Are today’s antitrust laws fit for the new business models? Major tech giants, such as Facebook, Amazon, and Apple have been the subject of several antitrust investigations. The list of fines resulting from these investigations are ranging from a €110 million fine for Facebook due to misleading information about the WhatsApp takeover (European Commission, 2017), to a $4.34 billion fine on Google for misusing Android software to hold off competition (D’Onfro, 2018). U.S. Lawmakers are hence urging ‘aggressive action’ from regulators on the big tech giants (McCabe, 2019).
In order to understand what has changed in recent years’ business models, let us make a comparison between Amazon and a traditional supermarket. Supermarkets, equal to other forms of retailing, have lower profit margins compared to other industries, on average ranging from 0.5% to 3.5%. That is why supermarkets, such as Wal-Mart, are focused on gaining a high sales volume (Ross, 2019). Amazon, on the contrary, has a staggering $141.3 billion in international sales via its web shop with an operating income of $7.2 billion, nearly 5% profit margin. Although this profit margin is slightly higher than the retailers average, 5% profit margin is nothing to panic about. However, Amazon also has another operation namely, Amazon Web Service (AWS). AWS has grown to a $26 billion revenue in 2018, with an operating income of $7.3 billion, creating a 28% profit margin on its webservice (Frankenfield, 2019). Consequently, while supermarkets are struggling with their 0.5% to 3.5% profit margin, AWS makes a 28% profit margin. This $7.3 billion can be used by amazon to finance its other operations, such as retailing, while Wal-Mart needs to make money solely on its retail operations. Amazon is now competing with Wal-Mart with its Amazon Go operations, a supermarket chain without any checkouts. The difference is, however, Wal-Mart needs to make a profit to survive, while Amazon Go does not. They could potentially lower their prices without risking the future of their business, but would they do that?
The answer is yes. As an example, diapers.com has been the victim of a price war with Amazon rapidly lowering its prices on Amazon’s diapers. This price war resulted from diapers.com refusing a takeover bit made by Jeff Bezos, CEO of Amazon. Diapers.com was forced to sell its diapers at a loss (Lecher, 2019). What might look as predatory pricing, which is anti-competitive, misses one component: Amazon does not have to increase its prices after their competitors went out of business. That is why Amazon can perform this strategy without too many troubles, caused by market watchdogs. According to Baumol (1979), companies are not allowed to increase its prices within a five-year period after their competitors run out of business. Subsequently, businesses would be discouraged to commit in any form of predatory pricing. Nevertheless, since Amazon can finance this pricing strategy with its other operations, such as AWS, they can play the long game. The Federal Trade Commission (FTC), responsible for fighting antitrust, is therefore having a hard time prosecuting big tech giants with this ‘new’ business model for predatory pricing.
Should we thus change the rules of the game regarding antitrust to give market watchdogs, such as the FTC, more tools to prevent antitrust breaches. As Khan (2016) stated: “this Note argues that the current framework in antitrust – specifically its pegging competition to “consumer welfare,” defined as short-term price effects – is unequipped to capture the architecture of market power in the modern economy.” The so called: Antitrust Paradox, requires antitrust laws to increasingly secure the economies welfare over the short-term consumer welfare. If lawmakers do not act now, we might end up with Amazon Go being America’s only supermarket.
References
Baumol, W.J., 1979. Quasi-permanence of price reductions: A policy for prevention of predatory pricing. The Yale Law Journal, 89(1), pp.1-26.
Khan, L.M., 2016. Amazon’s antitrust paradox. Yale LJ, 126, p.710.
*All websites were viewed on 18 September 2019.
D’Onfro, J. 2018: https://www.cnbc.com/2018/07/18/googles-5-billion-fine-what-you-need-to-know.html
European Commission, 2017: https://europa.eu/rapid/press-release_IP-17-1369_en.htm
Frankenfield, J. 2019: https://www.investopedia.com/how-amazon-makes-money-4587523
Lecher, C. 2019: https://www.theverge.com/2019/5/13/18563379/amazon-predatory-pricing-antitrust-law
McCabe, D. 2019: https://www.nytimes.com/2019/09/17/technology/senate-antitrust-tech-hearing.html
Ross, S. 2019: https://www.investopedia.com/ask/answers/071615/what-profit-margin-usual-company-retail-sector.asp
