The first installment of this blog was a preliminary look at a Washington Post article “Is Amazon Getting Too Big?” by Steven Pearlstein. That article promoted strong opinions of Yale law school student Lina Khan based largely on (1) faulty market concentration estimates from President Obama’s Council of Economic Advisers and (2) a selective 40‐year survey of mergers as evidence of some current problem linking concentrated markets to rising prices.
There was another bit of indirect evidence in the Obama CEA memo which merits discussion. A graph from former CEA Chair Jason Furman showed large recent gains in “returns on invested capital” among public nonfinancial firms, as measured by McKinsey & Co. The CEA insinuated that this shows a recent surge in “rents” (receipts larger than needed to attract capital) which they wrongly defined as “greatly in excess of historical standards.” There is a simpler explanation.
Return on invested capital is notoriously difficult to estimate and, as McKinsey explains, returns look relatively larger by this measure because invested capital has become smaller as the economy shifted from capital‐intensive manufacturing to services and software:
“What if the invested‐capital side of the equation approaches zero, as it increasingly does among companies that use outsourcing and alliances and thus reduce the capital intensity of parts of their businesses? Other businesses, such as software development and services, also have inherently low capital requirements or take advantage of atypical working‐capital dynamics, including prepayment by customers for licenses and payment by suppliers for inventory. Even traditional businesses are shedding capital: the median level of invested capital for US industrial companies dropped from around 50 percent of revenues in the early 1970s to just above 30 percent in 2004.”
Like the CEA’s mention of a rising share of sales by Top 50 firms in 10 industries between two years, the CEA’s return on invested capital data also failed to uncover any new “market concentration” problem to be solved by the Democratic Party’s mysterious “Better Deal.”
Neither Khan, Pearlstein, nor their cited sources provide any evidence of (1) the alleged widespread increase in market share held by 3 or 4 firms, nor of (2) higher prices outside of federally‐regulated and subsidized industries, nor of (3) any connection between concentration and monopoly pricing, nor of (4) any connection between return on invested capital and concentration or monopoly pricing.
Despite no evidence that market share (concentration) predicts higher pricing, Pearlstein and Khan talk about Amazon’s share of markets. Pearlstein claims Amazon sells 40% of books in this country, but such estimates vary depending on how we handle Kindle’s share of e‑Books, Amazon’s consumer‐friendly discounting of new books, and Amazon’s utility as a market for used books. Many people, like me, sell very good used books on Amazon and eBay, making the market for new books more competitive than ever. Stacy Mitchell’s “The Big Box Swindle” costs $14.32 on Amazon Prime, but very good used copies sell below $2.
Khan claims “Amazon now controls 46% of all e‑commerce in the United States.” That inflated figure includes sales that Amazon processes for other retailers and producers. And retail alone is not “all e‑commerce” even ignoring the biggest e‑commerce market – China. In U.S. business‐to‐business sales, Amazon Business is ranked 37th in the B2B E‑Commerce 300 by Digital Commerce. Besides, e‑commerce only amounted to 11.7% of U.S. retail sales last year, according to the Commerce Department.
The source of Amazon’s alleged 46% share of something or other is Stacy Mitchell (BA in History) a publicist for “local‐self‐reliance” (which was also the unwise goal [zi li geng sheng] of Mao Tse-tung’s 1958–59 “Great Leap Forward”). As Ms. Mitchell and her co‐author explain, “Amazon’s market share was calculated by the authors, drawing on information from Amazon and Channel Advisor.”
E‑commerce is not a market, much less a U.S. market, and it’s not something that can be “controlled.” But the Khan‐Mitchell‐Pearlstein complaint is not about a big market share causing higher prices for buyers but about lower prices for sellers. Mitchell applauds the Democrats’ new tough talk on antitrust because, “With most industries now dominated by just a few firms, it is harder… for small businesses to compete and for farmers and producers to get a fair price” [emphasis added].
“In considering whether a proposed merger or business practice would harm competition,” writes Mr. Pearlstein, “courts and regulators narrowed their analysis to ask whether it would hurt consumers by raising prices.” He and Kahn blame such a “narrow” emphasis on consumer welfare on what they call “The Chicago School.” They want courts and regulators to instead ask whether businesses structure or practices would harm competitors by reducing prices. Khan thinks “antitrust enforcers” should take a “holistic” approach, taking account the interests of rival sellers or producers who might have a tough time competing with Amazon’s low prices, huge inventories, or fast delivery.
As I noted in the first blog, antitrust law is a large and lucrative industry, which has long been famously generous to politicians and think tanks who try to enlarge the volume and value of antitrust activities. “Amazon is reported to be in the market for an antitrust economist,” notes Pearlstein, and “has engaged the services of two former heads of the Justice Department antitrust division, one Democrat and one Republican.” Indeed. That’s the way the antitrust extortion racket is played. Skilled antitrust lawyers are equally eager to prosecute or defend, since they win either way.
Antitrust works very much like any other regulatory bureaucracy. Business lobbyists recruit antitrust agencies to get them to damage or constrain their more‐successful rivals. Key members of congressional committees use antitrust threats to shake down corporate executives for campaign contributions and discourage them from supporting a rival Party’s policies or candidates. Redundant federal agencies, the DOJ and FTC, drag companies into costly litigation battles for years, with the usual result being multi‐billion‐dollar fines rather than noticeable change in business practices. Ambitious prosecutors use the publicity from high‐profile cases as a red‐carpet invitation into the revolving door of high‐paying positions as antitrust defense attorneys or as executives in the effected industries.
Pearlstein suggests antitrust should be more about “fair play” and a “level field” to protect competitors who would much prefer to charge higher prices for less selection and slower service. “Some observers point to the E.U.’s Google case as an example of the difference between the American and European approach: They protect competitors; we protect consumers. … To me, this view betrays a naïve belief that in our open market system, every person and every company has the same opportunity to succeed. … Leveling the playing field is a legitimate policy goal.”
To me, Pearlstein’s view betrays naïve optimism that ambitious politicians and prosecutors are omniscient and incorruptible. He thinks future antitrust cops should have great discretionary authority to “block Amazon” from competing too effectively with UPS, Oracle or Comcast. If that threat ever materialized, it would surely attract generous donations from UPS, Oracle, or Comcast to sympathetic politicians and think tanks. Antitrust law is not supposed to be about dividing the spoils but frequently is.
