Reviewing 'Amazon's Antitrust Paradox' (January 2025)

In her influential article, 'Amazon's Antitrust Paradox,'(1) published in The Yale Law Journal in 2017, Lina, Khan, the current Commissioner of the Federal Trade Commission (FTC), lays out a preliminary case for the break-up of Amazon based on its anticompetitive business practices. Khan relies on an older view of antitrust policy (or competition policy as it is termed in most countries), which she maintains is consistent with the original intent of America's early antitrust legislation. For this she cites the Sherman Act (1890) and the Clayton and FTC acts (1914). This puts her in opposition with the current body of antitrust jurisprudence which has for the last forty-plus years favoured a laissez-faire approach to business concentrations in horizontal markets (mergers) and vertically integrated markets so long as 'consumer welfare' is advanced. 'Consumer welfare' as advocated by Robert Bork—the principal jurist identified in her paper— and the Chicago School of antitrust(2) espouses a non-interventionist antitrust policy. Initially associated with the University of Chicago, today, these views are generally regarded as the most popular among lawyers, judges and economists in the U.S.(3) In their view, monopolies are not inherently harmful; to be harmful, a monopolist must manipulate prices and output to the disadvantage of customers.

Khan explains why contemporary thinking about antitrust is outdated and inadequate both in a general sense and specifically in the instance of Amazon.

Focusing antitrust exclusively on consumer welfare is a mistake. For one, it betrays legislative intent, which makes clear that Congress passed antitrust laws to safeguard against excessive concentrations of economic power. This vision promotes a variety of aims, including the preservation of open markets, the protection of producers and consumers from monopoly abuse, and the dispersion of political and economic control. Secondly, focusing on consumer welfare disregards the host of other ways that excessive concentration can harm us—enabling firms to squeeze suppliers and producers, endangering system stability (for instance, by allowing companies to become too big to fail).

The title of Khan's paper, 'Amazon's Antitrust Paradox,' is her response to Bork's Antitrust Paradox (1978). Hers is targeted at one firm, Amazon, while his is more general and theoretical and thus intended to apply more widely. For Bork, the paradox is that while a dominant company in a given market may seem to be dangerous, as long as no reduction in consumer welfare can be brought in evidence, then the company's dominant position cannot and should not be regarded as harmful; therefore, the company should not be punished. In fact, efficiencies of scale may just as likely result in pricing and production outcomes more favourable for consumers. The key assumption would be that a company will be guided primarily by the motive to maximize profits. That is standard price theory for the firm. Such is not the case for Khan, who believes that harm does not have to have already occurred as price increases; it is the potential that market dominance creates to do harm. Thus, harm should not be limited simply to consideration of prices and output, especially as these are manifested in the short-term. Over the longer term, gross asymmetries in market power can have broader negative economic and political consequences, in addition to price rises, reductions in quality, less choice, and retarded innovation. For Khan, the paradox in Amazon's case is that it is not irrational, as Chicago School economist contend, for a company to pursue increased market share at the expense of profits, as the long-term stream of profits accruing to a dominant company promise greater and more sustainable profitability for the company.

Informing Khan's case is the judgment that the purpose of U.S. antitrust legislation has been lost in the court decisions and agency reviews (by the Department of Justice and the FTC) of the past four-plus decades, which focus too narrowly on harm as reflected in negative price and output outcomes. Missing is the originally intended focus on the process and structure of competitive markets, which considers the effects of harmful business concentrations that do not necessarily show up in analyses guided by standard microeconomic price theory. Such effects include the potential of anticompetitive behaviour to stifle innovation, relax product quality control as well as raise barriers to entry, all of which tend to be manifested over a period of time. In addition, one would expect that the effects of anticompetitive business concentrations reach public policy areas such as labour markets, consumer safety and environmental protection. Even the electoral process is not immune as was seen in the 2024 presidential election where the demonstration of political influence by Jeff Bezos, founder and former CEO of Amazon (now the executive chairman), included a last-minute and surprising refusal by his newspaper, the Washington Post, to endorse a presidential candidate, who traditionally has been the Democratic presidential nominee; the secret meetings that followed between executives of Blue Origins, Bezos’ aerospace company (a direct competitor with Elon Musk’s SpaceX), and Trump; and the million dollar contribution to Trump's inauguration. Incidentally, all of these actions are consistent with the new (and non-nerdy) Washington-savvy Bezos that journalist Dana Mattioli has reported. Khan's quote from Senator John Sherman at the time the Sherman Act was passed by Congress fairly sums up her own position with respect to the anti-democratic effects of anticompetitive business concentrations:

If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessities of life. If we would not submit to an emperor, we should not submit to an autocrat of trade, with power to prevent competition and to fix the price of any commodity.

For Khan, the evidence of anticompetitive behaviour is credible and consistent with the very sorts of monopoly abuse targeted by America's early antitrust legislation, e.g., John D. Rockefeller’s Standard Oil Trust. However, in her view, these laws and the existing jurisprudence in contemporary American antitrust requires updating to reflect a new era, the Internet Age, where many of the Chicago School's bedrock assumptions are no longer valid. For example, predatory pricing behaviour according to which a firm underprices its product to drive a rival out of the market is not regarded as relevant by the Chicago School. Since predatory pricing is irrational behaviour for a profit-maximizing company and since companies do not behave irrationally, the issue of predatory pricing is moot. In other words, predatory pricing does not exist, and what is often characterized as 'predatory pricing' is actually legal. Kahn answers that it is by no means irrational for Amazon to seek greater market share at the expense of short-term profits. When Amazon initially forgoes profit in order to secure a commanding share of the market, it positions itself over the long term to be the dominant firm to raise prices, lower production standards (including worker and consumer safety and product quality) and slow the pace of innovation. While no market can be said to be captured for once and all, the barriers to entry prevent competitors from replicating Amazon's Internet platform (a platform is the digital space where customers and businesses engage one another in commerce) are considerable. This is evidenced by the fact that no company has done so yet and many would-be competitors prefer to use Amazon for marketing and sales and product fulfillment. This despite the fact that Amazon often preferentially markets its own products to compete with its customer vendors who use its platform.

Khan provides an overview of four case studies where Amazon has demonstrated harmful anticompetitive behaviour—using predatory pricing to establish dominance in markets (bestseller e-books); using its dominant Internet platform to advantage its new lines of business (Quidsi baby products) and establish a dominant position in logistics and delivery (Fulfillment by Amazon); and exploiting the extensive data that Amazon extracts from its Marketplace customers to support the development of private label Amazon products by means of targeting profitable product lines of its business customers and using its proprietary online platform to suppress its competitors’ products.

Khan advocates viewing Amazon's platform as a common utility that all competitors can use without prejudice which would justify either spinning the online platform off as a separate company or closely regulating Amazon's fair use of its online platform so that there is no conflict of interest between Amazon the utility and Amazon the retailer. Amazon’s vertical integration of its multiple lines of business has produced anticompetitive harm to Amazon’s competition and to consumers, and the status quo cannot be maintained. Her preferred solution is to have Amazon broken up into separate companies so that Amazon can no longer leverage its online platform to dominate multiple product markets by means of anticompetitive practices such as favouring its own products over those of its business customers.

For a more recent account of Amazon as a dangerous monopolist, see Dana Mattioli's book, The Everything War: Amazon's Ruthless Quest to Own the World and Remake Corporate Power (2024). The book is a journalistic update on the state of business at Amazon vis à vis contemporary America's antitrust policy. Her writing draws significantly from Khan's paper as is indicated in the Prologue, which opens with this extended quote from ‘Amazon’s Antitrust Paradox:’

Amazon is the titan of twenty-first century commerce. In addition to being a retailer, it is now 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 host of cloud server space. Although Amazon has clocked staggering growth, it generates meager profits, choosing to price below-cost and expand widely instead. Through this strategy, the company has positioned itself at the center of e-commerce and now serves as essential infrastructure for a host of other businesses that depend upon it. Elements of the firm’s structure and conduct pose anticompetitive concerns—yet it has escaped antitrust scrutiny.

Mattioli's book is recommended as it is well-researched and updates Khan. Also, the narrative is accessible to a lay audience and is quite interesting given the cast of characters she weaves into her reporting.

Endnotes