Fri, 14 Sep 2018 04:04
abstract. Amazon is the titan of twenty-firstcentury commerce. In addition to being a retailer, it is now a marketingplatform, a delivery and logistics network, a payment service, a credit lender,an auction house, a major book publisher, a producer of television and films, afashion designer, a hardware manufacturer, and a leading host of cloud serverspace. Although Amazon has clocked staggering growth, it generates meagerprofits, choosing to price below-cost and expand widely instead. Through thisstrategy, the company has positioned itself at the center of e-commerce and nowserves as essential infrastructure for a host of other businesses that depend uponit. Elements of the firm's structure and conduct pose anticompetitiveconcerns'--yet it has escaped antitrust scrutiny.
ThisNote argues that the current framework in antitrust'--specifically its pegging competition to ''consumer welfare,'' defined asshort-term price effects'--is unequipped to capture the architecture of marketpower in the modern economy. We cannot cognize the potential harms tocompetition posed by Amazon's dominance if we measure competition primarilythrough price and output. Specifically, current doctrine underappreciates therisk of predatory pricing and how integration across distinct business linesmay prove anticompetitive. These concerns are heightened in the context ofonline platforms for two reasons. First, the economics of platform markets createincentives for a company to pursue growth over profits, a strategy thatinvestors have rewarded. Under these conditions, predatory pricing becomeshighly rational'--even as existing doctrine treats it as irrational and thereforeimplausible. Second, because online platforms serve as critical intermediaries,integrating across business lines positions these platforms to control theessential infrastructure on which their rivals depend. This dual role alsoenables a platform to exploit information collected on companies using itsservices to undermine them as competitors.
ThisNote maps out facets of Amazon's dominance. Doing so enables us to make senseof its business strategy, illuminates anticompetitive aspects of Amazon'sstructure and conduct, and underscores deficiencies in current doctrine. TheNote closes by considering two potential regimes for addressing Amazon's power:restoring traditional antitrust and competition policy principles or applyingcommon carrier obligations and duties.
author. I am deeply grateful to David SinghGrewal for encouraging me to pursue this project and to Barry C. Lynn for introducingme to these issues in the first place. For thoughtful feedback at variousstages of this project, I am also grateful to Christopher R. Leslie, Daniel Markovits , Stacy Mitchell, Frank Pasquale, George Priest,Maurice Stucke , and Sandeep Vaheesan .Lastly, many thanks to Juliana Brint , Urja Mittal, and the YaleLaw Journal staff for insightful comments and careful editing. All errorsare my own.
Introduction''Evenas Amazon became one of the largest retailers in the country, it never seemedinterested in charging enough to make a profit. Customers celebrated and thecompetition languished.''
'-- The NewYork Times 1
''[O]ne of Mr. Rockefeller's most impressivecharacteristics is patience.''
'-- Ida Tarbell , A History of the Standard Oil Company 2
In Amazon's early years, a running joke among Wall Streetanalysts was that CEO Jeff Bezos was building a house of cards. Entering itssixth year in 2000, the company had yet to crack a profit and was mountingmillions of dollars in continuous losses, eachquarter's larger than the last. Nevertheless, a segment of shareholdersbelieved that by dumping money into advertising and steep discounts, Amazon wasmaking a sound investment that would yield returns once e-commerce took off.Each quarter the company would report losses, and its stock price would rise.One news site captured the split sentiment by asking, ''Amazon: Ponzi Scheme or Wal-Mart of the Web?''3
Sixteen years on, nobody seriously doubts that Amazon isanything but the titan of twenty-firstcenturycommerce. In 2015, it earned $107 billion in revenue,4 and, as of 2013, it soldmore than its next twelve online competitors combined.5 By some estimates, Amazonnow captures 46% of online shopping, with its share growing faster than thesector as a whole.6 In addition to being a retailer, itis a marketing platform, a delivery and logistics network, a payment service, acredit lender, an auction house, a major book publisher, a producer oftelevision and films, a fashion designer, a hardware manufacturer, and a leadingprovider of cloud server space and computing power. Although Amazon has clockedstaggering growth'--reporting double-digit increases in net sales yearly'--itreports meager profits, choosing to invest aggressively instead. The companylisted consistent losses for the first seven years it was in business, withdebts of $2 billion.7While it exits the red more regularly now,8 negative returns are stillcommon. The company reported losses in two of the last five years, for example,and its highest yearly net income was still less than 1% of its net sales.9
Despite the company's history of thin returns, investors havezealously backed it: Amazon's shares trade at over 900 times diluted earnings, making it the most expensive stock in the Standard &Poor's 500.10 As one reporter marveled, ''The company barely ekes out a profit, spends a fortune onexpansion and free shipping and is famously opaque about its businessoperations. Yet investors . . . pourinto the stock.''11 Another commented thatAmazon is in ''a class of its own when it comes to valuation.''12
Reporters and financial analysts continue to speculate aboutwhen and how Amazon's deep investments and steep losses will pay off.13 Customers, meanwhile, universallyseem to love the company. Close to half of all online buyers go directly toAmazon first to search for products,14 and in 2016, the ReputationInstitute named the firm the ''most reputable company in America'' for the thirdyear running.15 In recent years,journalists have exposed the aggressive business tactics Amazon employs. Forinstance Amazon named one campaign ''The Gazelle Project,'' a strategy wherebyAmazon would approach small publishers ''the way a cheetah would a sicklygazelle.''16 This, as well as other reporting,17 drew widespread attention,18 perhaps because it offereda glimpse at the potential social costs of Amazon's dominance. The firm'shighly public dispute with Hachette in 2014'--in which Amazon delisted thepublisher's books from its website during business negotiations'--similarlygenerated extensive press scrutiny and dialogue.19 More generally, there isgrowing public awareness that Amazon has established itself as an essentialpart of the internet economy,20 and a gnawing sensethat its dominance'--its sheer scale and breadth'--may pose hazards.21 But when pressed on why,critics often fumble to explain how a company that has so clearly deliveredenormous benefits to consumers'--not to mention revolutionized e-commerce ingeneral'--could, at the end of the day, threaten our markets. Trying to makesense of the contradiction, one journalist noted that the critics' argumentseems to be that ''even though Amazon's activities tend to reduce book prices, which is considered good for consumers, theyultimately hurt consumers.''22
In some ways, the story of Amazon's sustained and growingdominance is also the story of changes in our antitrust laws. Due to a changein legal thinking and practice in the 1970s and 1980s, antitrust law nowassesses competition largely with an eye to the short-term interests ofconsumers, not producers or the health of the market as a whole; antitrust doctrineviews low consumer prices, alone, to be evidence of sound competition. By thismeasure, Amazon has excelled; it has evaded government scrutiny in part throughfervently devoting its business strategy and rhetoric to reducing prices forconsumers. Amazon's closest encounter with antitrust authorities was when theJustice Department sued other companies for teaming up against Amazon.23 It is as if Bezos chartedthe company's growth by first drawing a map of antitrust laws, and thendevising routes to smoothly bypass them. With its missionary zeal forconsumers, Amazon has marched toward monopoly by singing the tune of contemporaryantitrust.
This Note maps out facets of Amazon's power. In particular,it traces the sources of Amazon's growth and analyzes the potential effects ofits dominance. Doing so enables us to make sense of the company's business strategyand illuminates anticompetitive aspects of its structure and conduct. Thisanalysis reveals that the current framework in antitrust'--specifically itsequating competition with ''consumer welfare,'' typically measured throughshort-term effects on price and output24'--fails to capture thearchitecture of market power in the twenty-first century marketplace. In otherwords, the potential harms to competition posed by Amazon's dominance are notcognizable if we assess competition primarily through price and output. Focusingon these metrics instead blinds us to the potential hazards.
My argument is that gauging real competition in thetwenty-first century marketplace'--especially in the case of onlineplatforms'--requires analyzing the underlying structure and dynamics of markets.Rather than pegging competition to a narrow set of outcomes, this approachwould examine the competitive process itself. Animating this framework is theidea that a company's power and the potential anticompetitive nature of thatpower cannot be fully understood without looking to the structure of a businessand the structural role it plays in markets. Applying this idea involves, forexample, assessing whether a company's structure creates certainanticompetitive conflicts of interest; whether it can cross-leverage marketadvantages across distinct lines of business; and whether the structure of themarket incentivizes and permits predatory conduct.
This is the approach I adopt in this Note. I begin byexploring'--and challenging'--modern antitrust law's treatment of market structure.Part I gives an overview of the shift in antitrust away from economicstructuralism in favor of price theory and identifies how this departure hasplayed out in two areas of enforcement: predatory pricing and verticalintegration. Part II questions this narrow focus on consumer welfare as largelymeasured by prices, arguing that assessing structure is vital to protectimportant antitrust values. The Note then uses the lens of market structure toreveal anticompetitive aspects of Amazon's strategy and conduct. Part IIIdocuments Amazon's history of aggressive investing and loss leading, itscompany strategy, and its integration across many lines of business. Part IVidentifies two instances in which Amazon has built elements of its businessthrough sustained losses, crippling its rivals, and two instances in whichAmazon's activity across multiple business lines poses anticompetitive threatsin ways that the current framework fails to register. The Note then assesseshow antitrust law can address the challenges raised by online platforms likeAmazon. Part V considers what capital markets suggest about the economics ofAmazon and other internet platforms. Part VI offers two approaches foraddressing the power of dominant platforms: (1) limiting their dominancethrough restoring traditional antitrust and competition policy principles and(2) regulating their dominance by applying common carrier obligations andduties.
I. the chicago school revolution: the shift away from competitive process and market structureOne of the most significant changes in antitrust law andinterpretation over the last century has been the move away from economicstructuralism. In this Part, I trace this history by sketching out how a structure-basedview of competition has been replaced by price theory and exploring how thisshift has played out through changes in doctrine and enforcement.
Broadly, economic structuralism rests on the idea thatconcentrated market structures promote anticompetitive forms of conduct.25 This view holds that amarket dominated by a very small number of large companies is likely to be lesscompetitive than a market populated with many small- and medium-sizedcompanies. This is because: (1) monopolistic and oligopolistic market structuresenable dominant actors to coordinate with greater ease and subtlety, facilitatingconduct like price-fixing, market division, and tacit collusion; (2) monopolisticand oligopolistic firms can use their existing dominance to block new entrants;and (3) monopolistic and oligopolistic firms have greater bargaining poweragainst consumers, suppliers, and workers, which enables them to hike pricesand degrade service and quality while maintaining profits.
This market structure-based understanding of competition wasa foundation of antitrust thought and policy through the 1960s. Subscribing tothis view, courts blocked mergers that they determined would lead to anticompetitivemarket structures. In some instances, this meant halting horizontaldeals'--mergers combining two direct competitors operating in the same market orproduct line'--that would have handed the new entity a large share of the market.26 In others, it involvedrejecting vertical mergers'--deals joining companies that operated in differenttiers of the same supply or production chain'--that would ''foreclosecompetition.''27 Centrally, this approachinvolved policing not just for size but also for conflicts of interest'--likewhether allowing a dominant shoe manufacturer to extend into shoe retailingwould create an incentive for the manufacturer to disadvantage or discriminateagainst competing retailers.28
The Chicago School approach to antitrust, which gainedmainstream prominence and credibility in the 1970s and 1980s, rejected this structuralist view.29 In the words of RichardPosner, the essence of the Chicago School position is that ''the proper lens forviewing antitrust problems is price theory.''30 Foundational to this view is a faithin the efficiency of markets, propelled by profit-maximizing actors. The ChicagoSchool approach bases its vision of industrial organization on a simpletheoretical premise: ''[R] ational economic actorsworking within the confines of the market seek to maximize profits by combininginputs in the most efficient manner. A failure to act in this fashion will bepunished by the competitive forces of the market.''31
While economic structuralists believe that industrial structure predisposes firms toward certain forms ofbehavior that then steer market outcomes, the Chicago School presumes thatmarket outcomes'--including firm size, industry structure, and concentrationlevels'--reflect the interplay of standalone market forces and the technicaldemands of production.32 In other words, economic structuralists take industry structure as an entryway forunderstanding market dynamics, while the Chicago School holds that industrystructure merely reflects such dynamics. For the Chicago School, ''[w]hat existsis ultimately the best guide to what should exist.''33
Practically, the shift from structuralism to price theory hadtwo major ramifications for antitrust analysis. First, it led to a significantnarrowing of the concept of entry barriers. An entry barrier is a cost thatmust be borne by a firm seeking to enter an industry but is not carried byfirms already in the industry.34 According to the Chicago School, advantagesthat incumbents enjoy from economies of scale, capital requirements, andproduct differentiation do not constitute entry barriers, as these factors areconsidered to reflect no more than the ''objective technical demands ofproduction and distribution.''35With so many ''entry barriers . . . discounted, all firmsare subject to the threat of potentialcompetition . . . regardless of the number of firms orlevels of concentration.''36On this view, market power is always fleeting'--and hence antitrust enforcementrarely needed.
The second consequence of the shift away from structuralismwas that consumer prices became the dominant metric for assessing competition.In his highly influential work, TheAntitrust Paradox, Robert Bork asserted that the sole normative objectiveof antitrust should be to maximize consumer welfare, best pursued throughpromoting economic efficiency.37 Although Bork used ''consumerwelfare'' to mean ''allocative efficiency,''38 courts and antitrust authoritieshave largely measured it through effects on consumer prices. In 1979, theSupreme Court followed Bork's work and declared that ''Congress designed theSherman Act as a 'consumer welfare prescription'''39'--a statement that is widely viewedas erroneous.40 Still, this philosophywound its way into policy and doctrine. The 1982 merger guidelines issued bythe Reagan Administration'--a radical departure from the previous guidelines,written in 1968'--reflected this newfound focus. While the 1968 guidelines hadestablished that the ''primary role'' of merger enforcement was ''to preserve andpromote market structures conducive to competition,''41 the 1982 guidelines saidmergers ''should not be permitted to create or enhance 'market power,''' definedas the ''ability of one or more firms profitably to maintain prices abovecompetitive levels.''42 Today, showing antitrust injuryrequires showing harm to consumer welfare, generally in the form of priceincreases and output restrictions.43
It is true that antitrust authorities do not ignore non-priceeffects entirely. The 2010 Horizontal Merger Guidelines, for example,acknowledge that enhanced market power can manifest as non-price harms,including in the form of reduced product quality, reduced product variety, reducedservice, or diminished innovation.44 Notably, the Obama Administration'sopposition to one of the largest mergers proposed on its watch'--Comcast/ TimeWarner '--stemmed from a concern about market access, notprices.45 And by some measures, theFederal Trade Commission (FTC) has alleged potential harm to innovation inroughly one-third of merger enforcement actions in the last decade.46 Still, it is fair to saythat a concern for innovation or non-price effects rarely animates or drivesinvestigations or enforcement actions'--especially outside of the merger context.47 Economic factors that are easier tomeasure'--such as impacts on price, output, or productive efficiency in narrowlydefined markets'--have become ''disproportionately important.''48
Two areas of enforcement that this reorientation has affecteddramatically are predatory pricing and vertical integration. The Chicago Schoolclaims that ''predatory pricing, vertical integration, and tying arrangementsnever or almost never reduce consumer welfare.''49 Both predatory pricing andvertical integration are highly relevant to analyzing Amazon's path to dominanceand the source of its power. Below, I offer a brief overview of how the ChicagoSchool's influence has shaped predatory pricing doctrine and enforcers' viewsof vertical integration.
A. Predatory PricingThrough the mid-twentieth century, Congress repeatedlyenacted legislation targeting predatory pricing. Congress, as well as statelegislatures, viewed predatory pricing as a tactic used by highly capitalizedfirms to bankrupt rivals and destroy competition'--in other words, as a tool toconcentrate control. Laws prohibiting predatory pricing were part of a larger arrangementof pricing laws that sought to distribute power and opportunity. However, acontroversial Supreme Court decision in the 1960s created an opening forcritics to attack the regime. This intellectual backlash wound its way intoSupreme Court doctrine by the early 1990s in the form of the restrictive '' recoupment test .''
The earliest predatory pricing case in America was thegovernment's antitrust suit against Standard Oil, which reached the SupremeCourt in 1911.50 As detailed in Ida Tarbell's expos(C),A History of the Standard Oil Company, Standard Oil routinely slashedprices in order to drive rivals from the market.51 Moreover, itcross-subsidized: Standard Oil charged monopoly prices52 in markets where it facedno competitors; in markets where rivals checked the company's dominance, itdrastically lowered prices in an effort to push them out. In its antitrust caseagainst the company, the government argued that a suite of practices by StandardOil'--including predatory pricing'--violated section 2 of the Sherman Act. TheSupreme Court ruled for the government and ordered the break-up of the company.53 Subsequent courts cited thedecision for establishing that in the quest for monopoly power, ''price cuttingbecame perhaps the most effective weapon of the larger corporation.''54
Recognizing the threat of predatory pricing executed byStandard Oil, Congress passed a series of laws prohibiting such conduct. In1914 Congress enacted the Clayton Act55 to strengthen the Sherman Act andincluded a provision to curb price discrimination and predatory pricing.56 The House Reportstated that section 2 of the Clayton Act was expressly designed to prohibitlarge corporations from slashing prices below the cost of production ''with theintent to destroy and make unprofitable the business of their competitors'' andwith the aim of ''acquiring a monopoly in the particular locality or section inwhich the discriminating price is made.''57
Congress also acted to protect state ''fair trade'' laws thatfurther safeguarded against predatory pricing. Fair trade legislation grantedproducers the right to set the final retail price of their goods, limiting theability of chain stores to discount.58 When the Supreme Courttargeted these ''resale price maintenance'' efforts, Congress stepped up to defendthem. After the Supreme Court in 1911 struck down the form of resale pricemaintenance enabled by fair trade laws,59 Congress in 1937 carved outan exception for state fair trade laws through the Miller- Tydings Act.60 When the Supreme Court in1951 ruled that producers could enforce minimum prices only against thoseretailers that had signed contracts agreeing to do so,61 Congress responded with alaw making minimum prices enforceable against nonsigners too.62
Another byproduct of the ''fair trade'' movement was theRobinson- Patman Act of 1936. This Act prohibitedprice discrimination by retailers among producers and by producers amongretailers.63 Its aim was to preventconglomerates and large companies from using their buyer power to extractcrippling discounts from smaller entities, and to keep large manufacturers andretailers from teaming up against rivals.64 Like laws banning predatorypricing, the prohibition against price discrimination effectively curbed thepower of size. Section 3 of the Act addressed predatory pricing directly bymaking it a crime to sell goods at ''unreasonably low prices for the purpose ofdestroying competition or eliminating a competitor.''65 While predatory price cuttinggave rise to civil liability and remedies under the Clayton Act, the Robinson- Patman Act attached criminal penalties as well.66
This series of antitrust laws demonstrates that Congress sawpredatory pricing as a serious threat to competitive markets. By themid-twentieth century, the Supreme Court recognized and gave effect to thiscongressional intent. The Court upheld the Robinson- Patman Act numerous times, holding that the relevant factors were whether a retailerintended to destroy competition through its pricing practices and whether itsconduct furthered that purpose.67However, not all instances of below-cost pricing were illegitimate. Liquidatingexcess or perishable goods, for example, was considered fair game.68 Only ''sales made below costwithout legitimate commercial objective and with specific intent to destroycompetition'' would clearly violate section 3.69 In other cases, the Courtdistinguished between competitive advantages drawn from superior skill andproduction, and those drawn from the brute power of size and capital.70 The latter, the Courtruled, were illegitimate.71
In Utah Pie Co. v. Continental Baking Co. , the Court further reinforcedthe illegitimacy of predatory pricing.72 Utah Pie and ContinentalBaking were competing manufacturers of frozen dessert pies. A locationaladvantage gave Utah Pie cheaper access to the Salt Lake City market, which itused to price goods below those sold by competitors. Other frozen pie manufacturers,including Continental, began selling at below-cost prices in the Salt Lake Citymarket, while keeping prices in other regions at or above cost. Utah Piebrought a predatory pricing case against Continental. The Supreme Court ruledfor Utah Pie, noting that the pricing strategies of its competitors had divertedbusiness from Utah Pie and compelled the company to further lower its prices,leading to a ''declining price structure'' overall.73 Additionally, Continentalhad admitted to sending an industrial spy to Utah Pie's plant to gain informationto sabotage Utah's business relations with retailers, a fact the Court used toestablish ''intent to injure.''74
The decision was controversial. Continental's conduct hadloosened the grip of a quasi-monopolist. Prior to the alleged predation, UtahPie had controlled 66.5% of the Salt Lake City market, but followingContinental's practices, its share dropped to 45.3%.75 Penalizing conduct that hadmade a market more competitive aspredatory seemed perverse. As Justice Stewart noted in the dissent, ''I cannothold that Utah Pie's monopolistic position was protected by the federalantitrust laws from effective price competition . . . .''76
The case presented an opportunity for critics of predatorypricing laws to attack the doctrine as misguided. In an article labeling UtahPie ''the most anticompetitive antitrust decision of the decade,'' WardBowman, an economist at Yale Law School, argued that the premise of predatorypricing laws was wrong.77 He wrote, ''The Robinson- Patman Act rests upon a presumption that pricediscrimination can or might be used as a monopolizing technique. This, as morerecent economic literature confirms, is at best a highly dubious presumption.''78 Bork, meanwhile, said ofthe decision, ''There is no economic theory worthy of the name that could findan injury to competition on the facts of the case. Defendants were convictednot of injuring competition but, quite simply, of competing.''79 He described predatorypricing generally as ''a phenomenon that probably does not exist'' and theRobinson- Patman Act as ''the misshapen progeny ofintolerable draftsmanship coupled to wholly mistaken economic theory.''80 Other scholars,particularly those from the rising Chicago School, also weighed in to criticizeUtah Pie . 81
As the writings of Bowman and Bork suggest, the ChicagoSchool critique of predatory pricing doctrine rests on the idea that below-costpricing is irrational and hence rarely occurs.82 For one, the critics argue,there was no guarantee that reducing prices below cost would either drive acompetitor out or otherwise induce the rival to stop competing. Second, even ifa competitor were to drop out, the predator would need to sustain monopolypricing for long enough to recoup the initial losses and successfully thwart entry by potential competitors, who wouldbe lured by the monopoly pricing. The uncertainty of its success, coupled withits guarantee of costs, made predatory pricing an unappealing'--and thereforehighly unlikely'--strategy.83
As the influence and credibility of these scholars grew,their thinking shaped government enforcement. During the 1970s, for example,the number of Robinson- Patman Act cases that the FTCbrought dropped dramatically, reflecting the belief that these cases were oflittle economic concern.84 Under the Reagan Administration, theFTC all but entirely abandoned Robinson- Patman Actcases.85 Bork's appointment as SolicitorGeneral, meanwhile, gave him a prime platform to influence the Supreme Court onantitrust issues and enabled him ''to train and influence many of the attorneyswho would argue before the Supreme Court for the next generation.''86
The Chicago School critique came to shape Supreme Courtdoctrine on predatory pricing. The depth and degree of this influence becameapparent in Matsushita Electric Industrial Co. v. Zenith Radio Corp.87 Zenith, an American manufacturer ofconsumer electronics, brought a Sherman Act section 1 case accusing Japanesefirms of conspiring to charge predatorily low prices in the U.S. market inorder to drive American companies out of business.88 The Supreme Court grantedcertiorari to review whether the Third Circuit had applied the correct standardin reversing the district court's grant of summary judgment to Matsushita'--aninquiry that led the Court to assess the reasonableness of assuming the allegedpredation.89
Citing to Bork's The Antitrust Paradox , the Court concluded that predatorypricing schemes were implausible and therefore could not justify a reasonableassumption in favor of Zenith. ''As [Bork's work] shows, the success of suchschemes is inherently uncertain: the short-run loss is definite, but thelong-run gain depends on successfully neutralizing the competition,'' the Courtwrote.90 ''For this reason, there isa consensus among commentators that predatory pricing schemes are rarely tried,and even more rarely successful.''91
In addition to adopting Bork's cost-benefit framing, theCourt echoed his concern that price competition could be mistaken forpredation. In The Antitrust Paradox , Bork wrote, ''The real danger for the law is less thatpredation will be missed than that normal competitive behavior will be wronglyclassified as predatory and suppressed.''92 Justice Powell, writing forthe 5-4 majority in Matsushita, echoed Bork: '' [C] utting prices in order to increase business often is the very essence of competition. Thus mistaken inferences in cases such as thisone are especially costly, because they chill the very conduct the antitrustlaws are designed to protect.''93
Although Matsushita focusedon a narrow issue'--the summary judgment standard for claims brought underSection 1 of the Sherman Act, which targets coordinationamong parties94'--it has been widely influential inmonopolization cases, which fall under Section 2. In other words, reasoningthat originated in one context has wound up in jurisprudence applying tototally distinct circumstances, even as the underlying violations differvastly.95 Subsequent courts applied Matsushita's predatory pricing analysisto cases involving monopolization and unilateral anticompetitive conduct, shapingthe jurisprudence of Section 2 of the Sherman Act.96 The lower courts seized on Matsushita's central point: the ideathat ''predatory pricing schemes are rarely tried, and even more rarely successful.''97 The phrase became atalisman against the existence of predatory pricing, routinely invoked bycourts in favor of defendants.
In Brooke Group Ltd. v. Brown & Williamson TobaccoCorp.,98 the Supreme Courtformalized this premise into a doctrinal test.The case involved cigarettemanufacturing, an industry dominated by six firms.99 Liggett, one of the six,introduced a line of generic cigarettes, which it sold for about 30% less thanthe price of branded cigarettes.100 Liggett alleged that whenit became clear that its generics were diverting business from brandedcigarettes, Brown & Williamson, a competing manufacturer, began selling itsown generics at a loss.101Liggett sued, claiming that Brown & Williamson's tactic was designed topressure Liggett to raise prices on its generics, thus enabling Brown &Williamson to maintain high profits on branded cigarettes. A jury returned averdict in favor of Liggett, but the district court judge decided that Brown& Williamson was entitled to judgment as a matter of law.102
Importantly, Liggett's accusation was that Brown &Williamson would recoup its losses through raising prices on brandedcigarettes, not the genericscigarettes it was steeply discounting. Building on the analysis introduced in Matsushita,the Court held that Liggett had failed to show that Brown & Williamsonwould be able to execute the scheme successfully by recouping its lossesthrough supracompetitive pricing. ''Evidence ofbelow-cost pricing is not alone sufficient to permit an inference of probable recoupmentand injury to competition,'' Justice Kennedy wrote for the majority.103 Instead, the plaintiff''must demonstrate that there is a likelihood that the predatory scheme allegedwould cause a rise in prices above a competitive level that would be sufficientto compensate for the amounts expended on the predation, including the timevalue of the money invested in it''104'--a requirement now known asthe ''recoupment test.''
In placing recoupment at the center of predatory pricinganalysis, the Court presumed that direct profit maximization is the singulargoal of predatory pricing.105Furthermore, by establishing that harm occurs only when predatorypricing results in higher prices, the Court collapsed the rich set of concernsthat had animated earlier critics of predation, including an aversion to largefirms that exploit their size and a desire to preserve local control. Instead,the Court adopted the Chicago School's narrow conception of what constitutesthis harm (higher prices) and how this harm comes about'--namely, through the alleged predator raising prices onthe previously discounted good.106
Today, succeeding on a predatory pricing claim requires aplaintiff to meet the Brooke Group recoupmenttest by showing that the defendant would be able to recoup its losses throughsustaining supracompetitive prices. Since the Courtintroduced this recoupment requirement, the number of cases brought and won byplaintiffs has dropped dramatically.107 Despite the Court's contention'--that''predatory pricing schemes are rarely tried and even more rarely successful'''--ahost of research shows that predatory pricing can be ''an attractiveanticompetitive strategy'' and has been used by dominant firms across sectors tosquash or deter competition.108
B. Vertical IntegrationAnalysis of vertical integration has similarly moved awayfrom structural concerns. Vertical integration arises when ''two or moresuccessive stages of production and/or distribution of a product are combinedunder the same control.''109For most of the last century, enforcers reviewed vertical integration under thesame standards as horizontal mergers, as set out in the Sherman Act, theClayton Act, and the Federal Trade Commission Act. Vertical integration wasbanned whenever it threatened to ''substantially lessen competition''110 or constituted a''restraint of trade''111or an ''unfair method[ ] of competition.''112 However, the ChicagoSchool's view that vertical mergers are generally pro-competitive has ledenforcement in this area to significantly drop.
Serious concern about vertical integration took hold in thewake of the Great Depression, when both the law and economic theory becamesharply critical of the phenomenon.113 Thurman Arnold, the AssistantAttorney General in the 1930s, targeted vertical ownership achieved throughboth mergers and contractual provisions, and by the 1950s courts and antitrustauthorities generally viewed vertical integration as anticompetitive. Partlybecause it believed that the Supreme Court had failed to use existing law toblock vertical integration through acquisitions, Congress in 1950 amended section7 of the Clayton Act to make it applicable to vertical mergers.114
Critics of vertical integration primarily focused on twotheories of potential harm: leverage and foreclosure. Leverage reflects theidea that a firm can use its dominance in one line of business to establish dominancein another. Because ''horizontal power in one market or stage of productioncreates 'leverage' for the extension of the power to bar entry at anotherlevel,'' vertical integration combined with horizontal market power ''can impaircompetition to a greater extent than could the exercise of horizontal poweralone.''115 Foreclosure, meanwhile,occurs when a firm uses one line of business to disadvantage rivals in anotherline. A flourmill that also owned a bakery could hike prices or degrade qualitywhen selling to rival bakers'--or refuse to do business with them entirely. Inthis view, even if an integrated firm did not directly resort to exclusionarytactics, the arrangement would still increase barriers to entry by requiringwould-be entrants to compete at two levels.
When seeking to block vertical combinations or arrangements,the government frequently built its case on one of these theories'--and, throughthe 1960s, courts largely accepted them.116 In Brown Shoe v. United States, for example, the government sought toblock a merger between a leading manufacturer and a leading retailer of shoeson the grounds that the tie-up would '' foreclos [e]competition'' and '' enhanc [e] Brown's competitiveadvantage over other producers, distributors and sellers of shoes.''117 The Court acknowledgedthat the Clayton Act did not ''render unlawful all . . . vertical arrangements,'' but held that thismerger would undermine competition by '' foreclos [ ing ] . . . independent manufacturersfrom markets otherwise open to them.''118 In other words, theconcern was that'--once merged'--the combined entity would forbid its retailing armfrom stocking shoes made by competing independent manufacturers. Calling thisform of foreclosure ''the primary vice of a vertical merger,''119 the Court noted it wasalso largely inevitable: ''Every extended vertical arrangement by its verynature, for at least a time, denies to competitors of the supplier the opportunityto compete for part or all of the trade of the customer-party to the verticalarrangement.''120 In his partial concurrence,Justice Harlan observed that the deal would enable Brown to ''turn an independentpurchaser into a captive market for its shoes,'' thereby ''diminish[ ing ] the available market for which shoe manufacturerscompete.''121 The Court enjoined the merger.122
Another reason courts cited for blocking these arrangementswas that vertical deals eliminated potential rivals'--a recognition of how amerger would reshape industry structure. Upholding the FTC's challenge of Fordpurchasing an equipment manufacturer, the Court noted that before theacquisition, Ford had helped check the power of the manufacturers and had a''soothing influence'' over prices.123 An outside firm ''maysomeday go in and set the stage for noticeable deconcentration ,''the Court wrote.124''While it merely stays near the edge, it is a deterrent to currentcompetitors.''125 In otherwords, the threat of potential entry by Ford'--the fact that, pre-merger, it could have internally expanded intoequipment manufacturing'--had played an important disciplining role. Relatedly,the Court observed that when a company in a competitive market integrates witha firm in an oligopolistic one, the merger can have ''the result of transmittingthe rigidity of the oligopolistic structure'' of one industry to the other,''thus reducing the chances of future deconcentration ''of the market.126The Court required Ford to divest the manufacturer.127
In the 1950s'--while Congress, enforcement agencies, and thecourts recognized potential threats posed by vertical arrangements'--ChicagoSchool scholars began to cast doubt on the idea that vertical integration hasanticompetitive effects.128By replacing market transactions with administrative decisions within the firm,they argued, vertical arrangements generated efficiencies that antitrust lawshould promote. And if integration failed to yield efficiencies, then theintegrated firm would have no cost advantages over unintegrated rivals,therefore posing no risk of impeding entry. They further argued that verticaldeals would not affect a firm's pricing and output policies, the primarymetrics in their analysis. Under this framework, only horizontal mergers affectcompetition, as ''[h] orizontal mergers increase marketshare, but vertical mergers do not.''129
Chicago School theory holds that concerns about both leverageand foreclosure are misguided. Under the ''single monopoly profit theorem,'' theamount of profit that a firm can extract from one market is fixed and cannot beexpanded through extending into an adjacent market if the two products are usedin fixed proportions.130Under this premise, not only does monopoly leveraging not pose any competitiveconcern, but'--since it can only be motivated by efficiencies, not profits'--it isactually procompetitive when it does occur.
The traditional worries about foreclosure, Bork claimed, wereunfounded, as ''[p] redation through vertical merger isextremely unlikely.''131A manufacturer would not favor its retail subsidiary over others unless it wascheaper to do so'--in which case, Bork argued, discriminating would yieldefficiencies that the firm would pass on to consumers. Additionally, any manufacturerthat sought to privilege its own retailer would face ''entrants who would arrivein sky-darkening swarms for the profitable alternatives.''132 In other words, Bork'stake was that vertical integration generally would not create forms of marketpower that firms could use to hike prices or constrain output. In the rare casethat vertical integration did createthis form of market power, he believed that it would be disciplined by actualor potential entry by competitors.133 In light of this,antitrust law's aversion to vertical arrangements was, Bork argued, irrational.''The law against vertical mergers is merely a law against the creation ofefficiency.''134
With the election of President Reagan, this view of verticalintegration became national policy. In 1982 and 1984, the Department of Justice(DOJ) and the FTC issued new merger guidelines outlining the framework thatofficials would use when reviewing horizontal deals.135 The 1984 version included guidelinesspecific to vertical deals.136Part of a sweeping effort to overhaul antitrust enforcement, the new guidelinesnarrowed the circumstances in which the agencies would challenge verticalmergers.137 Althoughthe guidelines acknowledged that vertical mergers could sometimes give rise tocompetitive concerns, in practice the change constituted a de facto approval ofvertical deals. The DOJ and FTC did not challenge even one vertical mergerduring President Reagan's tenure.138
Although subsequent administrations have continued reviewingvertical mergers, the Chicago School's view that these deals generally do notpose threats to competition has remained dominant.139 Rejection of verticaltie-ups'--standard through the 1960s and 1970s'--is extremely rare today;140 in instances whereagencies spot potential harm, they tend to impose conduct remedies or requiredivestitures rather than block the deal outright.141 The Obama Administrationtook this approach with two of the largest vertical deals of the last decade:Comcast/NBC and Ticketmaster/ LiveNation . In eachcase, consumer advocates opposed the deal142 and warned that the tie-up wouldconcentrate significant power in the hands of a single company,143 which it could use toengage in exclusionary practices, hike prices for consumers, and dock paymentsto content producers, such as TV screenwriters and musicians. Nonetheless, theDOJ attached certain behavioral conditions and required a minor divestiture, ultimatelyapproving both deals.144The district court held the consent decrees to be in the public interest.
II. Why competitive process and structure matterThe current framework in antitrust fails to register certainforms of anticompetitive harm and therefore is unequipped to promote realcompetition'--a shortcoming that is illuminated and amplified in the context ofonline platforms and data-driven markets. This failure stems both fromassumptions embedded in the Chicago School framework and from the way this frameworkassesses competition.
Notably, the present approach fails even if one believes thatantitrust should promote only consumer interests. Critically, consumerinterests include not only cost but also product quality, variety, and innovation.Protecting these long-term interests requires a much thicker conception of''consumer welfare'' than what guides the current approach. But more importantly,the undue focus on consumer welfare is misguided. It betrays legislativehistory, which reveals that Congress passed antitrust laws to promote a host ofpolitical economic ends'--including our interests as workers, producers,entrepreneurs, and citizens. It also mistakenly supplants a concern about processand structure (i.e., whether power is sufficiently distributed to keep marketscompetitive) with a calculation regarding outcome (i.e., whether consumers arematerially better off).
Antitrust law and competition policy should promote notwelfare but competitive markets. By refocusing attention back on process andstructure, this approach would be faithful to the legislative history of majorantitrust laws. It would also promote actual competition'--unlike the presentframework, which is overseeing concentrations of power that risk precludingreal competition.
A. Price and Output Do Not Cover the Full Range of Threats to Consumer Welfare As discussed in Part I, modern doctrine assumes thatadvancing consumer welfare is the sole purpose of antitrust. But the consumerwelfare approach to antitrust is unduly narrow and betrays congressionalintent, as evident from legislative history and as documented by a vast body ofscholarship. I argue in this Note that the rise of dominant internet platformsfreshly reveals the shortcomings of the consumer welfare framework and that itshould be abandoned.
Strikingly, the current approach fails even if one believes that consumer interests should remainparamount.Focusing primarily on price and output undermines effective antitrustenforcement by delaying intervention until market power is being activelyexercised, and largely ignoring whether and how it is being acquired. In otherwords, pegging anticompetitive harm to high prices and/or lower output'--while disregardingthe market structure and competitive process that give rise to this marketpower'--restricts intervention to the moment when a company has already acquiredsufficient dominance to distort competition.
This approach is misguided because it is much easier topromote competition at the point when a market risks becoming less competitivethan it is at the point when a market is no longer competitive. The antitrustlaws reflect this recognition, requiring that enforcers arrest potentialrestraints to competition ''in their incipiency.''145 But the Chicago School'shostility to false positives'--and insistence that market power and highconcentration both reflect and generate efficiency146'--has undermined thisincipiency standard and enfeebled enforcement as a whole. Indeed, enforcershave largely abandoned section 2 monopolization claims,147 which'--by virtue ofassessing how a single company amasses and exercises its power'--traditionallyinvolved an inquiry into structure. By instead relying primarily on price and outputeffects as metrics of competition, enforcers risk overlooking the structuralweakening of competition until it becomes difficult to address effectively, anapproach that undermines consumer welfare.
Indeed, growing evidence shows that the consumer welfareframe has led to higher prices and few efficiencies ,failing by its own metrics.148It arguably has further contributed to a decline in new business growth,resulting in reduced opportunities for entrepreneurs and a stagnant economy.149 The long-term interests ofconsumers include product quality, variety, and innovation'--factors best promotedthrough both a robust competitive process and open markets. By contrast,allowing a highly concentrated market structure to persist endangers theselong-term interests, since firms in uncompetitive markets need not compete toimprove old products or tinker to create news ones. Even if we accept consumerwelfare as the touchstone of antitrust, ensuring a competitive process'--bylooking, in part, to how a market is structured'--ought to be key .Empirical studies revealing that the consumer welfare framehas resulted in higher prices'--failing even by its own terms'--support theneed for a different approach.
B. Antitrust Laws Promote Competition To Serve a Variety of InterestsLegislative history reveals that the idea that ''Congressdesigned the Sherman Act as a 'consumer welfare prescription'''150 is wrong.151 Congress enacted antitrustlaws to rein in the power of industrial trusts, the large business organizationsthat had emerged in the late nineteenth century. Responding to a fear ofconcentrated power, antitrust sought to distribute it. In this sense, antitrustwas ''guided by principles.''152 The law was ''for diversity and access to markets; it was against high concentration and abuses of power.''153
More relevant than any single goal was this general vision.When Congress passed the Sherman Act in 1890,Senator John Sherman called it ''a bill of rights, a charter of liberty,'' andstressed its importance in political terms. 154On the floor of the Senate he declared,
If we will not endure a king as a political power, weshould not endure a king over the production, transportation, and sale of anyof the necessities of life. If we would not submit to an emperor, we should notsubmit to an autocrat of trade, with power to prevent competition and to fixthe price of any commodity.''155
In other words, what was at stake inkeeping markets open'--and keeping them free from industrial monarchs'--wasfreedom.
Animating this vision was the understanding thatconcentration of economic power also consolidates political power, ''breed[ ing ] antidemocratic political pressures.''156 This would occur through enabling asmall minority to amass outsized wealth, which they could then use to influencegovernment. But it would also occur by permitting ''private discretion by a fewin the economic sphere'' to '' control[ ] the welfare ofall,'' undermining individual and business freedom.157 In the lead up to thepassage of the Sherman Act, Senator George Hoar warned that monopolies were ''amenace to republican institutions themselves.''158
This vision encompassed a variety of ends. For one,competition policy would prevent large firms from extracting wealth fromproducers and consumers in the form of monopoly profits.159 Senator Sherman, forexample, described overcharges by monopolists as ''extortion which makes thepeople poor,''160 while Senator Richard Cokereferred to them as ''robbery.''161Representative John Heard announced that trusts had ''stolen millions from thepeople,''162 and Congressman EzraTaylor noted that the beef trust ''robs the farmer on the one hand and theconsumer on the other.''163In the words of Senator James George, ''[t]hey aggregate to themselves greatenormous wealth by extortion which makes the people poor.''164
Notably, this focus on wealth transfers was not solelyeconomic. Leading up to the passage of the Sherman Act, price levels in theUnited States were stable or slowly decreasing.165 If the exclusive concernhad been higher prices, then Congress could have focused on those industrieswhere prices were, indeed, high or still rising. The fact that Congress choseto denounce unjust redistribution suggests that something else was atplay'--namely, that the public was ''angered less by the reduction in their wealththan by the way in which the wealth was extracted.''166 In other words, though theharm was being registered through an economic effect'--a wealth transfer'--theunderlying source of the grievance was also political.167
Another distinct goal was to preserve open markets, in orderto ensure that new businesses and entrepreneurs had a fair shot at entry.Several Congressmen advocated for the Federal Trade Commission Act because itwould help promote small business. Senator James Reed expressly noted that Congress'saim in passing the law was to keep markets open to independent firms.168 When discussing theSherman Act, Senator George lamented that if large-scale industry were allowedto grow unchecked, it would ''crush out all small men, all small capitalists, all small enterprises.''169
Through the 1950s, courts and enforcers applied antitrustlaws to promote this variety of aims. While the vigor and tenor of enforcementvaried, there was an overarching understanding that antitrust served to protectwhat Justice Louis Brandeis called ''industrial liberty.''170 Key to this vision was therecognition that excessive concentrations of private power posed a publicthreat, empowering the interests of a few to steer collective outcomes. ''Powerthat controls the economy should be in the hands of elected representatives ofthe people, not in the hands of an industrial oligarchy,'' Justice William O.Douglas wrote.171Decentralizing this power would ensure that ''the fortunes of the people willnot be dependent on the whim or caprice, the political prejudice, the emotionalstability of a few self-appointed men.''172
As described in Part I, Chicago School scholars upended thistraditional approach, concluding that the only legitimate goal of antitrust isconsumer welfare, best promoted through enhancing economic efficiency. Notably,some prominent liberals'--including John Kenneth Galbraith'--ratified this idea,championing centralization.173In the wake of high inflation in the 1970s, Ralph Nader and other consumer advocatesalso came to support an antitrust regime centered on lower prices, accordingwith the Chicago School's view.174By orienting antitrust toward material rather than political ends, both the neoclassicalschool and its critics effectively embraced concentration over competition.175
Focusing antitrust exclusively on consumer welfare is amistake.176 For one, it betrays legislativeintent, which makes clear that Congress passed antitrust laws to safeguardagainst excessive concentrations of economic power. This vision promotes avariety of aims, including the preservation of open markets, the protection ofproducers and consumers from monopoly abuse, and the dispersion of political177 and economic control.178 Secondly, focusing onconsumer welfare disregards the host of other ways that excessive concentrationcan harm us'--enabling firms to squeeze suppliers and producers, endangeringsystem stability (for instance, by allowing companies to become too big tofail),179 or undermining media diversity,180 to name a few. Protecting this rangeof interests requires an approach to antitrust that focuses on the neutralityof the competitive process and the openness of market structures.
C.Promoting Competition Requires Analysis ofProcess and Structure
The Chicago School's embrace of consumer welfare as the solegoal of antitrust is problematic for at least two reasons. First, as describedin Section II.B, this idea contravenes legislative history, which shows thatCongress passed antitrust laws to safeguard against excessive concentrations ofprivate power. It recognized, in turn, that this vision would protect a host ofinterests, which the sole focus on ''consumer welfare'' disregards. Second, byadopting this new goal, the Chicago School shifted the analytical emphasis awayfrom process'--the conditions necessaryfor competition'--and toward an outcome'--namely,consumer welfare.181In other words, a concern about structure (is power sufficiently distributed tokeep markets competitive?) was replaced by a calculation (did prices rise?).182 This approach isinadequate to promote real competition, a failure that is amplified in the caseof dominant online platforms.
Antitrust doctrine has evolved to reflect this redefinition.The recoupment requirement in predatory pricing, for example, reflects the ideathat competition is harmed only if the predator can ultimately charge consumers supracompetitive prices.183 This logic is agnosticabout process and structure; it measures the health of competition primarilythrough effects on price and output. The same is true in the case of verticalintegration. The modern view of integration largely assumes away barriers to entry,an element of structure, presuming that any advantages enjoyed by theintegrated firm trace back to efficiencies.184
More generally, modern doctrine assumes that market power isnot inherently harmful and instead may result from and generate efficiencies.In practice, this presumes that market power is benign unless it leads to higher prices or reduced output'--again glossingover questions about the competitive process in favor of narrow calculations.185 In other words, this approachequates harm entirely with whether a firm choosesto exercise its market power through price-based levers, while disregardingwhether a firm has developed thispower, distorting the competitive process in some other way.186 But allowing firms toamass market power makes it more difficult to meaningfully check that powerwhen it is eventually exercised. Companies may exploit their market power in ahost of competition-distorting ways that do not directly lead to short-term priceand output effects.
I propose that a better way to understand competition is byfocusing on competitive process and market structure.187 By arguing for a focus onmarket structure, I am not advocating a strict return to the structure-conduct-performanceparadigm. Instead, I claim that seeking to assess competition withoutacknowledging the role of structure is misguided. This is because the best guardianof competition is a competitive process, and whether a market is competitive isinextricably linked to'--even if not solely determined by'--how that market isstructured. In other words, an analysis of the competitive process and marketstructure will offer better insight into the state of competition than domeasures of welfare.
Moreover, this approach would better protect the range ofinterests that Congress sought to promote through preserving competitivemarkets, as described in Section II.B. Foundational to these interests is thedistribution of ownership and control'--inescapably a question of structure.Promoting a competitive process also minimizes the need for regulatory involvement.A focus on process assigns government the task of creating backgroundconditions, rather than intervening to manufacture or interfere with outcomes.188
In practice, adopting this approach would involve assessing arange of factors that give insight into the neutrality of the competitiveprocess and the openness of the market. These factors include: (1) entrybarriers, (2) conflicts of interest, (3) the emergence of gatekeepers orbottlenecks, (4) the use of and control over data, and (5) the dynamics ofbargaining power. An approach that took these factors seriously would involvean assessment of how a market is structured and whether a single firm hadacquired sufficient power to distort competitive outcomes.189 Key questions involvingthese factors would be: What lines of business is a firm involved in and how dothese lines of business interact? Does the structure of the market create orreflect dependencies? Has a dominant player emerged as a gatekeeper so as torisk distorting competition?
Attention to structural concerns and the competitive processare especially important in the context of online platforms, where price-basedmeasures of competition are inadequate to capture market dynamics, particularlygiven the role and use of data.190 As internet platforms mediate agrowing share of both communications and commercial activity, ensuring that ourframework fits how competition actually works in these markets is vital. BelowI document facets of Amazon's power, trace the source of its growth, andanalyze the effects of its dominance. Doing so through the lens of structureand process enables us to make sense of the company's strategy and illuminatesanticompetitive aspects of its business.
III. Amazon's Business StrategyAmazon has established dominance as an online platform thanksto two elements of its business strategy: a willingness to sustain losses andinvest aggressively at the expense of profits, and integration across multiplebusiness lines.191 These facets of its strategy areindependently significant and closely interlinked'--indeed, one way it has beenable to expand into so many areas is through foregoing returns. Thisstrategy'--pursuing market share at the expense of short-term returns'--defies theChicago School's assumption of rational, profit-seeking market actors. Moresignificantly, Amazon's choice to pursue heavy losses while also integratingacross sectors suggests that in order to fully understand the company and thestructural power it is amassing, we must view it as an integrated entity.Seeking to gauge the firm's market role by isolating a particular line ofbusiness and assessing prices in that segment fails to capture both (1) thetrue shape of the company's dominance and (2) the ways in which it is able toleverage advantages gained in one sector to boost its business in another.
A. Willingness To Forego Profits To Establish Dominance Recently, Amazon has started reporting consistent profits,largely due to the success of Amazon Web Services, its cloud computingbusiness.192 Its North America retailbusiness runs on much thinner margins, and its international retail businessstill runs at a loss.193But for the vast majority of its twenty years in business, losses'--not profits'--werethe norm. Through 2013, Amazon had generated a positive net income in just overhalf of its financial reporting quarters. Even in quarters in which it didenter the black, its margins were razor-thin, despite astounding growth. Thegraph below captures the general trend.
Figure 1.
Amazon's Profits 194
Just as striking as Amazon's lack of interest in generatingprofit has been investors' willingness to back the company.195 With the exception of afew quarters in 2014, Amazon's shareholders have poured money in despite thecompany's penchant for losses. On a regular basis, Amazon would report losses,and its share price would soar.196As one analyst told the New York Times,''Amazon's stock price doesn't seem to be correlated to its actual experience inany way.''197
Analysts and reporters have spilled substantial ink seekingto understand the phenomenon. As one commentator joked in a widely circulatedpost, ''Amazon, as best I can tell, is a charitable organization being run byelements of the investment community for the benefit of consumers.''198
In some ways, the puzzlement is for naught: Amazon'strajectory reflects the business philosophy that Bezos outlined from the start.In his first letter to shareholders, Bezos wrote:
We believe that a fundamental measure of our successwill be the shareholder value we create over the long term. This value will be a direct result of our ability toextend and solidify our current market leadership position . . . .We first measure ourselves in terms of the metrics most indicative of ourmarket leadership: customer and revenue growth, the degree to which ourcustomers continue to purchase from us on a repeat basis, and the strength ofour brand. We have invested and will continue to invest aggressively to expandand leverage our customer base, brand, and infrastructure as we move to establishan enduring franchise.199
In other words, the premise of Amazon's business model was toestablish scale. To achieve scale, the company prioritized growth. Under thisapproach, aggressive investing would be key, even if that involved slashingprices or spending billions on expanding capacity, in order to becomeconsumers' one-stop-shop. This approach meant that Amazon ''may make decisionsand weigh tradeoffs differently than some companies,'' Bezos warned.200 ''At this stage, we chooseto prioritize growth because we believe that scale is central to achieving thepotential of our business model.''201
The insistent emphasis on ''market leadership'' (Bezos relieson the term six times in the short letter)202 signaled that Amazonintended to dominate. And, by many measures, Amazon has succeeded. Itsyear-on-year revenue growth far outpaces that of other online retailers.203 Despite efforts by big-box competitorslike Walmart, Sears, and Macy's to boost their online operations, no rival hassucceeded in winning back market share.204
One of the primary ways Amazon has built a huge edge isthrough Amazon Prime, the company's loyalty program, in which Amazon hasinvested aggressively. Initiated in 2005, Amazon Prime began by offeringconsumers unlimited two-day shipping for $79.205 In the years since, Amazonhas bundled in other deals and perks, like renting e-books and streaming musicand video, as well as one-hour or same-day delivery. The program has arguablybeen the retailer's single biggest driver of growth.206 Amazon does not disclose the exactnumber of Prime subscribers, but analysts believe the number of users hasreached 63 million'--19 million more than in 2015.207 Membership doubled between 2011 and2013; analysts expect it to ''easily double again by 2017.''208 By 2020, it is estimatedthat half of U.S. households may be enrolled.209
As with its other ventures, Amazon lost money on Prime togain buy-in. In 2011 it was estimated that each Prime subscriber cost Amazon atleast $90 a year'--$55 in shipping, $35 in digital video'--and that the companytherefore took an $11 loss annually for each customer.210 One Amazon expert tallies thatAmazon has been losing $1 billion to $2 billion a year on Prime memberships.211 The full cost of AmazonPrime is steeper yet, given that the company has been investing heavily inwarehouses, delivery facilities, and trucks, as part of its plan to speed updelivery for Prime customers'--expenditures that regularly push it into the red.212
Despite these losses'--or perhaps because of them'--Prime isconsidered crucial to Amazon's growth as an online retailer. According toanalysts, customers increase their purchases from Amazon by about 150% afterthey become Prime members.213Prime members comprise 47% of Amazon's U.S. shoppers.214 Amazon Prime members alsospend more on the company's website'--an average of $1,500 annually, compared to$625 spent annually by non-Prime members.215 Business experts note thatby making shipping free, Prime ''successfully strips out paying for . . . the leading consumer burden ofonline shopping.''216Moreover, the annual fee drives customers to increase their Amazon purchases inorder to maximize the return on their investment.217
As a result, Amazon Prime users are both more likely to buyon its platform and less likely to shop elsewhere. ''[Sixty-three percent] ofAmazon Prime members carry out a paid transaction on the site in the samevisit,'' compared to 13% of non-Prime members.218 For Walmart and Target,those figures are 5% and 2% respectively.219 One study found that lessthan 1% of Amazon Prime members are likely to consider competitor retail sitesin the same shopping session. Non-Prime members, meanwhile, are eight timesmore likely than Prime members to shop between both Amazon and Target in thesame session.220 In the words of one formerAmazon employee who worked on the Prime team, ''It was never about the $79. Itwas really about changing people's mentality so they wouldn't shop anywhereelse.''221 In that regard, AmazonPrime seems to have proven successful.222
In 2014, Amazon hiked its Prime membership fee to $99.223 The move prompted some consumer ire,but 95% of Prime members surveyed said they would either definitely or probablyrenew their membership regardless,224 suggesting that Amazon hascreated significant buy-in and that no competitor is currently offering a comparablyvaluable service at a lower price. It may, however, also reveal the generalstickiness of online shopping patterns. Although competition for onlineservices may seem to be ''just one click away,'' research drawing on behavioraltendencies shows that the ''switching cost'' of changing web services can, infact, be quite high.225
No doubt, Amazon's dominance stems in part from itsfirst-mover advantage as a pioneer of large-scale online commerce. But inseveral key ways, Amazon has achieved its position through deeply cutting pricesand investing heavily in growing its operations'--both at the expense of profits.The fact that Amazon has been willing to forego profits for growth undercuts acentral premise of contemporary predatory pricing doctrine, which assumes thatpredation is irrational precisely because firms prioritize profits over growth.226 In this way, Amazon'sstrategy has enabled it to use predatory pricing tactics without triggering thescrutiny of predatory pricing laws.
B. Expansion into Multiple Business Lines Another key element of Amazon's strategy'--and one partlyenabled by its capacity to thrive despite posting losses'--has been to expandaggressively into multiple business lines.227 In addition to being a retailer,Amazon is a marketing platform, a delivery and logistics network, a paymentservice, a credit lender, an auction house, a major book publisher, a producerof television and films, a fashion designer, a hardware manufacturer, and aleading provider of cloud server space and computing power.228 For the most part, Amazonhas expanded into these areas by acquiring existing firms.229
Involvement in multiple, related businesslines means that, in many instances, Amazon's rivals are also itscustomers. The retailers that compete with it to sell goods may also use itsdelivery services, for example, and the media companies that compete with it toproduce or market content may also use its platform or cloud infrastructure. Ata basic level this arrangement creates conflicts of interest, given that Amazonis positioned to favor its own products over those of its competitors.
Critically, not only has Amazon integrated across selectlines of business, but it has also emerged as central infrastructure for theinternet economy. Reports suggest this was part of Bezos's vision from thestart. According to early Amazon employees, when the CEO founded the business,''his underlying goals were not to build an online bookstore or an onlineretailer, but rather a 'utility' that would become essential to commerce.''230 In other words, Bezos'starget customer was not only end-consumers but also other businesses.
Amazon controls key critical infrastructure for the Interneteconomy'--in ways that are difficult for new entrants to replicate or competeagainst. This gives the company a key advantage over its rivals: Amazon'scompetitors have come to depend on it. Like its willingness to sustain losses,this feature of Amazon's power largely confounds contemporary antitrustanalysis, which assumes that rational firms seek to drive their rivals out ofbusiness. Amazon's game is more sophisticated. By making itself indispensableto e-commerce, Amazon enjoys receiving business from its rivals, even as itcompetes with them. Moreover, Amazon gleans information from these competitorsas a service provider that it may use to gain a further advantage over them asrivals'--enabling it to further entrench its dominant position.
IV. Establishing Structural DominanceAmazon now controls 46% of all e-commerce in the UnitedStates.231 Not only is it thefastest-growing major retailer, but it is also growing faster than e-commerceas a whole.232 In 2010, it employed 33,700 workers;by June 2016, it had 268,900.233It is enjoying rapid success even in sectors that it only recently entered. Forexample, the company ''is expected to triple its share of the U.S. apparelmarket over the next five years.''234 Its clothing salesrecently rose by $1.1 billion'--even as online sales at the six largest U.S.department stores fell by over $500 million.235
These figures alone are daunting, but they do not capture thefull extent of Amazon's role and power. Amazon's willingness to sustain lossesand invest aggressively at the expense of profits, coupled with its integrationacross sectors, has enabled it to establish a dominant structural role in themarket.
In the Sections that follow, I describe several examples ofAmazon's conduct that illustrate how the firm has established structuraldominance.236 These examples'--its handlingof e-books and its battle with an independent online retailer'--focus on predatorypricing practices. These cases suggest ways in which Amazon may benefit frompredatory pricing even if the company does not raise the price of the goods onwhich it lost money. The other examples, Fulfillment-by-Amazon and AmazonMarketplace, demonstrate how Amazon has become an infrastructure company, bothfor physical delivery and e-commerce, and how this vertical integrationimplicates market competition. These cases highlight how Amazon can use itsrole as an infrastructure provider to benefit its other lines of business.These examples also demonstrate how high barriers to entry may make itdifficult for potential competitors to enter these spheres, locking in Amazon'sdominance for the foreseeable future. All four of these accounts raise concernsabout contemporary antitrust's ability to registerand address the anticompetitive threat posed by Amazon and other dominantonline platforms.
A. Below-Cost Pricing of Bestseller E-Books and the Limits of Modern Recoupment Analysis Amazon entered the e-book market by pricing bestsellers belowcost. Although this strategic pricing helped Amazon to establish dominance inthe e-book market, the government perceived Amazon's cost cutting as benign, focusingon the profitability of e-books in the aggregate and characterizing thecompany's pricing of bestsellers as ''loss leading'' rather than predatorypricing. This failure to recognize Amazon's conduct asanticompetitive stems from a misunderstanding of online markets generally andof Amazon's strategy specifically. Additionally, analyzing the issuesraised in this case suggests that Amazon could recoup its losses through meansnot captured by current antitrust analysis.
In late 2007, Amazon rolled out the Kindle, its e-readingdevice, and launched a new e-book library.237 Before introducing thedevice, CEO Jeff Bezos had decided to price bestseller e-books at $9.99,238 significantly below the$12 to $30 that a new hardback typically costs.239 Critically, the wholesale price atwhich Amazon was buying books from publishers had not dropped; it was insteadchoosing to price e-books below cost.240 Analysts estimate that Amazon soldthe Kindle device below manufacturing cost too.241 Bezos's plan was todominate the e-book selling business in the way that Apple had become the go-toplatform for digital music.242The strategy worked: through 2009, Amazon dominated the e-book retail market,selling around 90% of all e-books.243
Publishers, fearingthat Amazon's $9.99 price point for e-books would permanently drive down the pricethat consumers were willing to pay for all books, sought to wrest back somecontrol. When the opportunity came to partner with Apple to sell e-booksthrough the iBookstore store, five of the ''Big Six''publishers introduced agency pricing, whereby publishers would set the finalretail price and Apple would get a 30% cut. 244 After securing this deal, MacMillan, one of the ''Big Six,'' demandedthat Amazon, too, adopt this pricing model. 245 Though it initially refused and delisted MacMillan's books, 246 Amazon ultimately relented, explaining to readers that ''we will haveto capitulate and accept Macmillan's terms because Macmillan has a monopolyover their own titles.'' 247 Other publishers followed suit, haltingAmazon's ability to price e-books at $9.99. 248
In 2012, the DOJ suedthe publishers and Apple for colluding to raise e-book prices. 249 In response to claims that the DOJ was going after the wrongactor'--given that it was Amazon's predatory tactics that drove the publishersand Apple to join forces'--the DOJ investigated Amazon's pricing strategies andfound ''persuasive evidence lacking'' to show that the company had engaged inpredatory practices. 250 According to the government, ''from the time of its launch, Amazon's e-bookdistribution business has been consistently profitable, even when substantiallydiscounting some newly released and bestselling titles.'' 251
Judge Cote, whopresided over the district court trial, refrained from affirming thegovernment's conclusion. 252 Still, the government's argument illustratesthe dominant framework that courts and enforcers use to analyze predation'--andhow it falls short. Specifically, the government erred by analyzing theprofitability of Amazon's e-book business in the aggregate and by characterizingthe conduct as ''loss leading'' rather than potentially predatory pricing. 253 These missteps suggest a failure to appreciate two critical aspects ofAmazon's practices: (1) how steep discounting by a firm on a platform-basedproduct creates a higher risk that the firm will generate monopoly power thandiscounting on non-platform goods and (2) the multiple ways Amazon could recouplosses in ways other than raising the price of the same e-books that itdiscounted.
On the first point,the government argued that Amazon was not engaging in predation because in the aggregate,Amazon's e-books business was profitable. This perspectiveoverlooks how heavy losses on particular lines of e-books (bestsellers, for example,or new releases) may have thwarted competition, even if the e-books business asa whole was profitable. That the DOJ chose to define the relevant market ase-books'--rather than as specific lines, like bestseller e-books'--reflects adeeper mistake: the failure to recognize how the economics of platform-basedproducts differ in crucial ways from non-platform goods. 254 As a result, the DOJ analyzed the e-book market as it would the marketfor physical books.
One indication ofthis failure to appreciate the difference between physical books and e-books isthat the government and Judge Cote treated Amazon's below-cost pricing as lossleading, 255 rather than as predatory pricing. 256 The difference between loss leading and predatory pricing is notspelled out in law, but the distinction turns on the nature of the below-costpricing, specifically its intensity and the intent motivating it. Judge Cote'suse of ''loss leading'' revealed a view that ''Amazon's below-cost pricing was (a)selective rather than pervasive, and (b) not intended to generate monopolypower.'' 257 On this view, Amazon's aim was to triggeradditional sales of other products sold by Amazon, rather than to drive outcompeting e-book sellers and acquire the power to increase e-book prices. 258 In other words, because Amazon's alleged short-term aim was to sellmore e-readers and e-books'--rather than to harm its rivals and raise prices'--itsconduct is considered loss leading rather than predatory pricing. What both theDOJ and the district court missed, however, is the way in which below-costpricing in this instance entrenched and reinforced Amazon's dominance in waysthat loss leading by physical retailers does not.
Unlike with onlineshopping, each trip to a brick-and-mortar store is discrete. If, on Monday,Walmart heavily discounts the price of socks and you are looking to buy socks,you might visit, buy socks, and'--because you are already there'--also buy milk. OnThursday, the fact that Walmart had discounted socks on Monday does notnecessarily exert any tug; you may return to Walmart because you now know thatWalmart often has good bargains, but the fact that you purchased socks fromWalmart on Monday is not, in itself, a reason to return.
Internet retail isdifferent. Say on Monday, Amazon steeply discounts the e-book version of HarperLee's Go Set a Watchman, and you purchase both a Kindle and the e-book. OnThursday, you would be inclined to revisit Amazon'--and not simply because youknow it has good bargains. Several factors extend the tug. For one, Amazon,like other e-book sellers, has used a scheme known as ''digital rights management''(DRM), which limits the types of devices that can read certain e-book formats. 259 Compelling readers to purchase a Kindle through cheap e-books locksthem into future e-book purchases from Amazon. 260 Moreover, buying'--or even browsing'--e-books on Amazon's platform handsthe company information about your reading habits and preferences, data thecompany uses to tailor recommendations and future deals. 261 Replicated across a few more purchases, Amazon's lock-in becomesstrong. It becomes unlikely that a reader will then purchase a Nook and switchto buying e-books through Barnes & Noble, even if that company is slashingprices.
Put differently, lossleading pays higher returns with platform-based e-commerce'--and specificallywith digital products like e-books'--than it does with brick-and-mortar stores.The marginal value of the first sale and early sales in general is much higherfor e-books than for print books because there are lock-in effects at play, dueboth to technical design and the possibilities for and value of personalization.
By treatinge-commerce and digital goods the same as physical stores and goods, both thegovernment and Judge Cote missed the anticompetitive implications of Amazon'sbelow-cost pricing. Though the immediate effect of Amazon's pricing of bestsellere-books may have been to sell more e-books generally, that tactic has alsopositioned Amazon to dominate the market in a way that sets it up to raisefuture prices. In this context, the traditional distinction between lossleading and predatory pricing is strained.
Instead ofrecognizing that the economics of platforms meant that below-cost pricing on aplatform-hosted good would tend to facilitate long-term dominance, the governmenttook comfort that the industry was ''dynamic and evolving'' and concluded thatthe ''presence and continued investment by technology giants, multinational bookpublishers, and national retailers in e-books businesses'' rendered an Amazon-dominatedmarket unlikely. 262 Yet Amazon's early lead has, in fact,translated to long-term dominance. It controls around 65% of the e-book markettoday, 263 while its share of the e-reader market hovers around 74%. 264 Players that appeared up-and-coming even a few years ago are nowretreating from the market. Sony closed its U.S. Reader store and is no longerintroducing new e-readers to the U.S. market. 265 Barnes & Noble, meanwhile, has slashed funding for the Nook by 74%. 266 The only real e-books competitor left standing is Apple. 267
Because thegovernment deflected predatory pricing claims by looking at aggregateprofitability, neither the government nor the court reached the question ofrecoupment. Given that'--under current doctrine'--whether below-cost pricing ispredatory or not turns on whether a firm recoups its losses, we should examinehow Amazon could use its dominance to recoup its losses in ways that are moresophisticated than what courts generally consider or are able to assess.
Most obviously,Amazon could earn back the losses it generated on bestseller e-books by raisingprices of either particular lines of e-books or e-books as a whole. Thisintra-product market form of recoupment is what courts look for. However, it remainsunclear whether Amazon has hiked e-book prices because, as the New York Times noted, ''[ i ]t is difficult to comprehensively track the movement ofprices on Amazon,'' which means that any evidence of price trends is ''anecdotaland fragmentary.'' 268 As Amazon customers can attest, Amazon's pricesfluctuate rapidly and with no explanation. 269
This underscores abasic challenge of conducting recoupment analysis with Amazon: it may not beapparent when and by how much Amazon raises prices. Online commerce enablesAmazon to obscure price hikes in at least two ways: rapid, constant pricefluctuations and personalized pricing. 270 Constant price fluctuations diminish our ability to discern pricing trends. Byone account, Amazon changes prices more than 2.5 million times each day. 271 Amazon is also able to tailor prices to individual consumers, known asfirst-degree price discrimination. There is no public evidence that Amazon iscurrently engaging in personalized pricing, 272 but online retailers generally are devoting significant resources toanalyzing how to implement it. 273 A major topic of discussion at the 2014 National Retail Federationannual convention, for example, was how to introduce discriminatory pricingwithout triggering consumer backlash. 274 One mechanism discussed was highly personalized coupons sent at thepoint of sale, which would avoid the need to show consumers different pricesbut would still achieve discriminatory pricing. 275
Ifretailers'--including Amazon'--implement discriminatory pricing on a wide scale,each individual would be subject to his or her own personal price trajectory,eliminating the notion of a single pricing trend. It is not clear how we wouldmeasure price hikes for the purpose of recoupment analysis in that scenario.There would be no obvious conclusions if some consumers faced higher priceswhile others enjoyed lower ones. But given the magnitude and accuracy of datathat Amazon has collected on millions of users, tailored pricing is not simplya hypothetical power. 276 Discerning whether and by how much Amazon raises book prices will be moredifficult than the Matsushita or Brooke Group Courts could have imagined. 277
It is true thatbrick-and-mortar stores also collect data on customer purchasing habits andsend personalized coupons. But the types of consumer behavior that internetfirms can access'--how long you hover your mouse on a particular item, how manydays an item sits in your shopping basket before you purchase it, or thefashion blogs you visit before looking for those same items through a searchengine'--is uncharted ground. The degree to which a firm can tailor andpersonalize an online shopping experience is different in kind from the methodsavailable to a brick-and-mortar store'--precisely because the type of behaviorthat online firms can track is far more detailed and nuanced. And unlikebrick-and-mortar stores'--where everyone at least sees a common price (even if they go on to receivediscounts)'--internet retail enables firms to entirely personalize consumer experiences,which eliminates any collective baseline from which to gauge price increases ordecreases.
The decision of whichproduct market in which Amazon maychoose to raise prices is also an open question'--and one that current predatorypricing doctrine ignores. Courts generally assume that a firm will recoup byincreasing prices on the same goods on which it previously lost money. Butrecoupment across markets is also available as a strategy, especially for firmsas diversified across products and services as Amazon. Reporting suggests thecompany did just this in 2013, by hiking prices on scholarly and small-pressbooks and creating the risk of a ''two-tier system where some books are pricedbeyond an audience's reach.'' 278 Although Amazon may be recouping its initial losses in e-books throughmarkups on physical books, this cross-market recoupment is not a scenario thatenforcers or judges generally consider. 279 One possible reason for this neglect is that Chicago Schoolscholarship, which assumes recoupment in single-product markets is unlikely,also holds recoupment in multi-product scenarios to be implausible. 280
Although currentpredatory pricing doctrine focuses only on recoupment through raising pricesfor consumers, Amazon could also recoup its losses by imposing higher fees onpublishers. Large book retailer chains like Barnes & Noble have long usedtheir market dominance to charge publishers for favorable product placement,such as displays in a storefront window or on a prominent table. 281 Amazon's dominance in the e-book market has enabled it to demandsimilar fees for even the most basic of services. For example, when renewingits contract with Hachette last year, Amazon demanded payments for servicesincluding the pre-order button, personalized recommendations, and an Amazonemployee assigned to the publisher. 282 In the words of one person close to the negotiations, Amazon ''is veryinventive about what we'd call standard service. . . . They'reteasing out all these layers and saying, 'If you want that service, you'll haveto pay for it.''' 283 By introducing fees on services that itpreviously offered for free, Amazon has created another source of revenue.Amazon's power to demand these fees'--and recoup some of the losses it sustainedin below-cost pricing'--stems from dominance partly built through that samebelow-cost pricing. The fact that Amazon has itself vertically integrated intobook publishing'--and hence can promote its own content'--may give it additionalleverage to hike fees. Any publisher that refuses could see Amazon favor itsown books over the publisher's, reflecting a conflict of interest I discussfurther in Section IV.D. It is not uncommon for half of the titles on Amazon'sKindle bestseller list to be its own. 284
While not captured bycurrent antitrust doctrine, the pressure Amazon puts on publishers merits concern. 285 For one, consolidation among book sellers'--partly spurred by Amazon'spricing tactics and demands for better terms from publishers'--has also spurredconsolidation among publishers. Consolidation among publishers last reached itsheyday in the 1990s'--as publishing houses sought to bulk up in response to thegrowing clout of Borders and Barnes & Noble'--and by the early 2000s, theindustry had settled into the ''Big Six.'' 286 This trend has cost authors and readers alike, leaving writers withfewer paths to market and readers with a less diverse marketplace. SinceAmazon's rise, the major publishers have merged further'--thinning down to five,with rumors of more consolidation to come. 287
Second, theincreasing cost of doing business with Amazon is upending the publishers'business model in ways that further risk sapping diversity. Traditionally,publishing houses used a cross-subsidization model whereby they would use theirbest sellers to subsidize weightier and riskier books requiring greater upfrontinvestment. 288 In the face of higher fees imposed byAmazon, publishers say they are less able to invest in a range of books. In arecent letter to DOJ, a group of authors wrote that Amazon's actions have''extract[ ed ] vital resources from the [book] industryin ways that lessen the diversity and quality of books.'' 289 The authors noted that publishers have responded to Amazon's fees byboth publishing fewer titles and focusing largely on books by celebrities andbestselling authors. 290 The authors also noted, ''Readers are presentedwith fewer books that espouse unusual, quirky, offbeat, or politically riskyideas, as well as books from new and unproven authors. This impoverishesAmerica's marketplace of ideas.'' 291
Amazon's conductwould be readily cognizable as a threat under the pre-ChicagoSchool view that predatory pricing laws specifically and antitrust generallypromoted a broad set of values. Under the predatory pricing jurisprudence ofthe early and mid-twentieth century, harm to the diversity and vibrancy ofideas in the book market may have been a primary basis for governmentintervention. The political risks associated with Amazon's market dominancealso implicate some of the major concerns that animate antitrust laws. For instance,the risk that Amazon may retaliate against books that it disfavors'--either to imposegreater pressure on publishers or for other political reasons'--raises concernsabout media freedom. Given that antitrust authorities previously considereddiversity of speech and ideas a factor in their analysis, Amazon's degree ofcontrol, too, should warrant concern.
Even within thenarrower ''consumer welfare'' framework, Amazon's attempts to recoup lossesthrough fees on publishers should be understood as harmful. A market with lesschoice and diversity for readers amounts to a form of consumer injury. That DOJignored this concern in its suit against Apple and the publishers suggests thatits conception of predatory pricing fails to captureoverlooks the full suite of harms that Amazon's actions may cause. 292
Amazon's below-costpricing in the e-book market'--which enabled it to capture 65% of that market, 293 a sizable share by any measure'--strains predatory pricing doctrine inseveral ways. First, Amazon is positioned to recoup its losses by raisingprices on less popular or obscure e-books, or by raising prices on print books.In either case, Amazon would be recouping outside the original market where itsustained losses (bestseller e-books), so courts are unlikely to look for orconsider these scenarios. Additionally, constant fluctuations in prices and theability to price discriminate enable Amazon to raise prices with little chanceof detection. Lastly, Amazon could recoup its losses by extracting more frompublishers, who are dependent on its platform to market both e-books and printbooks. This may diminish the quality and breadth of the works that arepublished, but since this is most directly a supplier -siderather than buyer-side harm, it is less likely that a modern court wouldconsider it closely. The current predatory pricing framework fails to capturethe harm posed to the book market by Amazon's tactics.
B. Acquisition of Quidsi and Flawed Assumptions About Entry and Exit BarriersIn addition to using below-cost pricing to establish adominant position in e-books, Amazon has also used this practice to putpressure on and ultimately acquire a chief rival. This history challenges contemporaryantitrust law's assumption that predatory pricing cannot be used to establishdominance. While theory may predict that entry barriers for online retail arelow, this account shows that in practice significant investment is needed toestablish a successful platform that will attract traffic. Finally, Amazon's conductsuggests that psychological intimidation can discourage new entry that wouldchallenge a dominant player's market power.
In 2008, Quidsi was one of theworld's fastest growing e-commerce companies.294 It oversaw several subsidiaries: Diapers.com(focused on baby care), Soap.com (focused on household essentials), and BeautyBar.com(focused on beauty products). Amazon expressed interest in acquiring Quidsi in 2009, but the company's founders declined Amazon'soffer.295
Shortly after Quidsi rejectedAmazon's overture, Amazon cut its prices for diapers and other baby products byup to 30%.296 By reconfiguring theirprices, Quidsi executives saw that Amazon's pricingbots'--software ''that carefully monitors other companies' prices and adjustsAmazon's to match'''--were tracking Diapers.com and would immediately slashAmazon's prices in response to Quidsi's changes.297 In September 2010, Amazon rolled outAmazon Mom, a new service that offered a year's worth of free two-day Primeshipping (which usually cost $79 a year).298 Customers could also secure anadditional 30% discount on diapers by signing up for monthly deliveries as partof a service known as ''Subscribe and Save.''299 Quidsi executives ''calculated that Amazon was on track to lose $100 million over threemonths in the diaper category alone.''300
Eventually, Amazon's below-cost pricing started eating into Diapers.com's growth, and it ''slowed under Amazon's pricingpressure.''301 Investors, meanwhile,''grew wary of pouring more money'' into Quidsi , giventhe challenge from Amazon.302Struggling to keep up with Amazon's pricing war, Quidsi's owners began talks with Walmart about potentiallyselling the business. Amazon intervened and made an aggressive counteroffer.303 Although Walmart offered ahigher final bid, ''the Quidsi executives stuck withAmazon, largely out of fear.''304The FTC reviewed the Amazon- Quidsi deal and decidedthat it did not trigger anticompetitive concerns.305 Through its purchase of Quidsi , Amazon eliminated a leading competitor in theonline sale of baby products. Amazon achieved this by slashing prices andbleeding money,306losses that its investors have given it a free pass to incur'--and that a smallerand newer venture like Quidsi , by contrast, could notmaintain.
After completing its buy-up of a key rival'--and seemingly losinghundreds of millions of dollars in the process'--Amazon went on to raise prices.In November 2011, a year after buying out Quidsi ,Amazon shut down new memberships in its Amazon Mom program.307 Though the company hassince reopened the program, it has continued to scale back the discounts and generousshopping terms of the original offer. As of February 2012, discounts that had previouslybeen 30% were reduced to 20%, and the one year of free Prime membership was cutto three months.308In November 2014, the company hiked prices further: members purchasing morethan four items in a month would no longer receive the general 20% discount,and the 20% discount on baby wipes'--one of the program's top-sellingproducts'--was cut to 5%.309Summarizing the series of changes, one journalist observed, ''The Amazon Momprogram has become much less generous than it was when it was introduced in2010.''310 In online forums whereconsumers expressed frustrations with the changes, several users said theywould be taking their business from Amazon and returning to Diapers.com'--which,other users pointed out, was no longer possible.311 Through its strategy,Amazon now holds a strong position in the baby-product market.312
Amazon's conduct runs counter to contemporary predatorypricing thinking, which contends that predation is no path to buying up acompetitor. In The Antitrust Paradox,Bork wrote, ''[T]he modern law ofhorizontal mergers makes it all but impossible for the predator to bring thewar to an end by purchasing his victim. To accomplish the predator's purpose,the merger must create a monopoly'' and law ''would preclude the attainment ofthe monopoly necessary to make predation profitable.''313 For sectors with low entrycosts, Bork writes, this strategy is precluded by the constant possibility ofreentry by other players. ''A shoe retailer can be driven out rapidly, butreentry will be equally rapid.''314In fields in which entry costs are high, Bork argued that exit by competitorsis unlikely because management would need to believe that the predation hadrendered the value of their facilities negligible. For instance, ''[r] ailroading , which involves specialized facilities, isdifficult to enter, but the potential victim of predation would be difficult todrive out precisely because railroad facilities are not useful in other industries.''315
Does online retailing of baby products resemble shoeretailing or railroading? Given the absence of formal barriers, entry should beeasy: unlike railroading, selling baby products online requires no heavy investmentor fixed costs. However, the economics of online retailing are not quite liketraditional shoe retailing. Given that attracting traffic and generating salesas an independent online retailer involves steep search costs, the vastmajority of online commerce is conducted on platforms, central marketplacesthat connect buyers and sellers. Thus, in practice, successful entry by apotential diaper retailer carries with it the cost of attempting to build a newonline platform, or of creating a brand strong enough to draw traffic from anexisting company's platform. As several commentators have observed, thepractical barriers to successful and sustained entry as an online platform arevery high, given the huge first-mover advantages stemming from data collectionand network effects.316 Moreover, the high exit barriersthat Bork assumes for railroads'--namely, that they would have to be convincedtheir facilities were worth more as scrap than as a railroad'--do not apply toonline platforms. Investment in online platforms lies not in physical infrastructurethat might be repurposed, but in intangibles like brand recognition. Theseintangibles can be absorbed by a rival platform or retailer with greater easethan a railroad could take over a competing line.317 In other words, onlineretailers like Quidsi face the high entry barriers ofa railroad coupled with the relatively low exit costs typical ofbrick-and-mortar retailers'--a combination that Bork, and the courts, failed toconsider.
Courts also tend to discount that predators can usepsychological intimidation to keep out the competition.318 Amazon's history with Quidsi has sent a clear message to potentialcompetitors'--namely that, unless upstarts have deep pockets that allow them tobleed money in a head-to-head fight with Amazon, it may not be worth enteringthe market. Even as Amazon has raised the price of the Amazon Mom program, nonewcomers have recently sought to challenge it in this sector, supporting theidea that intimidation may also serve as a practical barrier.319
As the world's largest online retailer, Amazon serves as adefault starting point for many online shoppers: one study estimates that 44%of U.S. consumers '' go[ ] directly to Amazon first tosearch for products.''320Moreover, the swaths of data that Amazon has collected on consumers' browsingand searching histories can create the same problem that Google's would-becompetitors encounter: ''an insurmountable barrier to entry for newcompetition.''321 Though at least oneventure opened shop with an eye to challenging Amazon,322 its founders recently soldthe firm to Walmart323'--a move that suggests that the onlyplayers positioned to challenge Amazon are the existing giants. However, eventhis strategy has skeptics.324While established brick-and-mortar retailers like Target have tried to lureonline consumers through discounts and low delivery costs,325 Amazon remains the majoronline seller of baby products.326Although Amazon established its dominance in this market through aggressiveprice cutting and selling steeply at a loss, its actions have not triggeredpredatory pricing claims. In part, this is because prevailing theoryassumes'--per Bork's analysis'--that market entry is easy enough for new rivals toemerge any time a dominant firm starts charging monopoly prices.
In this case, Amazon raised prices by cutting back discountsand (at least temporarily) refusing to expand the program. Even if a firmviewed the unmet demand as an invitation to enter, several factors would provediscouraging in ways that the existing doctrine does not consider. In theory,online retailing itself has low entry costs since anyone can set up shoponline, without significant fixed costs. But in practice, successful entry inonline markets is a challenge, requiring significant upfront investment. Itrequires either building up strong brand recognition to draw users to anindependent site, or using an existing platform, such as Amazon or eBay, whichcan present other anticompetitive challenges.327 Indeed, most independentretailers choose to sell through Amazon328'--even when the businessrelationship risks undermining their business. The fact that no real rival hasemerged, even after Amazon raised prices, undercuts the assumption embedded incurrent antitrust doctrine.
C. Amazon Delivery and Leveraging Dominance Across SectorsAs its history with Quidsi shows,Amazon's willingness to sustain losses has allowed it to engage in below-costpricing in order to establish dominance as an online retailer. Amazon hastranslated its dominance as an online retailer into significant bargainingpower in the delivery sector, using it to secure favorable conditions fromthird-party delivery companies. This in turn has enabled Amazon to extend itsdominance over other retailers by creating the Fulfillment-by-Amazon serviceand establishing its own physical delivery capacity. This illustrates how acompany can leverage its dominant platform to successfully integrate into othersectors, creating anticompetitive dynamics. Retail competitors are left withtwo undesirable choices: either try to compete with Amazon at a disadvantage orbecome reliant on a competitor to handle delivery and logistics.
As Amazon expanded its share of e-commerce'--and enlarged thee-commerce sector as a whole'--it started comprising a greater share of deliverycompanies' business. For example, in 2015, UPS derived $1 billion worth ofbusiness from Amazon alone.329The fact that it accounted for a growing share of these firms' businesses gaveAmazon bargaining power to negotiate for lower rates.330 By some estimates, Amazonenjoyed a 70% discount over regular delivery prices.331 Delivery companies soughtto make up for the discounts they gave to Amazon by raising the prices theycharged to independent sellers,332a phenomenon recently termed the ''waterbed effect.''333 As scholars have described,
[T]he presence of a waterbed effect can furtherdistort competition by giving a powerful buyer now a two-fold advantage,namely, through more advantageous terms for itself and through higher purchasingcosts for its rivals. What then becomes a virtuous circle for the strong buyerends up as a vicious circle for its weaker competitors.334
To this two-fold advantage Amazon added a third perk:harnessing the weakness of its rivals into a business opportunity. In 2006,Amazon introduced Fulfillment-by-Amazon (FBA), a logistics and delivery servicefor independent sellers.335Merchants who sign up for FBA store their products in Amazon's warehouses, andAmazon packs, ships, and provides customer service on any orders. Products soldthrough FBA are eligible for service through Amazon Prime'--namely, free two-dayshipping and/or free regular shipping, depending on the order.336 Since many merchantsselling on Amazon are competing with Amazon's own retail operation and itsAmazon Prime service, using FBA offers sellers the opportunity to compete atless of a disadvantage.
Notably, it is partly because independent sellers facedhigher rates from UPS and FedEx'--a result of Amazon's dominance'--that Amazonsucceeded in directing sellers to its new business venture.337 In many instances, ordersrouted through FBA were still being shipped and delivered by UPS and FedEx,since Amazon relied on these firms.338 But because Amazon hadsecured discounts unavailable to other sellers, it was cheaper for thosesellers to go through Amazon than to use UPS and FedEx directly. Amazon hadused its dominance in the retail sector to create and boost a new venture inthe delivery sector, inserting itself into the business of its competitors.
Amazon has followed up on this initial foray into fulfillmentservices by creating a logistics empire. Building out physical capacity letsAmazon further reduce its delivery times, raising the bar for entry yet higher.Moreover it is the firm's capacity for aggressive investing that has enabled itto rapidly establish an extensive network of physical infrastructure. Since2010, Amazon has spent $13.9 billion building warehouses, 339 and it spent $11.5 billionon shipping in 2015 alone.340Amazon has opened more than 180 warehouses,341 28 sorting centers, 59 deliverystations that feed packages to local couriers, and more than 65 Prime Now hubs.342 Analysts estimate that thelocations of Amazon's fulfillment centers bring it within twenty miles of 31%of the population and within twenty miles of 60% of its core same-day base.343 This sprawling network offulfillment centers'--each placed in or near a major metropolitan area'--equipsAmazon to offer one-hour delivery in some locations and same-day in others (aservice it offers free to members of Amazon Prime).344 While several rivalsinitially entered the delivery market to compete with Prime shipping, some arenow retreating.345As one analyst noted, ''Prime has proven exceedingly difficult for rivals tocopy.''346
Most recently, Amazon has also expanded into trucking. LastDecember, it announced it plans to roll out thousands of branded semi-trucks, amove that will give it yet more control over delivery, as it seeks to speed uphow quickly it can transport goods to customers.347 Amazon now owns four thousand trucktrailers and has also signed contracts for container ships, planes,348 and drones.349 As of October 2016, Amazonhad leased at least forty jets.350Former employees say Amazon's long-term goal is to circumvent UPS and FedEx altogether,though the company itself has said it is looking only to supplement itsreliance on these firms,not supplant them.351
The way that Amazon has leveraged its dominance as an onlineretailer to vertically integrate into delivery is instructive on severalfronts. First, it is a textbook example of how the company can use its dominancein one sphere to advantage a separate line of business. To be sure, thisdynamic is not intrinsically anticompetitive. What should prompt concern inAmazon's case, however, is that Amazon achieved these cross-sector advantagesin part due to its bargaining power. Because Amazon was able to demand heavydiscounts from FedEx and UPS, other sellers faced price hikes from thesecompanies'--which positioned Amazon to capture them as clients for its newbusiness. By overlooking structural factors like bargaining power, modern antitrustdoctrine fails to address this type of threat to competitive markets.
Second, Amazon is positioned to use its dominance acrossonline retail and delivery in ways that involve tying, are exclusionary, andcreate entry barriers.352That is, Amazon's distortion of the delivery sector in turn creates anticompetitivechallenges in the retail sector. For example, sellers who use FBA have a betterchance of being listed higher in Amazon search results than those who do not,which means Amazon is tying the outcomes it generates for sellers using itsretail platform to whether they also use its delivery business.353 Amazon is also positionedto use its logistics infrastructure to deliver its own retail goods faster thanthose of independent sellers that use its platform and fulfillment service'--aform of discrimination that exemplifies traditional concerns about verticalintegration. And Amazon's capacity for losses and expansive logisticscapacities mean that it could privilege its own goods while still offering independentsellers the ability to ship goods more cheaply and quickly than they could byusing UPS and FedEx directly.
Relatedly, Amazon's expansion into the delivery sector alsoraises questions about the Chicago School's limited conception of entry barriers.The company's capacity for losses'--the permission it has won from investors toshow negative profits'--has been key in enabling Amazon to achieve outsizedgrowth in delivery and logistics. Matching Amazon's network would require arival to invest heavily and'--in order to viably compete'--offer free or otherwisebelow-cost shipping. In interviews with reporters, venture capitalists saythere is no appetite to fund firms looking to compete with Amazon on physicaldelivery.354 In this way, Amazon'sability to sustain losses creates an entry barrier for any firm that does notenjoy the same privilege.
Third, Amazon's use of Prime and FBA exemplifies how thecompany has structurally placed itself at the center of e-commerce. Already 44%of American online shoppers begin their online shopping on Amazon's platform.355 Given the traffic, it isbecoming increasingly clear that in order to succeed in e-commerce, anindependent merchant will need to use Amazon's infrastructure. The fact thatAmazon competes with many of the businesses that are coming to depend on itcreates a host of conflicts of interest that the company can exploit toprivilege its own products.
The dominant framework in antitrust today fails to recognizethe risk that Amazon's dominance poses for discrimination and barriers to newentry. In part, this is because'--as with the framework's view of predatory pricing'--the primary harm that registers within the ''consumerwelfare'' frame is higher consumer prices. On the Chicago School's account,Amazon's vertical integration would only be harmful if and when it chooses touse its dominance in delivery and retail to hike fees to consumers. Amazon hasalready raised Prime prices.356But antitrust enforcers should be equally concerned about the fact that Amazonincreasingly controls the infrastructure of online commerce'--and the ways inwhich it is harnessing this dominance to expand and advantage its new businessventures. The conflicts of interest that arise from Amazon both competing withmerchants and delivering their wares pose a hazard to competition, particularlyin light of Amazon's entrenched position as an online platform. Amazon's conflictsof interest tarnish the neutrality of the competitive process. The thousands ofretailers and independent businesses that must ride Amazon's rails to reachmarket are increasingly dependent on their biggest competitor.
D. Amazon Marketplace and Exploiting DataAs described above, vertical integration in retail andphysical delivery may enable Amazon to leverage cross-sector advantages in waysthat are potentially anticompetitive but not understood as such under currentantitrust doctrine. Analogous dynamics are at play with Amazon's dominance inthe provision of online infrastructure,in particular its Marketplace for third-party sellers. Because informationabout Amazon's practices in this area is limited, this Section necessarily willbe brief. But to capture fully the anticompetitive features of Amazon'sbusiness strategy, it is vital to analyze how vertical integration across internetbusinesses introduces more sophisticated'--and potentially more troubling'--opportunitiesto abuse cross-market advantages and foreclose rivals.
The clearest example of how the company leverages its poweracross online businesses is Amazon Marketplace, where third-party retailerssell their wares. Since Amazon commands a large share of e-commerce traffic,many smaller merchants find it necessary to use its site to draw buyers.357 These sellers list their goods onAmazon's platform and the company collects fees ranging from 6% to 50% of theirsales from them.358More than two million third-party sellers used Amazon's platform as of 2015, anincrease from the roughly one million that used the platform in 2006.359 The revenue that Amazongenerates through Marketplace has been a major source of its growth:third-party sellers' share of total items sold on Amazon rose from 36% in 2011360 to over 50% in 2015.361
Third-party sellers using Marketplace recognize that usingthe platform puts them in a bind. As one merchant observed, ''You can't reallybe a high-volume seller online without being on Amazon, but sellers are veryaware of the fact that Amazon is also their primary competitor.''362 Evidence suggests thattheir unease is well founded. Amazon seems to use its Marketplace ''as a vastlaboratory to spot new products to sell, test sales of potential new goods, andexert more control over pricing.''363 Specifically, reportingsuggests that ''Amazon uses sales data from outside merchants to make purchasingdecisions in order to undercut them on price'' and give its own items ''featuredplacement under a given search.''364 Take the example of PillowPets, ''stuffed-animal pillows modeled after NFL mascots'' that a third-partymerchant sold through Amazon's site.365 For several months, themerchant sold up to one hundred pillows per day.366 According to oneaccount, ''just ahead of the holidayseason, [the merchant] noticed Amazon had itself beg[u]n offering the samePillow Pets for the same price while giving [its own] products featuredplacement on the site.''367The merchant's own sales dropped to twenty per day.368 Amazon has gonehead-to-head with independent merchants on price, vigorously matching and evenundercutting them on products that they had originally introduced. By goingdirectly to the manufacturer, Amazon seeks to cut out the independent sellers.
In other instances, Amazon has responded to popularthird-party products by producing them itself. Last year, a manufacturer thathad been selling an aluminum laptop stand on Marketplace for more than a decadesaw a similar stand appear at half the price. The manufacturer learned that thebrand was AmazonBasics , the private line that Amazonhas been developing since 2009.369As one news site describes it, initially, AmazonBasics focused on generic goods like batteries and blank DVDs. ''Then, for severalyears, the house brand 'slept quietly as it retained data about other sellers'successes.'''370 As it now rolls out more AmazonBasics products, it is clear that the company hasused ''insights gleaned from its vast Web store to build a private-labeljuggernaut that now includes more than 3,000 products.''371 One study found that inthe case of women's clothing, Amazon ''began selling 25 percent of the top itemsfirst sold through marketplace vendors.''372
It is true that brick-and-mortar retailers sometimes alsointroduce private labels and may use other brands' sales records to decide whatto produce. The difference with Amazon is the scale and sophistication of thedata it collects. Whereas brick-and-mortar stores are generally only able tocollect information on actual sales, Amazon tracks what shoppers are searchingfor but cannot find, as well as which products they repeatedly return to, whatthey keep in their shopping basket, and what their mouse hovers over on thescreen.373
In using its Marketplace this way, Amazon increases saleswhile shedding risk. It is third-party sellers who bear the initial costs anduncertainties when introducing new products; by merely spotting them, Amazongets to sell products only once their success has been tested. Theanticompetitive implications here seem clear: Amazon is exploiting the factthat some of its customers are also its rivals. The source of this power is: (1)its dominance as a platform, which effectively necessitates that independentmerchants use its site; (2) its vertical integration'--namely, the fact that itboth sells goods as a retailer and hosts sales by others as a marketplace; and(3) its ability to amass swaths of data, by virtue of being an internetcompany. Notably, it is this last factor'--its control over data'--that heightensthe anticompetitive potential of the first two.
Evidence suggests that Amazon is keenly aware of andinterested in exploiting these opportunities. For example, the company has reportedlyused insights gleaned from its cloud computing service to inform its investmentdecisions.374 By observingwhich start-ups are expanding their usage of Amazon Web Services, Amazon can makeearly assessments of the potential success of upcoming firms. Amazon has usedthis ''unique window into the technology startup world'' to invest in severalstart-ups that were also customers of its cloud business.375
How Amazon hascross-leveraged its advantages across distinct lines of business suggests thatthe law fails to appreciate when vertical integration may prove anticompetitive.This shortcoming is underscored with online platforms, which both serve asinfrastructure for other companies and collect swaths of data that they canthen use to build up other lines of business. In this way, the currentantitrust regime has yet to reckon with the fact that firms with concentratedcontrol over data can systematically tilt a market in their favor, dramaticallyreshaping the sector.376
V. How Platform Economics and Capital Markets May Facilitate Anticompetitive Conduct and Structures As Part IV mapped out, aspects of Amazon's conduct andstructure may threaten competition yet fail to trigger scrutiny under theanalytical framework presently used in antitrust. In part this reflects the ''consumerwelfare'' orientation of current antitrust laws, as critiqued in Part II. But italso reflects a failure to update antitrust for the internet age. This Partexamines how online platforms defy and complicate assumptions embedded incurrent doctrine. Specifically, it considers how the economics and businessdynamics of online platforms create incentives for companies to pursue growthat the expense of profits, and how online markets and control over data may enablenew forms of anticompetitive activity.
Economists have analyzed extensively how platform markets maypose unique challenges for antitrust analysis.377 Specifically, they stressthat analysis applicable to firms in single-sided markets may break down whenapplied to two-sided markets, given the distinct pricing structures and networkexternalities.378These studies often focus on the challenge that two-sided platforms face inattracting both sides'--the classic coordination problem of having to attractbuyers without an established line of sellers, and vice versa.379 Economists tend to concludethat'--given the particular challenges of two-sided markets380'--antitrust should beforgiving of conduct that might otherwise be characterized as anticompetitive.381
Legalanalysis ofonline platforms is comparatively undertheorized . TheJustice Department's case against Microsoft under Section 2 of the Sherman Act,initiated in the 1990s, remains the government's most significant case involvingtwo-sided markets'--even as platforms have emerged as central arteries in ourmodern economy. Starting in 2011, the FTC pursued an investigation into Google,partly in response to allegations that the company uses its dominance as asearch engine to cement its advantage and exclude rivals in other lines ofbusiness. While the FTC closed the investigation without bringing any charges,leaks later revealed that FTC staff had concluded that Google abused its poweron three separate counts.382The European Union has brought charges against Google for violating antitrustlaws.383
For the purpose of competition policy, one of the mostrelevant factors of online platform markets is that they are winner-take-all.This is due largely to network effects and control over data, both of which meanthat early advantages become self-reinforcing. The result is that technologyplatform markets will yield to dominance by a small number of firms. Walmart'srecent purchase of the one start-up that had sought to challenge Amazon inonline retail'--Jet.com'--illustrates this reality.384
Network effects arise when a user's utility from a productincreases as others use the product. Since popularity compounds and isreinforcing, markets with network effects often tip towards oligopoly or monopoly.385 Amazon's user reviews, for example,serve as a form of network effect: the more users that have purchased andreviewed items on the platform, the more useful information other users canglean from the site.386As the Fourth Circuit has noted, ''[O] nce dominance isachieved, threats come largely from outside the dominated market, because thedegree of dominance of such a market tends to become so extreme.''387 In this way, networkeffects act as a form of entry barrier.
A platform's control over data, meanwhile, can also entrenchits position.388 Access to consumer dataenables platforms to better tailor services and gauge demand. Involvement across markets, meanwhile, may permit acompany to use data gleaned from one market to benefit another business line.389 Amazon's use ofMarketplace data to advantage its retail sales, as described in Section IV.D,is an example of this dynamic. Control over data may also make it easier for dominantplatforms to enter new markets with greater ease. For example, reports nowsuggest that Amazon may dramatically expand its footprint in the ad business,''leveraging its rich supply of shopping data culled from years of operating amassive e-commerce business.''390In other words, control over data, too, acts as an entry barrier.
Given that online platforms operate in markets where networkeffects and control over data solidify early dominance, a company looking tocompete in these markets must seek to capture them. The most effective way isto chase market share and drive out one's rivals'--even if doing so comes at theexpense of short-term profits, since the best guarantee of long-term profits isimmediate growth. Due to this dynamic, striving to maximize market share at theexpense of one's rivals makes predation highly rational; indeed, it would beirrational for a business not tofrontload losses in order to capture the market. Recognizing that enduringearly losses while aggressively expanding can lock up a monopoly, investors seem willing to back this strategy.
As the Introduction and Part III describe, Amazon has chartedimmense growth while investing aggressively'--both by expanding provision ofphysical and online infrastructure and by pricing goods below cost. Amazon'sstock price has soared despite a history of razor-thin'--or evennegative'--margins. In essence, investors have given Amazon a free pass to growwithout any pressure to show profits. The firm has used this edge to expandwildly and dominate online commerce.
The idea that investors are willing to fund predatory growthin winner-take-all markets also holds in the case of Uber .Although the dynamics of the online retail market are distinct from those ofride-sharing, Uber's growth trajectory is worth analyzingfor general insight into how investors enable platform dominance. In 2015, newsreports revealed that Uber had an operating loss of$470 million on $415 million in revenue, confirming suspicions that the companyhas been bleeding money for the sake of achieving steep growth and acquiringmarket share.391 In China, the company has lost morethan $1 billion a year.392The strategy of aggressive price competition and brazen leadership coupled withsoaring growth prompted immediate comparisons to Amazon.393 Like Amazon, Uber has drawn immense interest from investors. As of July2015, its valuation hit nearly $51 billion, equaling the record set by Facebookin 2012.394 It recently secured anadditional $3.5 billion in investment, bringing its total funds to $13.5billion'--a figure ''far greater than most companies raise even during an initialpublic offering,'' which Uber has avoided.395
One might dismiss this phenomenon as irrational investorexuberance. But another way to read it is at face value: the reason investorsvalue Amazon and Uber so highly is because theybelieve these platforms will, eventually, generate huge returns. As one venturecapitalist recently remarked, if he had to ''put his entire capital in a singlecompany and hold it for the next 10 years,'' he would choose Amazon. ''I don'tsee any cleaner monopoly available to buy in the public markets right now.''396 In other words, that theseplatform companies are undertaking consistent, steep losses and stillgenerating strong investor backing suggests that the markets expect Amazon and Uber to recoup these losses.
While investors have unambiguously endorsed and funded onlineplatforms' quest to bleed money in their race to draw users, antitrust doctrinefails to acknowledge this strategy. In the past, the Supreme Court's analysishas embraced the Efficient Market Hypothesis (EMH), the idea that market pricesreflect all available information.397 The Justice Departmentalso acknowledges that market information'--for example, the financial terms ofan acquisition'--may ''be informative regarding competitive effects.''398 Applying EMH in this instanceoverwhelmingly suggests that these platforms are positioned to recoup theirlosses. Yet bringing a predatory pricing suit against an online platform wouldbe almost impossible to win in light of the recoupment requirement. Strikingly,the market is reflecting a reality that our current laws are unable to detect.399
In addition to overlooking why online platform dynamics makepredation especially rational, current doctrine also fails to appreciate how aplatform might recoup losses. For one, investor support allows Amazon tostrategize and operate on a time horizon far longer than what the Brooke Group or Matsushita Courts confronted. Raising prices in a third year afterenduring losses for two is different from engaging in a decade-long quest tobecome the dominant online retailer and provider of internet infrastructure. Thatlonger timeline, meanwhile, makes available more recoupment mechanisms. Notonly has Amazon inaugurated an entire generation into online shopping throughits platform, but it has expanded into a suite of additional businesses andamassed significant troves of data on users. This data enables it both toextend its tug over customers through highly tailored personal shoppingexperiences, and, potentially, to institute forms of price discrimination, asdescribed in Section IV.A. Both the latitude granted by investors and controlover data equip an incumbent platform to recoup losses in ways less obviouslyconnected to the initial form of below-cost pricing.
These recoupment mechanisms may also be more sophisticatedthan what a judge or even rivals would be able to spot. This last point becomeseven more apparent in the context of Uber , whose dynamicpricing has conditioned users not to expect a stable or regular price. While Uber claims that its algorithms set prices to reflectreal-time supply and demand, initial research has found that the company manipulatesthe availability of both.400Moreover, it routinely gives away discount coupons to select users, effectivelycharging users different prices, even for the same service at the same time.401
Although platforms form the backbone of the internet economy,the way that platform economics implicates existing laws is relatively undertheorized .402 Amazon's conduct suggeststhat predatory pricing and integration across related business lines areemerging as key paths to establishing dominance'--aided by the control over datathat dominant platforms enjoy. But because current predatory pricing doctrinedefines recoupment in overly narrow terms, competitors generally have not beenable to make an effective legal case. Similarly, because current doctrinelargely discounts entry barriers, the anticompetitive effects of verticalintegration are difficult to cognize under the existing framework. Roadblocksto these claims persist even as Amazon's valuation and share price point to astrong market expectation of recoupment and profits.
There are signs that enforcers are becoming more attuned tothe special factors that may render current antitrust analysis inadequate topromote competition in internet platform markets. For example, in 2014 theUnited States successfully challenged a merger between two leading providers ofonline ratings and reviews platforms. In its complaint, DOJ acknowledged thatdata-driven industries can be characterized by network effects, which increaseswitching costs and entry barriers.403 Recent comments by FTCCommissioner Terrell McSweeny '--noting that data canact as a barrier to entry and that ''competition enforcers can and should assessthe competitive implications of data'''--also suggest that top officials areassessing how to revise their tools and framework for gauging competition inplatform markets.404
While this burgeoning recognition is heartening, the uniquefeatures of platform markets require a more thorough evaluation of howantitrust is applied. Because scale is both vital to platforms' business modeland helps entrench their dominant position, antitrust should reckon with thefact that pursuing growth at the expense of returns is'--contra to currentdoctrine'--highly rational. An approach more attuned to the realities of onlineplatform markets would also recognize the variety of mechanisms that businessesmay use to recoup losses, the longer time horizon on which recoupment mightoccur, and the ways that vertical integration and concentrated control overdata may enable new forms of anticompetitive conduct. Revising antitrust toreflect the dynamics of online platforms is vital, especially as these companiescome to mediate a growing share of communications and commerce.
VI. Two Models for Addressing Platform Power If it is true that the economics of platform markets mayencourage anticompetitive market structures, there are at least two approacheswe can take. Key is deciding whether we want to govern online platform marketsthrough competition, or want to accept that they are inherently monopolistic oroligopolistic and regulate them instead. If we take the former approach, weshould reform antitrust law to prevent this dominance from emerging or to limitits scope. If we take the latter approach, we should adopt regulations to takeadvantage of these economies of scale while neutering the firm's ability toexploit its dominance.
A. Governing Online Platform Markets Through CompetitionReforming antitrust to address the anticompetitive nature ofplatform markets could involve making the law against predatory pricing morerobust and strictly policing forms of vertical integration that firms can usefor anticompetitive ends. Importantly, each of these doctrinal areas should bereformulated so that it is sensitive to preserving the competitive process andlimiting conflicts of interest that may incentivize anticompetitive conduct.
1. Predatory PricingWhile predatory pricing technically remains illegal, it isextremely difficult to win predatory pricing claims because courts now requireproof that the alleged predator would be able to raise prices and recoup itslosses.405 Revising predatory pricingdoctrine to reflect the economics of platform markets, where firms can sinkmoney for years given unlimited investor backing, would require abandoning therecoupment requirement in cases of below-cost pricing by dominant platforms.And given that platforms are uniquely positioned to fund predation, acompetition-based approach might also consider introducing a presumption ofpredation for dominant platforms found to be pricing products below cost.
Several reasons militate in favor of a presumption ofpredation in such cases. First, firms may raise prices years after the originalpredation, or raise prices on unrelated goods, in ways difficult to prove attrial. Second, firms may raise prices through personalized pricing or pricediscrimination, in ways not easily detectable. Third, predation can lead to ahost of market harms even if the firmdoes not raise consumer prices. Within a consumer welfare framework, theseharms include degradation of product quality and sapping diversity of choice.406 Such harms may arise ifAmazon uses its bargaining power to extract better terms from producers andsuppliers, who, in turn, slash investments to meet its demands. Within abroader framework'--which seeks to protect the full range of interests thatantitrust laws were enacted to safeguard'--the potential harms include lowerincome and wages for employees, lower rates of new business creation, lowerrates of local ownership, and outsized political and economic control in thehands of a few.407
Introducing a presumption of predation would involveidentifying when a price is below cost, a subject of much debate. The SupremeCourt has not addressed the issue, but most appellate courts have said thataverage variable cost is the right metric.408 This Note does notadvocate the adoption of one particular measure over others. Admittedly, ''belowcost'' is an imperfect filter, especially since what constitutes the relevantcost may vary depending on the industry or cost structure. And the specificdefinition of ''costs'' that courts and enforcers adopt may ultimately be lesssignificant if the test for predatory pricing also permits a businessjustification defense, which would help screen against false positives.409 A business justification defensecould cover compensating a buyer for taking the risk of buying a new product, expandingdemand to a level which will allow the entrant to achieve scale economies,keeping prices at competitive levels while expecting costs to decline, andmatching competition.410
Whether a platform is dominant enough to trigger thepresumption could be assessed through its market share: those holding greaterthan, say, 40% of the market in any given line of service (e.g., cloudcomputing, ride sharing) might be designated ''dominant.'' Rather than measuringthis market share nationally, enforcers would look to levels of local control;a ride-sharing platform that held only 35% of the national market but 75% ofthe Nashville market would still be considered dominant for the purpose ofprice-cutting in Nashville.
2. Vertical IntegrationThe current approach to antitrust does not sufficientlyaccount for how vertical integration may give rise to anticompetitive conflictsof interest, nor does it adequately address the way a dominant firm may use itsdominance in one sector to advance another line of business. This concern isheightened in the context of vertically integrated platforms, which can useinsights generated through data acquired in one sector to undermine rivals inanother. Potential ways to address this deficiency include scrutinizing mergersthat would enable a firm to acquire valuable data and cross-leverage it, or introducinga prophylactic ban on mergers that would give rise to conflicts of interest.
One way to address the concern about a firm's capacity tocross-leverage data is to expressly include it in merger review.411 Under the currentapproach, only mergers over a particular monetary threshold require agencyreview412'--yet the monetary value ofa deal may not be a good proxy for the scope and scale of data at stake. Thus,it could make sense for the agencies to automatically review any deal thatinvolves exchange of certain forms (or a certain quantity) of data. Data thatgave a player deep and direct insight into a competitor's business operations,for example, might trigger review. Under this regime, Facebook's purchases ofWhatsApp and Instagram,413for instance, would have received greater scrutiny from the antitrust agencies,in recognition of how acquiring data can deeply implicate competition. Internationaltransactions granting foreign corporations access to data on U.S. users wouldalso require close review. Uber's decision to sellits China operations to Didi Chuxing ,China's dominant ride-sharing service'--a deal through which Uber will also gain partial ownership over its main U.S. rival, Lyft 414'--is one deal that would promptscrutiny under this regime.415
A stricter approach would place prophylactic limits onvertical integration by platforms that have reached a certain level ofdominance. This would recognize that a platform's involvement across multiple relatedlines of business can give rise to conflicts of interest by creatingcircumstances in which a platform has an incentive to privilege its ownbusiness and disadvantage other companies.416 Seeking to prevent the industrystructures that create theseconflicts of interest may prove more effective than policing these conflicts.Adopting this prophylactic approach would mean banning a dominant firm fromentering any market that it already serves as a platform'--in other words, fromcompeting directly with the businesses that depend on it.417 In the case of Amazon, forexample, this prophylactic approach would prohibit the company from running both a dominant retail platform and adominant platform for third-party sellers. These two businesses would have tobe separated into different entities, in part to prevent Amazon from usinginsights from its role as a third-party host to benefit its retail business, asit reportedly does now.418
This form of prophylactic ban has a long history in bankinglaw.419 A core principle of banking law isthe separation of banking and commerce.420 ''U.S. commercial banks generally arenot permitted to conduct any activities that do not fall within . . . thestatutory concept of 'the business of banking.'''421 More specifically, theBank Holding Company Act of 1956 forbids firms that own or control a U.S. bankfrom engaging in business activities other than banking or managing banks.422 The main exception is thata bank that qualifies as a ''financial holding company'' ''may conduct broaderactivities that are 'financial in nature,' including securities dealing andinsurance underwriting.''423
The policy goals of this regime are worth reviewing becausethey have analogues in antitrust and competition policy. The mainjustifications for preserving the separation between banking and commerce have''included the needs to preserve the safety and soundness of insured depositoryinstitutions, to ensure a fair and efficient flow of credit to productive[businesses], and to prevent excessive concentration of financial and economicpower in the financial sector.''424All three concerns are linked to the fact that banks serve as critical intermediariesin our economy. The ''safety and soundness'' concern traces to the idea that ourbanking system is too vital to be subject to the risks of other businessactivities.425 The concern about fairnessand efficiency centers on the idea that allowing banks to be affiliated withcommercial companies may encourage banks to issue credit on the basis of howthose lending decisions will affect their commercial affiliates, therebydistorting competition. The practices this may trigger'--''price discrimination, unfairrestriction of access to credit, and other anticompetitive bankingpractices'''--would both ''hurt the individual commercial companies not affiliatedwith banks'' and undermine national ''productivity and growth.''426 Lastly, seeking ''theprevention of excessive concentration of economic . . . power'' among''large financial-industrial conglomerates'' recognizes that this market powertends to concentrate political power427 while also creatingsystemic dangers of ''too-big-to-fail'' conglomerates.428
Like bank holding companies, Amazon'--along with a few otherdominant platforms'--now play a crucial role in intermediating swaths of economicactivity. Amazon itself effectively controls the infrastructure of the interneteconomy. This level of concentrated control creates hazards analogous to thoserecognized in banking law. In light of this control, the conflicts of interestcreated through Amazon's expansion into distinct lines of business areespecially troubling. As in banking, enabling an essential intermediatingentity to compete with the companies that depend on it creates bad incentives.Allowing a vertically integrated dominant platform to pick and choose to whomit makes its services available, and on what terms, has the potential todistort fair competition and the economy as a whole.
The other two concerns'--safety and soundness, and excessiveeconomic and political power'--are also worth considering. It is true that Amazon(and other dominant platforms like Uber and Google)have extended directly into financial services.429 But its level ofinvolvement in these businesses, at least at the current scale, is unlikely toconcentrate financial risk in ways that warrant concern. Rather, the systemicrisks created by concentration among platforms are of a different kind. One involvesconcentration of data. That a huge share of consumer retail data may beconcentrated within a single company makes hacks of or technical failures bythat company all the more disruptive. The 2013 hack into Target's system'--as aresult of which up to 110 million consumers had personal information stolen430'--could have been orders ofmagnitude more disruptive had the hacked entity been Amazon. A few instanceswhere Amazon Web Services crashed led to disruptions for scores of otherbusinesses, including Netflix.431
Lastly, there is soundreason to ask whether permitting Amazon to leverage its platform to integrateacross business lines hands it undue economic and political power.432 While this subject invitesmuch deeper consideration than what this Note will provide, studiesinterviewing the host of businesses that now depend on Amazon'--retailers,manufacturers, publishers, to name a few'--reveal that the power it wields isacute.433 History suggests thatallowing a single actor to set the terms of the marketplace, largely unchecked,can pose serious hazards. Limiting Amazon's reach through prophylactic bans on vertical integration'--and thereby forcing it tosplit up its retail and Marketplace operation, for example'--would help mitigatethis concern.
B. Governing Dominant Platforms as Monopolies Through Regulation As described above, one option is to govern dominantplatforms through promoting competition, thereby limiting the power that anyone actor accrues. The other is to accept dominant online platforms as naturalmonopolies or oligopolies, seeking to regulate their power instead. In this Section,I sketch out two models for this second approach, traditionally undertaken inthe form of public utility regulations and common carrier duties. Industriesthat historically have been regulated as utilities include commodities (water,electric power, gas), transportation (railroads, ferries), and communications(telegraphy, telephones).434 Critically, a public utility regimeaims at eliminating competition: it accepts the benefits of monopoly andchooses instead to limit how a monopoly may use its power.435
Although largely out of fashion today, public utilityregulations were widely adopted in the early 1900s, as a way of regulating thetechnologies of the industrial age. Animating public utility regulations wasthe idea that essential network industries'--such as railroads and electricpower'--should be made available to the public in the form of universal serviceprovided at just and reasonable rates. The Progressive movement of the earlytwentieth century embraced public utility as a way to use government to steerprivate enterprise toward public ends. It was precisely because essentialnetwork industries often required scale that unregulated private control overthese sectors often led to abuse of monopoly power. Famously, the Interstate CommerceCommission'--which instituted a form of common carriage for railroads'--was createdpartly in response to the abusive conduct of railroads, whose control over anessential facility enabled them to pick winners and losers among farmers.436
In the United States, the first case applying public utilityregulations to a private business was Munnv. Illinois, in which the Supreme Court upheld state legislation establishingmaximum rates that companies could charge for the storage and transportation ofgrain.437 When one ''devotes hisproperty to a use in which the public has an interest, he, in effect, grants tothe public an interest in that use, and must submit to be controlled by thepublic for the common good,'' Chief Justice Waite wrote.438 ''[W]hen private propertyis devoted to a public use, it is subject to publicregulation.''439 While the decision usheredinto doctrine the principle of common carriers, the question of when a businesswas truly ''affected with the public interest'' was highly contested.440
Most importantly,''public utility was seen as a common, collective enterprise aimed at managing aseries of vital network industries that were too important to be left exclusivelyto market forces.''441 At the level of policy, publicutility regulations also enabled ''utilities to secure capital at lower cost andto channel it into very large technological systems,'' and thus was a way to''socialize the costs of building and operating'' a centralized system while''protecting consumers from the potential abuses associated with naturalmonopoly.''442
Given that Amazon increasingly serves as essentialinfrastructure across the internet economy, applying elements of public utilityregulations to its business is worth considering.443 The most common publicutility policies are (1) requiring nondiscrimination in price and service, (2)setting limits on rate-setting, and (3) imposing capitalization and investment requirements. Of these three traditionalpolicies, nondiscrimination would make the most sense, while rate-setting andinvestment requirements would be trickier to implement and, perhaps, would lessobviously address an outstanding deficiency.
A nondiscrimination policy that prohibited Amazon fromprivileging its own goods and from discriminating among producers and consumerswould be significant. Given that many of the most notable anticompetitiveconcerns around Amazon's business structure arise from its vertical integrationand the resulting conflicts of interest, applying a nondiscrimination schemewould curb the anticompetitive risk. This approach would permit the company tomaintain its involvement across multiple lines of business and permit it toenjoy the benefits of scale while mitigating the concern that Amazon couldunfairly advantage its own business or unfairly discriminate among platformusers to gain leverage or market power.444 Coupling nondiscriminationwith common carrier obligations'--requiring platforms to ensure open and fairaccess to other businesses'--would further limit Amazon's power to use itsdominance in anticompetitive ways.
Rate setting would be trickier. This would involve setting aceiling on the prices that Amazon can charge to both producers and consumers.Traditionally, governments used rate setting by identifying a ''fair return''that a company deserved for its investment, and then calculated consumer or producerprices accordingly.445But calculating ''fair return'' may prove more challenging in the online platformcontext than it did with traditional public utilities. One potential source ofdifficulty is that Amazon has invested so widely across such a range ofprojects that it is not clear which the government should peg to ''rate ofreturn.'' Another complicating factor is that part of Amazon's investment inthese platforms, so far, hasinvolvedlosing money through below-cost pricing.
Lastly, it is not clear that imposing capitalization andinvestment requirements would be necessary. A traditional reason for thesepolicies has been that that the economics of creating and running a utility canbe unfavorable, occasionally leading private companies to scrimp on investingand upkeep. In Amazon's case, the company is choosing to expand at a speed andscale that is pushing it into the red'--but it is not clear that the activity isintrinsically loss generating. That said, a public utility regime could also bejustified on the basis that succeeding as an online platform requires incurringheavy losses'--a model that Amazon and Uber have pursued.This approach would treat market-share chasing losses as a capital investment,446 suggesting the publicutility domain may be appropriate.
Practically, usheringin a public utility regime may prove challenging. Public utility regulationssuffered an intellectual and policy attack around mid-century. For one, criticschallenged the theory of natural monopoly as an ongoing rationale forregulation, arguing that rapid economic and technological change would rendermonopolies temporary problems. Second, critics portrayed public utility as aform of corruption, a system in which private industry executives colluded withpublic officials to enable rent seeking. Ultimately these lines of criticism substantiallythinned the very concept of public utility.447 The trend was part of abroader effort to idealize competitive markets and assume that noninterventionwas almost always superior to interference. Although the concept of publicutility regulation remains somewhat maligned today, there are signs that arobust movement to apply utility-like regulations to services that widelyregister as public'--such as the internet'--can catch wind. The core of the netneutrality debates, for example, involved foundational discussions about how toregulate the communication infrastructure of the twenty-first century.448 The net neutrality regimeultimately adopted falls squarely in the common carrier tradition.
Given Amazon's growing share of e-commerce as a whole, andthe vast number of independent sellers and producers that now depend on it,applying some form of public utility regulation could make sense. Nondiscriminationprinciples seem especially apt, given that conflicts of interest are a primaryhazard of Amazon's vertical power. One approach would apply public utility regulationsto all of Amazon's businesses thatserve other businesses. Another would require breaking up parts of Amazon andapplying nondiscrimination principles separately; so, for example, to AmazonMarketplace and Amazon Web Services as distinct entities. That said, given thepolitical challenges of ushering in such a regime, strengthening andreinforcing traditional antitrust principles may'--in the short run'--prove mostfeasible.
A lighter version of the regulatory approach would be toapply the essential facilities doctrine. This doctrine imposes sharingrequirements on a natural monopoly asset that serves as a necessary input in anothermarket. As Sandeep Vaheesan explains:
This doctrine rests on two basic premises: first, anatural monopolist in one market should not be permitted to deny access to thecritical facility to foreclose rivals in adjacent markets; second, the moreradical remedy of dividing the facility among multiple owners, while mitigatingthe threat of monopoly leveraging, could sacrifice important efficiencies.449
Unlike the prophylactic ban on integration, the essentialfacilities route accepts consolidated ownership. But recognizing that avertically integrated monopolist may deny access to a rival in an adjacent market,the doctrine requires the monopolist controlling the essential facility togrant competitors easy access. This duty has traditionally been enforcedthrough regulatory oversight.
While the essential facilities doctrine has not beenprecisely defined, the four-factor test enumerated by the Seventh Circuit in MCI Communications Corp. v. American Telephone& Telegraph Co. forms the basis of an essential facility claim today.450 Under that test, afacility is essential and must be shared if four conditions are met: (1) amonopolist controls the essential facility; (2) a competitor is unablepractically or reasonably to duplicate the essential facility; (3) themonopolist is denying use of the facility to a competitor; and (4) providingthe facility is feasible.451The MCI court also held that, inorder to be deemed essential, the facility must be a ''necessary input in a distinct, vertically related market.''452
While the Supreme Court has never recognized nor articulateda standard for ''essential facility,'' three Supreme Court rulings ''are seen ashaving established the functional foundation'' for the doctrine.453 In 2004, however, theCourt disavowed the essential facilities doctrine in dicta,454 leading severalcommentators to wonder whether it is a dead letter.Thisdecision by the Court to effectively reject its prior case law on essentialfacilities followed challenges on other fronts: notably from Congress,enforcement agencies, and academic scholars, all of whom have critiqued theidea of requiring dominant firms to share their property.455
Treating aspects of Amazon's business as ''essentialfacilities'' seems appropriate, given that factors two, three, and four of the MCI test are likely to hold for at leastone line of business. The first factor'--whether Amazon is a ''monopolist'''--issubject to the risk that doctrine takes an excessively narrow view of whatconstitutes a ''monopolist,'' a definition that may be especially out of touchwith dominance in the internet age.
Essential facilities doctrine has traditionally been appliedto infrastructure such as bridges, highways, ports, electrical power grids, andtelephone networks.456Given that Amazon controls key infrastructure for e-commerce, imposing a dutyto allow access to its infrastructure on a nondiscriminatory basis make sense. Andin light of the company's current trajectory, we can imagine at least threeaspects of its business could eventually raise ''essential facilities''-likeconcerns: (1) its fulfillment services in physical delivery; (2) itsMarketplace platform; and (3) Amazon Web Services. While the essentialfacilities doctrine has not yet been applied to the internet economy, someproposals have started exploring what this might look like.457 Pursuing this regime foronline platforms could maintain the benefits of scale while preventing dominantplayers from abusing their power.
conclusion Internet platforms mediate a large and growing share of ourcommerce and communications. Yet evidence shows that competition in platformmarkets is flagging, with sectors coalescing around one or two giants.458 The titan in e-commerce isAmazon'--a company that has built itsdominance through aggressively pursuing growth at the expense of profits andthat has integrated across many related lines of business. As a result, the company has positioned itself at thecenter of Internet commerce and serves as essential infrastructure for a host ofother businesses that now depend on it. This Note argues that Amazon's businessstrategies and current market dominance pose anticompetitive concerns that the consumerwelfare framework in antitrust fails to recognize.
In particular, current law underappreciates the risk ofpredatory pricing and how integration across distinct business lines may proveanticompetitive. These concerns are heightened in the context of onlineplatforms for two reasons. First, the economics of platform markets incentivizethe pursuit of growth over profits, a strategy that investors have rewarded.Under these conditions predatory pricing becomes highly rational'--even asexisting doctrine treats it as irrational. Second, because online platformsserve as critical intermediaries, integrating across business lines positionsthese platforms to control the essential infrastructure on which their rivalsdepend. This dual role also enables a platform to exploit information collectedon companies using its services to undermine them as competitors.
In order to capture these anticompetitive concerns, we shouldreplace the consumer welfare framework with an approach oriented aroundpreserving a competitive process and market structure. Applying this ideainvolves, for example, assessing whether a company's structure createsanticompetitive conflicts of interest; whether it can cross-leverage marketadvantages across distinct lines of business; and whether the economics ofonline platform markets incentivizes predatory conduct and capital marketspermit it. More specifically, restoring traditional antitrust principles tocreate a presumption of predation and to ban vertical integration by dominantplatforms could help maintain competition in these markets. If, instead, weaccept dominant online platforms as natural monopolies or oligopolies, thenapplying elements of a public utility regime or essential facilitiesobligations would maintain the benefits of scale while limiting the ability ofdominant platforms to abuse the power that comes with it.
My argument is part of a larger recent debate about whetherthe current paradigm in antitrust has failed. Though relegated to technocratsfor decades, antitrust and competition policy have once again become topics ofpublic concern.459 Last year, the Wall Street Journal reported that ''[a] growing number of industriesin the U.S. are dominated by a shrinking number of companies.''460 In March 2016, the Economist declared, ''Profits are toohigh. America needs a dose of competition.''461 Policy elites, too, haveweighed in, issuing policy papers and hosting conferences documenting thedecline of competition across the U.S. economy and assessing the resulting harms,including a drop in start-up growth and widening economic inequality.462 Antitrust even made itinto the 2016 presidential campaign: Democrats included competition policy intheir party platform for the first time since 1988, and in October of the sameyear, presidential candidate Hillary Clinton released a detailed antitrust platform,highlighting not only a need for more vigorous enforcement but for anenforcement philosophy that takes into account market structure.463
Animating these critiques is not a concern about harms toconsumer welfare,464but the broader set of ills and hazards that a lack of competition breeds. AsAmazon continues both to deepen its existing control over key infrastructure andto reach into new lines of business, its dominance demands the same scrutiny. Torevise antitrust law and competition policy for platform markets, we should beguided by two questions. First, does our legal framework capture the realitiesof how dominant firms acquire and exercise power in the internet economy? Andsecond, what forms and degrees of power should the law identify as a threat to competition?Without considering these questions, we risk permitting the growth of powers thatwe oppose but fail to recognize.