Pluralistic: 15 Sep 2022 California's antitrust case against Amazon

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The flag of California. It has been altered so that the bear is rearing on its hind legs, and its forelegs are crushing an Amazon lower-case 'a' logo. The 'smile' beneath the Amazon logo has been inverted into a frown. Atop the California bear stands a trustbuster-era editorial cartoon illustration of Roosevelt, swinging his 'big stick.' From the star in the California flag emanates a read beam-weapon that is bathing the Amazon 'a' with lethal rays. The 'a' is wreathed in flames.

California's antitrust case against Amazon (permalink)

California's antitrust case against Amazon feels anachronistic, like a witchcraft charge, or some other ancient crime that we no longer prosecute. It's true, antitrust spent 40 year in a coma! The Amazon case neatly illustrates how it was sedated, and why it finally roused.

Back in the Reagan years, antitrust underwent a profound change. For 90 years, America's trustbusters had pursued monopolists under the theory of "harmful dominance" – the idea that when companies get big enough, they can inflict harms on workers, communities, customers and the political process. They become "too big to fail" and "too big to jail."

Senator John Sherman said it well, when campaigning for his landmark 1890 Sherman Act, America's first comprehensive antitrust law: "If we will not endure a King as a political power we should not endure a King over the production, transportation, and sale of the necessaries of life."

For American competition regulators, the problem with big companies was that they usurped the power of democratically accountable law. The executives who commanded these firms became "autocrat[s] of trade with power to prevent competition and to fix the price of any commodity."

But for the business lobby, the ability to be an autocrat – to impose your will on your workers and suppliers and customers without interference by elected lawmakers or the regulators who report to them – was a feature, not a bug. The power of a monopolist to take away others' freedom to trade, work and live as they choose was essential to "liberty." That's why, as self-proclaimed "libertarian" Peter Thiel has it, "Competition is for losers."

Under Reagan, the business lobby got its way. Their champion was Robert Bork, Richard Nixon's disgraced solicitor general, whose book, "The Antitrust Paradox," was a kind of gnostic reading of US antitrust law, insisting that the lawmakers who voted for the Sherman Act and its successors actually liked monopoly:

These lawmakers, Bork said, viewed monopolies as beneficial, thanks to the efficiencies they realized by not having to engage in wasteful competition. The FTC, DoJ and the courts had been misapplying antitrust through its history. The only time the state should act against monopolies is when they use their market power to raise prices.

This "consumer welfare" theory of antitrust was the poison dart that plunged trustbusting into a 40-year coma. Bork and his cronies at the University of Chicago School of Economics – the cradle of neoliberalism – set up a sweet side-hustle, building complex mathematical models that only they understood.

These models were used to prove that every monopoly was untouchable under consumer welfare enforcement standards – even if a company bought all its competitors and then increased prices 1,000% (as Luxottica-Essilor did for eyeglasses, after buying nearly every eyeglass brand, retailer, insurer and lens-maker), it was still untouchable.

The Bork models could "prove" that these price-hikes were the result of "exogenous" factors – increasing wage bills, oil shocks, or just because the moon was in Venus. Price-gouging could be blamed on anything except corporate greed.

This highly technical change in antitrust enforcement is one of the most consequential, worst-understood shifts in our society. Today's headline inflation numbers rarely mention the monopoly CEOs who gleefully notify their shareholders that they've been able to raise prices far in excess of their costs, simply because they lack meaningful competition:

It was obvious from the start that "consumer welfare" was a scam, a ruse designed to let monopolies flourish and to install "autocrats of trade" on their thrones. Despite its ideological bankruptcy, "consumer welfare" was able to repel its critics for decades, because it had deep-pocketed backers – no different from tobacco-cancer denial or climate denial.

But, as with cancer and climate denial, inaction on antitrust created mounting harms that made it increasingly obvious that the story was a lie. In 2017, we reached a turning point when a third-year law student published "Amazon's Antitrust Paradox" in Yale Law Journal, which demolished Bork's arguments so comprehensively that today, that former law student is the chair of the FTC: Lina Khan.

Khan's leadership – and that of her colleagues, Robert Kanter at the DoJ and Tim Wu in the White House – have been nothing short of inspirational, an object lesson in the prospect that "personnel are policy." But they are not alone – they are part of a raging current sweeping through state governments and legislatures all over the world, from the EU to China.

And state houses, too. Which brings me back to California's antitrust case against Amazon. Amazon exerts serious harmful dominance, of course – you can't have missed the way that its conduct erodes local tax bases, immiserates workers, inflicts climate harms, wrecks local businesses and independent firms that rely on its platform.

But none of that is in the California case against Amazon. Rather, the case focuses on a narrow, and ingenious "consumer welfare" theory of how Amazon has raised prices – the one thing that consumer welfare claims to defend us from:

Amazon is a classic "chokepoint capitalism" business. The company's "Prime" program and other lock-in tactics were deliberately and explicitly designed to ensure that the majority of customers for the majority of goods turn to Amazon first. It worked:

That means that any business that wants to sell anything had better offer those goods on Amazon, or forfeit a large portion of its market – perhaps the majority. When large firms like Birkenstocks held out and refused to sell on Amazon, the company tacitly encouraged counterfeiters to sell substitute goods to customers searching on its site:

The result is that nearly every firm was corralled into Amazon's walled garden, and as those firms disappeared behind Amazon's walls, more customers bought into Prime and found themselves locked into Amazon's walled garden, too. Amazon is quite explicit about this strategy, which they call "the flywheel":

That meant that instead of competing in the market, these Amazon suppliers competed on Amazon. Amazon created a $31b/year "ad" business mainly made up of payola that Amazon vendors spend to rise to the top of the Amazon listings:

Even after spending $31b, independent merchants find themselves unable to make a go of it on Amazon's platform. Desperate, they sell out to "gators" – aggregators who professionalized the business of navigating Amazon's Byzantine rules and scams, spawning a multi-billion-dollar, socially useless industry:

But no matter how much you spend on Amazon "ads," and no matter how skilled you are at avoiding Amazon's other traps, you will struggle to top the listings unless you purchase a slew of Amazon "services" – most notably, "fulfillment by Amazon" and Amazon Prime Fulfillment.

All told, a successful Amazon seller is likely handing over 35-45% of the purchase price to Amazon in fees and commissions. That vastly exceeds the profit margin on many goods, which presents merchants with a stark choice: lose money on every sale, or charge more for everything sold on Amazon.

No business can survive for long if it loses money on every sale (at least, not without the backing of the Saudi royals – looking at you, Uber). So Amazon sellers hike prices, just to cover the vig extracted by Amazon itself.

You might be thinking that this is an opportunity for Amazon's rivals: if your local retailer (or even Walmart) opted not to charge all those fees, then the same merchants could offer the same products on their shelves at a 35-45% discount and still make the same amount of money. As habituated as we are to Amazon, as much as Prime means we turn to it first, a 45% discount would surely tempt some of us to shop elsewhere.

But Amazon's thought of that too, which is why they make every merchant that sells through their platform sign a "most favored nation" guarantee that they will not charge less for their products anywhere else – which means that the price is the same everywhere.

And that's the heart of the California antitrust case against Amazon: Amazon's market dominance makes it impossible to survive without offering your products on Amazon; to succeed there, you must turn over 35-45% of your gross to Amazon. That leads to higher prices on Amazon, and, thanks to the most favored nation deal, it pushes those same higher prices to every other retailer.

Amazon, in other words, is undermining "consumer welfare" by forcing up prices – not just on Amazon, but everywhere.

This is sleazy as hell of course, but, as noted, it is just one of Amazon's myriad of sins, and far from the worst one. California AG Rob Bonta has managed to thread the microscopic eye of Robert Bork's needle – but like busting Capone for tax fraud, the need to pursue this strategy reveals the poverty of our other enforcement regimes.

"Consumer welfare" was always a lie and a sham. The harms inflicted by chokepoint capitalists – to workers, suppliers, and our politics and regulation – are not limited to making us worse off as "consumers." No one is a mere "consumer" – a kind of ambulatory wallet. We are also workers, citizens, and residents. Even when monopolies make our prices go down, they also make our wages stagnate, lowering our overall purchasing power.

It's heartening to see California take on one nodule of the Amazon cancer, but that can only be the start. Even if Amazon is forced to stop price-gouging us, it will still inflict innumerable harms. This needs to be seen as the first step in taming monopolies – not as an end in itself.

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This day in history (permalink)

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Colophon (permalink)

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