“Monopoly exists when a specific individual or enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it.” (Milton Friedman)
Monopoly price refers to the price profitably above cost that a firm with monopoly power can charge. That power is often developed through restraints on trade. "I believe, Sir, that I may with safety take it for granted that the effect of monopoly generally is to make articles scarce, to make them dear, and to make them bad....” Thomas Babington Macaulay, speech to the British Parliament, 1841.
The history of Standard Oil is one of the great stories of monopoly power and its confrontations with antitrust regulation, lawsuits, and “muckraking” journalism. In the 1870’s when railroads were the main means for transporting oil, John D. Rockefeller and is partner Henry Flagler used the size, efficiency and economies of scale of Standard Oil to lower their transportation costs relative to their competitors by negotiating rebates from the railroad companies. But not only that, they also developed their competitive advantage through “drawbacks”, in which the railroads would further subsidize Standard Oil by paying the company a part of the higher fees they were already charging the competition behind their backs. (see Daniel Yergin, The Prize, pp. 21-22)
As Ida Tarbell, the author of The History of Standard Oil Company would write in 1904, “I never had an animus against their size and wealth…But they had never played fair, and that ruined their greatness for me. Standard Oil routinely engaged in predatory pricing, by slashing prices in order to drive rivals from the market. Moreover, it cross-subsidized: Standard Oil charged monopoly prices in markets where it faced no competitors; in markets where rivals checked the company’s dominance, it drastically lowered prices in an effort to push them out.
In 1906, the Theodore Roosevelt administration brought suit against Standard Oil, charging it under the Sherman Antitrust Act of 1890 with conspiring to restrain trade. Key to this vision was the recognition that excessive concentrations of private power posed a public threat, empowering the interests of a few to steer collective outcomes. This led to the dissolution of Standard Oil, although one consequence was for the price of the company’s stock to double.
Today, the criteria for Antitrust enforcement have changed from a structural concern regarding restraint of trade through market dominance and concentration of power to a more restricted focus on pricing. Antitrust law now assesses competition largely with an eye to the short-term interests of consumers, not producers, or the health of the market as a whole. But Congress passed antitrust laws to promote a host of political economic ends -including our interests as workers, producers, entrepreneurs, and citizens. Today, antitrust doctrine views low consumer prices, alone, to be evidence of sound competition. (This is due in part to the scholarship of Robert Bork).
Rather than exploiting the opportunities to raise prices or reduce quality, a new business model, primarily associated with Amazon, has lowered prices, and limited or even eschewed short-term profits as part of a quest to establish market dominance and quash competition. On a regular basis, Amazon would report losses year after year, and its share price would soar. This approach would seem irrational to “Chicago School” economists and their neo-liberal policies, but it has attracted investor support, exploited “network effects,” (in which the value of a product or service increases according to the number of others using it), and in Amazon’s case, has enabled the company to use information generated by its cloud services to undercut its competitors who use those platforms.
In an influential article published in the Yale Law School journal, Lina Khan analyzes Amazon’s dominance as an online platform thanks to two elements of its business strategy: a willingness to sustain losses and invest aggressively at the expense of profits, and integration across multiple business lines.
It is as if Standard Oil had both dominated oil production and owned the railroads, which would have enabled significantly more anti-competitive behavior.
In addition to being a retailer, Amazon is a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading provider of cloud server space and computing power.
By making itself indispensable to e-commerce, Amazon enjoys receiving business from its rivals, even as it competes with them. Moreover, Amazon gleans information from these competitors as a service provider that it may use to gain a further advantage over them—enabling it to further entrench its dominant position.
As data has become an increasingly accessible resource for firms to extract and use for their own advantage, the digital platform has emerged as a new business model, and platforms companies are now the leaders in the data-centric economy. As measured by market capitalization, the largest companies in the world are Apple, Alphabet, Microsoft, Amazon, Tencent, Alibaba, and Facebook). “At its most basic, the platform is an infrastructure that connects two or more groups.” (Nick Srenicek) “Facebook connects senders and receivers of messages, consumers and advertisers, users and companies. Uber is a platform that connects riders and drivers.”
By relying on “network effects”, platforms typically become more valuable as more users join and use them, creating a “virtuous cycle”. The endgame is to reach a critical mass and have network effects take on a life of their own. The self-perpetuating nature of these effects means that platforms have a strong tendency towards monopolization — greater concentration in the hands of top firms in a sector. The economics of platforms means that below cost pricing on a platform-hosted good tends to facilitate long-term dominance, as repeated use creates path dependencies. Although competition for online services may seem to be "just one click away," research drawing on behavioral tendencies shows that the "switching cost" of changing web services can, in fact, be quite high, so that path dependencies and “data moats” help consolidate monopolies. Path dependencies mean that the groups on a platform become tied to it, and in fact invested in its continued existence and dominance. Nick Srenicek argues that the introduction of artificial intelligence and “deep learning” will supercharge the insatiable appetite for data and the monopolizing dynamic of network effects. A new positive feedback loop will be set in motion, in which “more data means better machine learning, better machine learning means better services and products, better services and products mean more users, and more users means more data.”
One of the primary ways Amazon has built up a huge edge is through Amazon Prime, its customer loyalty program. As with its other ventures, Amazon lost money on Prime to gain buy-in. Prime is considered crucial to Amazon's growth as an online retailer. According to analysts, customers increase their purchases from Amazon by about 150% after they become Prime members. Moreover, the annual fee drives customers to increase their Amazon purchases in order to maximize the return on their investment. (Khan, pp. 750-751)
According to Lina Khan’s analysis, Amazon is in fact a monopoly but has escaped scrutiny because of its apparent benefits to consumers. She advocates splitting up the different businesses, or regulating Amazon like a utility.
Sources:
Daniel Yergin, The Prize
Lina M, Khan, “Amazon’s Antitrust Paradox”, Yale Law School Journal, Vol 126, No.3, Jan 2017.
Nick Srenicek, “The Political Economy of AI”, in Economics for the Many, edited by John McDonnell, Verso Books. 2018.