a flea market, but more like the interconnected shops on Disneyland's Main Street, where all the sellers are totally controlled by Amazon, which decides what goods they can sell, how much they cost, and whether a customer ever sees them.

2. What is "Amazon's pricing paradox" according to the article? The article states that Amazon can claim to offer low-priced, high-quality goods on its platform, but it makes $38 billion per year pushing the best deals way down in its search results, so that the top results are on average 29% more expensive than the best deal Amazon offers.