In 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.
Read the full article at National Review.