The argument that some companies are practicing predatory pricing, which will ultimately hurt consumers, doesn’t hold water.
The argument that some companies are practicing predatory pricing, which will ultimately hurt consumers, doesn't hold water.
I n a recent Wall Street Journal op-ed, a venture capital investor in the e-commerce firms Deliverr and Wish calls for breaking up Amazon because of its alleged predatory pricing. Although it’s tempting to dismiss that charge as a competitor’s sour grapes, it would be better to refute the argument on its merits, lest someone picks it up and runs with it.
The case for predatory pricing against the tech giant is as follows: Amazon is subsidizing low prices on its e-commerce platform and in third-party logistics with profits from its cloud-computing division, Amazon Web Services (AWS). This will ultimately (so the argument runs) drive competitors out of business, which will allow Amazon to raise prices.
Note that even if this theory is correct, consumers are benefiting on the front end from lower prices and expanded logistics. Under U.S. antitrust law, the standard for triggering enforcement action is consumer harm — the opposite of what Amazon’s customers are now experiencing. And so, for example, at a time when inflation is a toll on consumers’ budgets, there are currently 148 million Prime subscribers enjoying alleged artificially low prices, and other Amazon customers can benefit too (depending on the relative cost of delivery to the price of the good being bought). So where’s the “harm”? But what happens down the road when Amazon can (theoretically) raise prices, having (theoretically) driven its competitors out of business?
That’s the part that doesn’t really happen. Sustained predatory pricing doesn’t show up in the real world very often. In 1986, the Supreme Court said as much in Matsushita v. Zenith Radio Corp., which noted that examples of it do not appear to exist.
That’s because there must be a barrier that prevents potential competitors from entering — or returning to — the market once the predator hikes prices. Without a barrier to entry, potential new competitors have an enormous incentive to jump into the market offering lower prices.
The combination of a wide range of offered products and effective logistics networks already offers Amazon considerable competitive advantages over potential competitors, but they are not insurmountable barriers to entry. There’s enough venture capital funding, innovative thinking, and lust for profit in the world to give Amazon a run for its money if it ever pursued the second half of the alleged predatory-pricing scheme.
Another possibility is for Amazon’s established competitors to focus on revenue streams other than online commerce, biding their time until Amazon attempts to charge above-market prices, also called monopoly rents.
Take Walmart, for instance — Amazon’s closest online commerce competitor. With a broad scope of products, a pretty extensive internal logistics network, and a market cap of around $377 billion, Walmart could easily wait out any predatory pricing scheme by Amazon with the revenue generated from its more than 4,700 physical locations. Brick-and-mortar stores are a competitive advantage Amazon mostly lacks. Walmart would be in an excellent position to reenter the online marketplace if Amazon ever tried to drive it out with artificially low prices.
And what if Amazon never got to the second, monopoly-rent-collecting half of predatory pricing and instead chose to cross-subsidize artificially low e-commerce prices with profits from AWS forever? Well, there would be no consumer harm and therefore no antitrust case for breaking up the company.
Moreover, that kind of suboptimal use of internal resources isn’t likely to persist. Cross-subsidizing means taking resources away from the business’s profitable endeavors; there is no incentive to operate like that indefinitely and with no plan for profitability. Regulators have no special knowledge about where one firm should end and where the next should begin. Their decisions are less likely to produce healthy competition, beneficial innovation, and low prices than the invisible hand of the market, guided by the countless individual and voluntary decisions by consumers.
Antitrust regulators theorize, and competitors complain, but markets work.