Amazon went from a small operation in Jeff Bezos' garage in 1994 to being the well-known multinational company that it is today. It has become a true force in the retail sector, accelerating the prevalence of e-commerce. Amazon ranks amongst the most popular companies in the United States, which is more than I can say for Congress' approval rating of 17 percent (Gallup). Amazon has become ubiquitous to the point of becoming an integral part of the American way of life. I personally enjoy the fact that I can use Amazon Prime to purchase a lot of goods and have it sent to my home within two business days.
In spite of its popularity, not everyone is thrilled with Amazon's success. Last week, the Federal Trade Commission (FTC) joined 17 State Attorneys General in filing a lawsuit against Amazon. In the complaint filed, the FTC alleges that Amazon a) has monopolistic power, and b) acts in a way that to "stop rivals and sellers from lowering prices, degrade quality for shoppers, overcharge sellers, stifle innovation, and prevent rivals from fairly competing against Amazon." Ultimately, the FTC is trying to seek a permanent injunction against Amazon's monopolistic situation, which could mean breaking up Amazon. Does the FTC complaint withstand scrutiny?
First, what is a monopoly? In economics, a monopoly is a single seller with no competitors. Another characteristic of a monopoly is that it there are high barriers to the entry of other firms in that market. A pure monopoly rarely exists in practice. For regulatory purposes, monopoly power refers to the extent to which a seller can influence the price or quantity of a good or service in a given market. As we see below, monopolies gain greater profit at the expense of everyone else. These economic inefficiencies referred to as deadweight loss.
The FTC is claiming that Amazon has had 69 percent market share since 2015 (
FTC, p. 57). The FTC defines the market as "the online superstore market and...the online market for online services (p. 43)." If we used this narrow definition, it would mean that Amazon only competes with eBay, Wal-Mart, and Target (p. 57). The issue with this definition is that Amazon has more than those three large competitors, including hundreds of brick-and-mortar stores and multiple smaller e-commerce retail firms.
Amazon competes in the e-commerce market specifically and the retail market more generally. An accurate market size means including all of Amazon's competitors, not cherry-picking a select few for the sake of political grandstanding. In the e-commerce market, Amazon possesses a
37.8 percent market share. This sounds high, but there are
more concentrated markets out there. When looking at the overall retail market, Amazon has even less clout. According to market research firm
IBIS World, Amazon has a retail footprint of $318.3 billion. While that is a lot of money in as fragmented of a market as retail, it makes up 3.9 percent of the $8.1 trillion market size. A market size of 3.9 percent is a lot less dire of a situation than the 69 percent the FTC is claiming.
Furthermore, there are certain markets that have proven difficult for Amazon to enter. Even after purchasing Whole Foods, Amazon owns
1.8 percent of the grocer market share. Amazon's acquisition of MGM bought it
7.05 percent of the market share for film studios. Amazon Music
ranks fourth in the music streaming services market, at 13.5 percent. Amazon
had to shut down its telehealth services firm, Amazon Care, because it was too difficult of a market for Amazon to enter. Plus, if Amazon is doing so well,
why did Amazon cancel, close, or delay 99 facilities this year? Yes, Amazon's success has made it a sizable company, but it is nowhere near being the monopoly that the FTC is claiming.
In the next part, I will explore the FTC's complaints against certain business practices of Amazon and whether they harm third-party sellers.
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