The consequences of weak antitrust law
Letter to the Editor | Thursday, April 11, 2019
In a previous Observer letter to the editor I argued that the extreme wealth gap in America was partly attributed to misaligned personal incentives between corporate owners and managers. In the conclusion, I mentioned that I disagreed with prominent liberal voices that have recently been supporting a 70% marginal tax rate. In my opinion, this proposal is superficial at best. It’s a retroactive solution that is easily circumventable through income-composition modification, and it doesn’t address the underlying issues of excessive corporate and executive power. Today I will propose one possible alternative solution: antitrust law reform.
Sweeping tax reform changes passed through Congress are quite sexy. They routinely dominate mainstream news headlines with sensational drama starring our favorite (and least favorite) political figures. But a great deal of change in our country happens far outside of our congressional chambers — in a regulatory field much less sexy.
Antitrust law in the United States is usually associated with the early-20th century trust busting against “big oil” and “big railroad.” In the 21st century, however, antitrust has a fresh, new corporate face, and has largely been dormant.
Many whistle-blowers have documented instances of Amazon abusing its massive returns to scale and unfairly setting prices too low — even low enough to sometimes be at a loss — such that competitors are unable to compete. This is my chief concern.
You may be thinking, what’s the issue? What’s the danger of Amazon dropping prices too low?
There are two reasons why this is dangerous:
First, while artificially low prices are beneficial in the short term to consumers, it is detrimental to other producers. Amazon with its massive infrastructure can handle a momentary profit loss, but smaller competitors with infant-infrastructure systems cannot. This matters because a. producers are also consumers (they need to buy things to make things, and producers make up a critical proportion of the consumer base) and b. producers are employers. Rival producers who go out of business are unable to buy inputs that keep the economic cycle flowing, and are forced to lay off employees who could have been consuming more goods.
Second, artificially low prices that drive competitors out of the market create spaces for price gouging. The natural way the market checks price gouging is as competitors engage in price wars until the price of the good reaches equilibrium. But the presence of rival companies is critical to this process. Since rival companies are being forced out of the market by Amazon’s artificially low prices, the natural autocorrection mechanism cannot apply because the rival companies close their doors and therefore cannot compete. Once this occurs, Amazon is unchecked, and has every personal incentive to price gouge unabated.
While a $0.12 increase in the price of an Amazon Basic Micro USB may go unnoticed by an individual consumer, it hurts the consumer base at large when the $0.12 increase is multiplied by thousands and thousands of transactions. It doesn’t matter if its by $120 or $0.12, price gouging is still price gouging and it’s against the law.
What should change? Modern antitrust policy should be reworked so that it takes producer welfare into account.
Competition policy in the United States is still largely designed for traditional 20th-century domestic markets operating primarily in North America, and hasn’t been updated to deal with the 21st-century globalist structures of the economy operating through the internet. Moreover, current antitrust law focuses too strictly on consumer welfare. If the consumers are fine, then there is no problem. But this approach to antitrust is too narrow, and doesn’t take into account the variety of ways the health of the market can be compromised by anticompetitive practices. Producers are consumers too, and their health is linked to the consumer base and the market’s health. They need to be considered in the antitrust equation as well.
Little has been done in the realm of American competition policy recently, largely because the current direction of the globalized market system is heading towards uncharted territory that the world has never seen, and there is little precedent to draw from. If there is little precedent to draw from, then the precedent needs to be set.
The lack of competition law enforcement is perhaps one of the many central underlying causes for the income disparity in our world. With hypothetically feasible business cost structures that cut extreme salaries as “operational expenses,” competitors should be appearing left and right to challenge titans like Amazon. Yet, none have emerged, because top corporations are acting in their own self-interest by taking advantage of their monopolistic market power and infrastructure and stifling them down. Or, worse, they get bought out by Amazon and their power grows. Corporate executives are collecting large paychecks from corporate piggy banks fattened from nefarious anticompetitive behavior, and reforming antitrust law would help mitigate these problems.
A free and open market system is certainly the way to go, but the role of government in them is to set the rules and enforce them in order to help correct market failures. Markets are great, but they aren’t perfect. Perhaps antitrust regulators at the Department of Justice should get involved.
The views expressed in this Letter to the Editor are those of the author and not necessarily those of The Observer.