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Amazon's Antitrust Paradox Amazon's Antitrust Paradox
Lina M. Khan
Columbia Law School
, lkhan@law.columbia.edu
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Amazon's Antitrust Paradox
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LINA M. KHAN
Amazon’s Antitrust Paradox
abstract. Amazon is the titan of twenty-first century commerce. In addition to being a re-
tailer, it is now a marketing platform, a delivery and logistics network, a payment service, a credit
lender, an auction house, a major book publisher, a producer of television and films, a fashion
designer, a hardware manufacturer, and a leading host of cloud server space. Although Amazon
has clocked staggering growth, it generates meager profits, choosing to price below-cost and ex-
pand widely instead. Through this strategy, the company has positioned itself at the center of e-
commerce and now serves as essential infrastructure for a host of other businesses that depend
upon it. Elements of the firm’s structure and conduct pose anticompetitive concerns—yet it has
escaped antitrust scrutiny.
This Note argues that the current framework in antitrust—specifically its pegging competi-
tion to “consumer welfare,” defined as short-term price eects—is unequipped to capture the ar-
chitecture of market power in the modern economy. We cannot cognize the potential harms to
competition posed by Amazon’s dominance if we measure competition primarily through price
and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how
integration across distinct business lines may prove anticompetitive. These concerns are height-
ened in the context of online platforms for two reasons. First, the economics of platform markets
create incentives for a company to pursue growth over profits, a strategy that investors have re-
warded. Under these conditions, predatory pricing becomes highly rational—even as existing
doctrine treats it as irrational and therefore implausible. Second, because online platforms serve
as critical intermediaries, integrating across business lines positions these platforms to control
the essential infrastructure on which their rivals depend. This dual role also enables a platform to
exploit information collected on companies using its services to undermine them as competitors.
This Note maps out facets of Amazon’s dominance. Doing so enables us to make sense of its
business strategy, illuminates anticompetitive aspects of Amazon’s structure and conduct, and
underscores deficiencies in current doctrine. The Note closes by considering two potential re-
gimes for addressing Amazon’s power: restoring traditional antitrust and competition policy
principles or applying common carrier obligations and duties.
author
. I am deeply grateful to David Singh Grewal for encouraging me to pursue this pro-
ject and to Barry C. Lynn for introducing me to these issues in the first place. For thoughtful
feedback at various stages of this project, I am also grateful to Christopher R. Leslie, Daniel
Markovits, Stacy Mitchell, Frank Pasquale, George Priest, Maurice Stucke, and Sandeep Va-
heesan. Lastly, many thanks to Juliana Brint, Urja Mittal, and the Yale Law Journal sta for in-
sightful comments and careful editing. All errors are my own.
amazon's antitrust paradox
note contents
introduction
i. the chicago school revolution: the shift away from
competitive process and market structure
A. Predatory Pricing
B. Vertical Integration
ii. why competitive process and structure matter
A. Price and Output Eects Do Not Cover the Full Range of Threats to
Consumer Welfare
B. Antitrust Laws Promote Competition To Serve a Variety of Interests
iii. amazon’s business strategy
A. Willingness To Forego Profits To Establish Dominance
B. Expansion into Multiple Business Lines
iv. establishing structural dominance 755
A. Below-Cost Pricing of Bestseller E-Books and the Limits of Modern
Recoupment Analysis
B. Acquisition of Quidsi and Flawed Assumptions About Entry and Exit
Barriers
C. Amazon Delivery and Leveraging Dominance Across Sectors
D. Amazon Marketplace and Exploiting Data
v. how platform economics and capital markets may facilitate
anticompetitive conduct and structures
vi. two models for addressing platform power
A. Governing Online Platform Markets Through Competition
. Predatory Pricing
. Vertical Integration
B. Governing Dominant Platforms as Monopolies Through Regulation
conclusion
the yale law journal :
“Even as Amazon became one of the largest retailers in the country, it never
seemed interested in charging enough to make a profit. Customers celebrated
and the competition languished.”
—T
HE NEW YORK TIMES
1
“[O]ne of Mr. Rockefeller’s most impressive characteristics is patience.”
—I
DA TARBELL, A HISTORY OF THE STANDARD OIL COMPANY
2
introduction
In Amazon’s early years, a running joke among Wall Street analysts was
that CEO Je Bezos was building a house of cards. Entering its sixth year in
, the company had yet to crack a profit and was mounting millions of dol-
lars in continuous losses, each quarter’s larger than the last. Nevertheless, a
segment of shareholders believed that by dumping money into advertising and
steep discounts, Amazon was making a sound investment that would yield re-
turns once e-commerce took o. Each quarter the company would report loss-
es, 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 is anything but the
titan of twenty-first century commerce. In , it earned billion in reve-
nue,
4
and, as of , it sold more than its next twelve online competitors com-
bined.
5
By some estimates, Amazon now captures of online shopping,
1. David Streitfeld, As Competition Wanes, Amazon Cuts Back Discounts, N.Y. TIMES (July
, ), http://www.nytimes.com////business/as-competition-wanes-amazon
-cuts-back-its-discounts.html [http://perma.cc/JL-CPZ].
2. Ida Tarbell, John D. Rockefeller: A Character Study, MCCLURE’S MAG. , ().
3. Amazon: Ponzi Scheme or Wal-Mart of the Web?, SLATE: MONEYBOX (Feb. , , :
PM), http://www.slate.com/articles/business/moneybox///amazon_ponzi_scheme
_or_walmart_of_the_web.html [http://perma.cc/XQ-YRK].
4. Allison Enright, Amazon Sales Climb 22% in Q4 and 20% in 2015, INTERNET RETAILER (Jan.
, , : PM), http://www.internetretailer.com////amazon-sales-climb-
-q-and-- [http://perma.cc/NS-XTSB].
5. Shelly Banjo & Paul Ziobro, Aer Decades of Toil, Web Services Remain Small for
Many Retailers, W
ALL ST. J. (Aug. , , : PM), http://www.wsj.com/articles
/SB [http://perma.cc/CQJ-JYRN].
amazon's antitrust paradox
with its share growing faster than the sector as a whole.
6
In addition to being a
retailer, it is a marketing platform, a delivery and logistics network, a payment
service, a credit lender, an auction house, a major book publisher, a producer of
television and films, a fashion designer, a hardware manufacturer, and a lead-
ing provider of cloud server space and computing power. Although Amazon
has clocked staggering growth—reporting double-digit increases in net sales
yearly—it reports meager profits, choosing to invest aggressively instead. The
company listed consistent losses for the first seven years it was in business,
with debts of billion.
7
While it exits the red more regularly now,
8
negative
returns are still common. The company reported losses in two of the last five
years, for example, and its highest yearly net income was still less than of its
net sales.
9
Despite the company’s history of thin returns, investors have zealously
backed it: Amazon’s shares trade at over times diluted earnings, making it
the most expensive stock in the Standard & Poor’s .
10
As one reporter mar-
veled, “The company barely ekes out a profit, spends a fortune on expansion
and free shipping and is famously opaque about its business operations. Yet in-
6. Olivia LaVecchia & Stacy Mitchell, Amazon’s Stranglehold: How the Company’s Tightening Grip
Is Stifling Competition, Eroding Jobs, and Threatening Communities, I
NST. FOR LOC. SELF-
R
ELIANCE (Nov. ), http://ilsr.org/wp-content/uploads///ILSR_Amazon
Report_final.pdf [http://perma.cc/AND-NDJ].
7. Amazon Posts a Profit, CNN MONEY (Jan. , , : PM), http://money.cnn.com/
///technology/amazon [http://perma.cc/SMF-UCK].
8. Partly due to the success of Amazon Web Services, Amazon has recently begun reporting
consistent profits. See Nick Wingfield, Amazon’s Cloud Business Lis Its Profit to a Record,
N.Y.
TIMES (Apr. , ), http://www.nytimes.com////technology/amazon
-q-earnings.html [http://perma.cc/ZHL-JEZU]. Though this trend departs from the his-
tory on which I focus, my analysis stands given that I am interested in () the losses Amazon
formerly undertook to establish dominant positions in certain sectors, () the investor back-
ing and enthusiasm that Amazon consistently maintained despite these losses, and ()
whether these facts challenge the assumption—embedded in current doctrine—that losing
money is only desirable (and hence rational) if followed by recoupment. See id. (“Amazon
oen flip-flops between showing profits and losses, depending on how aggressively it de-
cides to plow money into big new business bets. Investors have granted the company much
wider leeway to do so than other technology companies of its size oen receive, because of
its history of delivering outsize growth.”); see also infra Part III.
9. Amazon.com, Inc., Annual Report (Form -K) (Jan. , ), http://www.sec
.gov/Archives/edgar/data///amzn-xk.htm [http://
perma.cc/GBA-YWZT].
10. Matt Krantz, Amazon Breaks Barrier: Now Most Costly Stock, USA TODAY (Nov. , ,
: PM), http://www.usatoday.com/story/money/markets////amazon-pe-ratio
-valuation-price/ [http://perma.cc/PBA-REB].
the yale law journal :
vestors . . . pour into the stock.”
11
Another commented that Amazon is in “a
class of its own when it comes to valuation.”
12
Reporters and financial analysts continue to speculate about when and how
Amazon’s deep investments and steep losses will pay o.
13
Customers, mean-
while, universally seem to love the company. Close to half of all online buyers
go directly to Amazon first to search for products,
14
and in , the Reputa-
tion Institute named the firm the “most reputable company in America” for the
third year running.
15
In recent years, journalists have exposed the aggressive
business tactics Amazon employs. For instance Amazon named one campaign
“The Gazelle Project,” a strategy whereby Amazon would approach small pub-
lishers “the way a cheetah would a sickly gazelle.”
16
This, as well as other re-
11. Meagan Clark & Angelo Young, Amazon: Nearly 20 Years in Business and It Still Doesn’t Make
Money, but Investors Don’t Seem To Care, I
NT’L BUS. TIMES (Dec. , , : AM), http://
www.ibtimes.com/amazon-nearly--years-business-it-still-doesnt-make-money-investors
-dont-seem-care- [http://perma.cc/NMH-HNC].
12. Krantz, supra note (“Amazon’s [price/earnings ratio] isn’t just high relative to the mar-
ket—but the stock is richly valued even if the company achieves the high expectations inves-
tors have. Amazon’s [price/earnings ratio] is now times higher than the astounding
annual growth analysts expect long term from the company. That’s an o-the-charts valua-
tion using traditional rules of thumb. Investors start to think a stock is pricey when its
[price/earnings ratio] is just times its expected growth rate.”).
13. See, e.g., Farhad Manjoo, How Amazon’s Long Game Yielded a Retail Juggernaut, N.Y.
T
IMES (Nov. , ), http://www.nytimes.com////technology/how-amazons
-long-game-yielded-a-retail-juggernaut.html [http://perma.cc/WG-KQ] (“For years,
observers have wondered if Amazon’s shopping business—you know, its main business—
could ever really work. Investors gave Mr. Bezos enormous leeway to spend billions building
out a distribution-center infrastructure, but it remained a semi-open question if the scale
and pace of investments would ever pay o. Could this company ever make a whole lot of
money selling so much for so little?”).
14. Sam Moore, Amazon Commands Nearly Half of Consumers’ First Product Search, BLOOM-
R
EACH (Oct. , ), http://bloomreach.com///amazon-commands-nearly-half-of
-consumers-first-product-search [http://perma.cc/LVD-FW].
15. Karsten Strauss, America’s Most Reputable Companies, 2016: Amazon Tops the List, FORBES
(Mar. , , : PM), http://www.forbes.com/sites/karstenstrauss///
/americas-most-reputable-companies--amazon-tops-the-list [http://perma.cc/MN
-KNB]; see also Melissa Homann, Amazon Has the Best Consumer Perception of Any Brand,
A
DWEEK (July , ), http://www.adweek.com/news/advertising-branding/amazon
-has-best-consumer-perception-any-brand- [http://perma.cc/FGW-YDN] (ob-
serving that Amazon continues to be the best-perceived brand despite negative news re-
ports).
16. David Streitfeld, A New Book Portrays Amazon as Bully, N.Y. TIMES: BITS BLOG (Oct. ,
, : AM), http:// bits .blogs .nytimes.com////a-new-book-portrays-amazon
-as-bully [http://perma.cc/E-EEN].
amazon's antitrust paradox
porting,
17
drew widespread attention,
18
perhaps because it oered a glimpse at
the potential social costs of Amazon’s dominance. The firm’s highly public dis-
pute with Hachette in —in which Amazon delisted the publisher’s books
from its website during business negotiations—similarly generated extensive
press scrutiny and dialogue.
19
More generally, there is growing public aware-
ness that Amazon has established itself as an essential part of the internet econ-
omy,
20
and a gnawing sense that its dominance—its sheer scale and breadth—
may pose hazards.
21
But when pressed on why, critics oen fumble to explain
17. An article on Amazon’s treatment of workers in its warehouses, see Spencer Soper, Inside
Amazon’s Warehouse, M
ORNING CALL (Aug. , , : PM), http://www.mcall.com/news
/local/amazon/mc-allentown-amazon-complaints--story.html [http://perma.cc
/BXK-RPCX], was a finalist for the prestigious Loeb Award, see Morning Call’s Watchdog
Journalism Recognized, M
ORNING CALL (June , ), http://articles.mcall.com/-
-/news/mc-morning-call-keystones-__amazon-warehouse-gas-explosion-key
stone-press-awards [http://perma.cc/FE-EBZS]. A New York Times piece on Amazon’s
white-collar workplace generated more than five million page views, ranking among the
Times’s most-read pieces of . See Nick Wingfield & Ravi Somaiya, Amazon Spars with the
Times over Investigative Article, N.Y.
TIMES (Oct. , ), http://www.nytimes.com//
//business/amazon-spars-with-the-times-over-investigative-article.html [http://perma.cc
/VDG-WZZQ].
18. David Streitfeld, supra note .
19. See Paul Krugman, Amazon’s Monopsony Is Not O.K., N.Y. TIMES (Oct. , ), http://www
.nytimes.com////opinion/paul-krugman-amazons-monopsony-is-not-ok.html
[http://perma.cc/KJE-ZPX] (“Amazon.com, the giant online retailer, has too much pow-
er, and it uses that power in ways that hurt America.”).
20. See Farhad Manjoo, Tech’s ‘Frightful 5’ Will Dominate Digital Life for Foreseeable Future, N.Y.
TIMES (Jan. , ), http://www.nytimes.com////technology/techs-frightful
--will-dominate-digital-life-for-foreseeable-future.html [http://perma.cc/YHN-KGJ]
(“By just about every measure worth collecting, these five American consumer technology
companies [Amazon, Apple, Facebook, Google, and Microso] are getting larger, more en-
trenched in their own sectors, more powerful in new sectors and better insulated against
surprising competition from upstarts. Though competition between the five remains
fierce—and each year, a few of them seem up and a few down—it’s becoming harder to pic-
ture how any one of them, let alone two or three, may cede their growing clout in every as-
pect of American business and society.”); Brooke Masters, Hooked on a Feeling that Amazon Is
Too Addictive by Far, F
IN. TIMES (Mar. , ), http://www..com/intl/cms/s/
/dde-e-e-bc-dfaeee.html [http://perma.cc/XD-NTS].
21. At a recent hearing held by the Senate Judiciary Committee’s Subcommittee on Antitrust,
Competition Policy, and Consumer Rights, both Republican and Democratic senators inter-
rogated Assistant Attorney General for Antitrust Bill Baer and Federal Trade Commission
(FTC) Chair Edith Ramirez about their treatment of online platforms, and urged the De-
partment of Justice (DOJ) and FTC to study closely the anticompetitive hazards these dom-
inant firms may pose. See Oversight of the Enforcement of the Antitrust Laws: Hearing Before the
Subcomm. on Antitrust, Competition Policy & Consumer Rights of the S. Comm. on the Judiciary,
th Cong. (); see also Oversight of the Antitrust Enforcement Agencies: Hearing Before the
the yale law journal :
how a company that has so clearly delivered enormous benefits to consumers—
not to mention revolutionized e-commerce in general—could, at the end of the
day, threaten our markets. Trying to make sense of the contradiction, one jour-
nalist noted that the critics’ argument seems to be that “even though Amazon’s
activities tend to reduce book prices, which is considered good for consumers,
they ultimately hurt consumers.”
22
In some ways, the story of Amazon’s sustained and growing dominance is
also the story of changes in our antitrust laws. Due to a change in legal think-
ing and practice in the s and s, antitrust law now assesses competition
largely with an eye to the short-term interests of consumers, not producers or
the health of the market as a whole; antitrust doctrine views low consumer
prices, alone, to be evidence of sound competition. By this measure, Amazon
has excelled; it has evaded government scrutiny in part through fervently de-
voting its business strategy and rhetoric to reducing prices for consumers. Am-
azon’s closest encounter with antitrust authorities was when the Justice De-
partment sued other companies for teaming up against Amazon.
23
It is as if
Bezos charted the company’s growth by first drawing a map of antitrust laws,
and then devising routes to smoothly bypass them. With its missionary zeal for
consumers, Amazon has marched toward monopoly by singing the tune of
contemporary antitrust.
This Note maps out facets of Amazon’s power. In particular, it traces the
sources of Amazon’s growth and analyzes the potential eects of its dominance.
Doing so enables us to make sense of the company’s business strategy and il-
luminates anticompetitive aspects of its structure and conduct. This analysis
reveals that the current framework in antitrust—specifically its equating com-
petition with “consumer welfare,” typically measured through short-term
eects on price and output
24
—fails to capture the architecture of market power
in the twenty-first century marketplace. In other words, the potential harms to
competition posed by Amazon’s dominance are not cognizable if we assess
Subcomm. on Regulatory Reform, Commercial & Antitrust Law of the H. Comm. on the Judiciary,
th Cong. ().
22. Vauhini Vara, Is Amazon Creating a Cultural Monopoly?, NEW YORKER (Aug. ,
), http://www.newyorker.com/business/currency/is-amazon-creating-a-cultural-mono
poly [http://perma.cc/VZ-UX].
23. See United States v. Apple Inc., F. Supp. d , (S.D.N.Y. ).
24. See, e.g., Nat’l Collegiate Athletic Ass’n v. Bd. of Regents of Univ. of Okla., U.S. , -
() (“‘Congress designed the Sherman Act as a ‘consumer welfare prescription.’ . . .
Restrictions on price and output are the paradigmatic examples of restraints of trade that the
Sherman Act was intended to prohibit.” (quoting Reiter v. Sonotone Corp., U.S. ,
())); see also infra Part I.
amazon's antitrust paradox
competition primarily through price and output. Focusing on these metrics in-
stead blinds us to the potential hazards.
My argument is that gauging real competition in the twenty-first century
marketplace—especially in the case of online platforms—requires analyzing the
underlying structure and dynamics of markets. Rather than pegging competi-
tion to a narrow set of outcomes, this approach would examine the competitive
process itself. Animating this framework is the idea that a company’s power
and the potential anticompetitive nature of that power cannot be fully under-
stood without looking to the structure of a business and the structural role it
plays in markets. Applying this idea involves, for example, assessing whether a
company’s structure creates certain anticompetitive conflicts of interest; wheth-
er it can cross-leverage market advantages across distinct lines of business; and
whether the structure of the market incentivizes and permits predatory con-
duct.
This is the approach I adopt in this Note. I begin by exploring—and chal-
lenging—modern antitrust law’s treatment of market structure. Part I gives an
overview of the shi in antitrust away from economic structuralism in favor of
price theory and identifies how this departure has played out in two areas of
enforcement: predatory pricing and vertical integration. Part II questions this
narrow focus on consumer welfare as largely measured by prices, arguing that
assessing structure is vital to protect important antitrust values. The Note then
uses the lens of market structure to reveal anticompetitive aspects of Amazon’s
strategy and conduct. Part III documents Amazon’s history of aggressive invest-
ing and loss leading, its company strategy, and its integration across many lines
of business. Part IV identifies two instances in which Amazon has built ele-
ments of its business through sustained losses, crippling its rivals, and two in-
stances in which Amazon’s activity across multiple business lines poses anti-
competitive threats in ways that the current framework fails to register. The
Note then assesses how antitrust law can address the challenges raised by
online platforms like Amazon. Part V considers what capital markets suggest
about the economics of Amazon and other internet platforms. Part VI oers
two approaches for addressing the power of dominant platforms: () limiting
their dominance through restoring traditional antitrust and competition policy
principles and () regulating their dominance by applying common carrier ob-
ligations and duties.
i. the chicago school revolution: the shift away from
competitive process and market structure
One of the most significant changes in antitrust law and interpretation over
the last century has been the move away from economic structuralism. In this
the yale law journal :
Part, I trace this history by sketching out how a structure-based view of compe-
tition has been replaced by price theory and exploring how this shi has played
out through changes in doctrine and enforcement.
Broadly, economic structuralism rests on the idea that concentrated market
structures promote anticompetitive forms of conduct.
25
This view holds that a
market dominated by a very small number of large companies is likely to be
less competitive than a market populated with many small- and medium-sized
companies. This is because: () monopolistic and oligopolistic market struc-
tures enable dominant actors to coordinate with greater ease and subtlety, facil-
itating conduct like price-fixing, market division, and tacit collusion; () mo-
nopolistic and oligopolistic firms can use their existing dominance to block
new entrants; and () monopolistic and oligopolistic firms have greater bar-
gaining power against consumers, suppliers, and workers, which enables them
to hike prices and degrade service and quality while maintaining profits.
This market structure-based understanding of competition was a founda-
tion of antitrust thought and policy through the s. Subscribing to this
view, courts blocked mergers that they determined would lead to anticompeti-
tive market structures. In some instances, this meant halting horizontal deals—
mergers combining two direct competitors operating in the same market or
product line—that would have handed the new entity a large share of the mar-
ket.
26
In others, it involved rejecting vertical mergers—deals joining companies
that operated in dierent tiers of the same supply or production chain—that
would “foreclose competition.”
27
Centrally, this approach involved policing not
just for size but also for conflicts of interest—like whether allowing a dominant
shoe manufacturer to extend into shoe retailing would create an incentive for
the manufacturer to disadvantage or discriminate against competing retailers.
28
The Chicago School approach to antitrust, which gained mainstream
prominence and credibility in the s and s, rejected this structuralist
25. See, e.g., JOE S. BAIN, INDUSTRIAL ORGANIZATION (d ed. ); DONALD F. TURNER & CARL
KAYSEN, ANTITRUST POLICY: AN ECONOMIC AND LEGAL ANALYSIS (); Joe S. Bain, Worka-
ble Competition in Oligopoly: Theoretical Considerations and Some Empirical Evidence, A
M.
ECON. REV. , - (). The institutionalists—scholars who emphasized the im-
portance of social rules and organizations in producing economic outcomes—were also in-
fluential in this vein. See, e.g., J
OHN R. COMMONS, LEGAL FOUNDATIONS OF CAPITALISM
().
26. See, e.g., United States v. Phila. Nat’l Bank, U.S. , - ().
27. See, e.g., Brown Shoe Co. v. United States, U.S. , - ().
28. See id.
amazon's antitrust paradox
view.
29
In the words of Richard Posner, the essence of the Chicago School posi-
tion is that “the proper lens for viewing antitrust problems is price theory.”
30
Foundational to this view is a faith in the eciency of markets, propelled by
profit-maximizing actors. The Chicago School approach bases its vision of in-
dustrial organization on a simple theoretical premise: “[R]ational economic ac-
tors working within the confines of the market seek to maximize profits by
combining inputs in the most ecient manner. A failure to act in this fashion
will be punished by the competitive forces of the market.”
31
While economic structuralists believe that industrial structure predisposes
firms toward certain forms of behavior that then steer market outcomes, the
Chicago School presumes that market outcomes—including firm size, industry
structure, and concentration levels—reflect the interplay of standalone market
forces and the technical demands of production.
32
In other words, economic
structuralists take industry structure as an entryway for understanding market
dynamics, while the Chicago School holds that industry structure merely re-
flects such dynamics. For the Chicago School, “[w]hat exists is ultimately the
best guide to what should exist.”
33
Practically, the shi from structuralism to price theory had two major ram-
ifications for antitrust analysis. First, it led to a significant narrowing of the
concept of entry barriers. An entry barrier is a cost that must be borne by a firm
seeking to enter an industry but is not carried by firms already in the indus-
try.
34
According to the Chicago School, advantages that incumbents enjoy from
economies of scale, capital requirements, and product dierentiation do not
29. I use “The Chicago School” to refer to the group of legal scholars and economists, primarily
based at the University of Chicago, who developed neoclassical law and economics in the
mid-twentieth century. But it is worth noting that a new group of scholars at the University
of Chicago—such as Luigi Zingales and Guy Rolnik—have departed from the neoclassical
approach and are studying market competition with an eye to power. See, e.g., R
AGHURAM
RAJAN & LUIGI ZINGALES, SAVING CAPITALISM FROM THE CAPITALISTS (). See generally
P
ROMARKET, http://promarket.org/about-this-blog [http://perma.cc/GCD-K] (“This
is the goal of the ‘ProMarket blog’: to educate the public about the many ways special inter-
ests subvert competition in order to make the market system work better.”).
30. Richard A. Posner, The Chicago School of Antitrust Analysis, U. PA. L. REV. ,
(). The key assumptions of price theory are “that demand curves slope downward, that
an increase in the price of a product will reduce the demand for its complement, [and] that
resources gravitate to areas where they will earn the highest return.” Id. at .
31. MARC ALLEN EISNER, ANTITRUST AND THE TRIUMPH OF ECONOMICS: INSTITUTIONS, EXPER-
TISE
, AND POLICY CHANGE ().
32. See ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF ().
33. EISNER, supra note , at .
34. GEORGE J. STIGLER, THE ORGANIZATION OF INDUSTRY ().
the yale law journal :
constitute entry barriers, as these factors are considered to reflect no more than
the “objective technical demands of production and distribution.”
35
With so
many “entry barriers . . . discounted, all firms are subject to the threat of poten-
tial competition . . . regardless of the number of firms or levels of concentra-
tion.”
36
On this view, market power is always fleeting—and hence antitrust en-
forcement rarely needed.
The second consequence of the shi away from structuralism was that con-
sumer prices became the dominant metric for assessing competition. In his
highly influential work, The Antitrust Paradox, Robert Bork asserted that the
sole normative objective of antitrust should be to maximize consumer welfare,
best pursued through promoting economic eciency.
37
Although Bork used
“consumer welfare” to mean “allocative eciency,”
38
courts and antitrust au-
thorities have largely measured it through eects on consumer prices. In ,
the Supreme Court followed Bork’s work and declared that “Congress designed
35. EISNER, supra note , at .
36. Id.
37. BORK, supra note , at (“[T]he only legitimate goal of antitrust is the maximization of
consumer welfare.”); id. at (“The only goal that should guide interpretation of the anti-
trust laws is the welfare of consumers . . . . In judging consumer welfare, productive ecien-
cy, the single most important factor contributing to that welfare, must be given due weight
along with allocative eciency.”); see also Daniel A. Crane, The Tempting of Antitrust: Robert
Bork and the Goals of Antitrust Policy, A
NTITRUST L.J. , () (“Bork’s big move
[was] his rejection of alternatives to eciency or consumer welfare-oriented theories of anti-
trust enforcement . . . .”).
38. As has been widely noted, Bork defines consumer welfare not as consumer surplus but as
total welfare. As a result, for Bork, outcomes that might otherwise be understood to harm
consumers are not thought to reduce consumer welfare. For example, Bork concludes that
wealth transfers from consumers to monopolist producers would not harm consumer wel-
fare. See B
ORK, supra note , at (“Those who continue to buy aer a monopoly is
formed pay more for the same output, and that shis income from them to the monopoly
and its owners, who are also consumers. This is not dead-weight loss due to restriction of
output but merely a shi in income between two classes of consumers. The consumer wel-
fare model, which views consumers as a collectivity, does not take this income eect into ac-
count.”). For critiques of Bork’s conflation of consumer welfare and allocative eciency, see
John J. Flynn, The Reagan Administration’s Antitrust Policy, “Original Intent” and the Legislative
History of the Sherman Act, A
NTITRUST BULL. (); Eleanor M. Fox, The Moderniza-
tion of Antitrust: A New Equilibrium, C
ORNELL L. REV. (); Herbert Hovenkamp,
Antitrust’s Protected Classes, M
ICH. L. REV. (); Robert H. Lande, A Traditional and
Textualist Analysis of the Goals of Antitrust: Eciency, Preventing The from Consumers, and
Consumer Choice, F
ORDHAM L. REV. () [hereinaer Lande, A Traditional and Tex-
tualist Analysis]; Robert H. Lande, Wealth Transfers as the Original and Primary Concern of
Antitrust: The Eciency Interpretation Challenged, H
ASTINGS L.J. () [hereinaer
Lande, Wealth Transfers]; and Maurice E. Stucke, Reconsidering Antitrust’s Goals, B.C.
L.
REV. ().
amazon's antitrust paradox
the Sherman Act as a ‘consumer welfare prescription’”
39
—a statement that is
widely viewed as erroneous.
40
Still, this philosophy wound its way into policy
and doctrine. The merger guidelines issued by the Reagan Administra-
tion—a radical departure from the previous guidelines, written in —
reflected this newfound focus. While the guidelines had established that
the “primary role” of merger enforcement was “to preserve and promote mar-
ket structures conducive to competition,”
41
the guidelines said mergers
“should not be permitted to create or enhance ‘market power,’” defined as the
“ability of one or more firms profitably to maintain prices above competitive
levels.”
42
Today, showing antitrust injury requires showing harm to consumer
welfare, generally in the form of price increases and output restrictions.
43
It is true that antitrust authorities do not ignore non-price eects entirely.
The Horizontal Merger Guidelines, for example, acknowledge that en-
hanced market power can manifest as non-price harms, including in the form
of reduced product quality, reduced product variety, reduced service, or dimin-
ished innovation.
44
Notably, the Obama Administration’s opposition to one of
the largest mergers proposed on its watch—Comcast/TimeWarner—stemmed
from a concern about market access, not prices.
45
And by some measures, the
39. Reiter v. Sonotone Corp., U.S. , () (quoting Bork, supra note , at ).
40. See Barak Orbach, Foreword: Antitrust’s Pursuit of Purpose, FORDHAM L. REV. ,
().
41. 1968 Merger Guidelines, U.S. DEP’T JUST. (), http://www.justice.gov/sites/default/files
/atr/legacy////.pdf [http://perma.cc/H-BGUH]. The guidelines contin-
ue, “Market structure is the focus of the Department’s merger policy chiefly because the
conduct of the individual firms in a market tends to be controlled by the structure of that
market.” Id.
42. 1982 Merger Guidelines, U.S. DEP’T JUST. (), http://www.justice.gov/sites/default/files
/atr/legacy////.pdf [http://perma.cc/J-ZQLY].
43. See, e.g., Ginzburg v. Mem’l Healthcare Sys., Inc., F. Supp. , (S.D. Tex. )
(“[B]ecause ‘the purpose of antitrust law is the promotion of consumer welfare,’ the court
must analyze the antitrust injury question from the perspective of the consumer . . . . Thus,
in order to show that he suered an antitrust injury, ‘an antitrust plainti must prove that
the challenged conduct aected the prices, quantity or quality of goods or services and not
just his own welfare.’” (quoting Reazin v. Blue Cross & Blue Shield of Kan., F.d ,
(th Cir. ); Angelico v. Lehigh Valley Hosp., Inc., F. Supp. , (E.D. Pa.
))).
44. Horizontal Merger Guidelines, U.S. DEP’T JUST. & FTC (Aug. , ), http://www.c.gov
/sites/default/files/attachments/merger-review/hmg.pdf [http://perma.cc/SQH-
ABP].
45. See Emily Steel, Under Regulators’ Scrutiny, Comcast and Time Warner Cable End Deal,
N.Y.
TIMES (Apr. , ), http://www.nytimes.com////business/media/comcast
-time-warner-cable-deal.html [http://perma.cc/HXS-LMY].
the yale law journal :
Federal Trade Commission (FTC) has alleged potential harm to innovation in
roughly one-third of merger enforcement actions in the last decade.
46
Still, it is
fair to say that a concern for innovation or non-price eects rarely animates or
drives investigations or enforcement actions—especially outside of the merger
context.
47
Economic factors that are easier to measure—such as impacts on
price, output, or productive eciency in narrowly defined markets—have be-
come “disproportionately important.”
48
Two areas of enforcement that this reorientation has aected dramatically
are predatory pricing and vertical integration. The Chicago School claims that
“predatory pricing, vertical integration, and tying arrangements never or al-
most never reduce consumer welfare.”
49
Both predatory pricing and vertical in-
tegration are highly relevant to analyzing Amazon’s path to dominance and the
source of its power. Below, I oer a brief overview of how the Chicago School’s
influence has shaped predatory pricing doctrine and enforcers’ views of vertical
integration.
A. Predatory Pricing
Through the mid-twentieth century, Congress repeatedly enacted legisla-
tion targeting predatory pricing. Congress, as well as state legislatures, viewed
predatory pricing as a tactic used by highly capitalized firms to bankrupt rivals
and destroy competition—in other words, as a tool to concentrate control.
Laws prohibiting predatory pricing were part of a larger arrangement of pric-
ing laws that sought to distribute power and opportunity. However, a contro-
versial Supreme Court decision in the s created an opening for critics to
attack the regime. This intellectual backlash wound its way into Supreme
Court doctrine by the early s in the form of the restrictive “recoupment
test.”
46. Edith Ramirez, Chairwoman, FTC, Keynote Remarks at th Annual Global Antitrust En-
forcement Symposium (Sept. , ) (citing Richard J. Gilbert & Hillary Greene,
Merging Innovation into Antitrust Agency Enforcement of the Clayton Act, G
EO. WASH. L.
R
EV. , ()), http://www.c.gov/public-statements///keynote-remarks
-c-chairwoman-edith-ramirez [http://perma.cc/FNS-FL].
47. And even merger review has “migrated towards assessing what is measurable—namely
short-term pricing eects, primarily understood under their unilateral eects theory, and
short-term productive eciencies.” M
AURICE E. STUCKE & ALLEN P. GRUNES, BIG DATA AND
COMPETITION POLICY (). “Price has become the common denominator in merger re-
view.” Id. at .
48. Id. at .
49. Crane, supra note , at .
amazon's antitrust paradox
The earliest predatory pricing case in America was the government’s anti-
trust suit against Standard Oil, which reached the Supreme Court in .
50
As
detailed in Ida Tarbell’s exposé, A History of the Standard Oil Company, Standard
Oil routinely slashed prices in order to drive rivals from the market.
51
Moreo-
ver, it cross-subsidized: Standard Oil charged monopoly prices
52
in markets
where it faced no competitors; in markets where rivals checked the company’s
dominance, it drastically lowered prices in an eort to push them out. In its an-
titrust case against the company, the government argued that a suite of practic-
es by Standard Oil—including predatory pricing—violated section of the
Sherman Act. The Supreme Court ruled for the government and ordered the
break-up of the company.
53
Subsequent courts cited the decision for establish-
ing that in the quest for monopoly power, “price cutting became perhaps the
most eective weapon of the larger corporation.”
54
Recognizing the threat of predatory pricing executed by Standard Oil,
Congress passed a series of laws prohibiting such conduct. In Congress
enacted the Clayton Act
55
to strengthen the Sherman Act and included a provi-
sion to curb price discrimination and predatory pricing.
56
The House Report
stated that section of the Clayton Act was expressly designed to prohibit large
corporations from slashing prices below the cost of production “with the intent
to destroy and make unprofitable the business of their competitors” and with
the aim of “acquiring a monopoly in the particular locality or section in which
the discriminating price is made.”
57
50. See Christopher R. Leslie, Revisiting the Revisionist History of Standard Oil, S. CAL. L. REV.
, ().
51. See IDA TARBELL, A HISTORY OF THE STANDARD OIL COMPANY - ().
52. Monopoly price refers to the price profitably above cost that a firm with monopoly power
can charge.
53. Standard Oil Co. v. United States, U.S. ().
54. Leslie, supra note , at (quoting United States v. A. Schrader’s Son, F. , (D.
Ohio ), rev’d, U.S. ()).
55. Ch. , Stat. () (codified as amended at U.S.C. -, U.S.C. -
()).
56. This legislative history makes plain that section of the Clayton Act “was born of a desire by
Congress to curb the use by financially powerful corporations of localized price-cutting tac-
tics which had gravely impaired the competitive position of other sellers.” FTC v. Anheuser–
Busch, Inc., U.S. , ().
57. H.R. REP. NO. -, at (). Section of the Clayton Act made it “unlawful for a firm
to charge a low price in a targeted community while selling similar goods at a higher price
elsewhere.” Herbert J. Hovenkamp, United States Competition Policy in Crisis: 1890-1955,
M
INN. L. REV. , ().
the yale law journal :
Congress also acted to protect state “fair trade” laws that further safeguard-
ed against predatory pricing. Fair trade legislation granted producers the right
to set the final retail price of their goods, limiting the ability of chain stores to
discount.
58
When the Supreme Court targeted these “resale price maintenance”
eorts, Congress stepped up to defend them. Aer the Supreme Court in
struck down the form of resale price maintenance enabled by fair trade laws,
59
Congress in carved out an exception for state fair trade laws through the
Miller-Tydings Act.
60
When the Supreme Court in ruled that producers
could enforce minimum prices only against those retailers that had signed con-
tracts agreeing to do so,
61
Congress responded with a law making minimum
prices enforceable against nonsigners too.
62
Another byproduct of the “fair trade” movement was the Robinson-Patman
Act of . This Act prohibited price discrimination by retailers among pro-
ducers and by producers among retailers.
63
Its aim was to prevent conglomer-
ates and large companies from using their buyer power to extract crippling dis-
counts from smaller entities, and to keep large manufacturers and retailers
from teaming up against rivals.
64
Like laws banning predatory pricing, the
prohibition against price discrimination eectively curbed the power of size.
Section of the Act addressed predatory pricing directly by making it a crime
to sell goods at “unreasonably low prices for the purpose of destroying compe-
tition or eliminating a competitor.”
65
While predatory price cutting gave 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 saw predatory
pricing as a serious threat to competitive markets. By the mid-twentieth centu-
ry, the Supreme Court recognized and gave eect to this congressional intent.
58. Lawrence Shepard, The Economic Eects of Repealing Fair Trade Laws, J. CONSUMER AFF.
, () (“Fair trade marketing or ‘resale price maintenance’ enabled manufacturers
to require retailers to charge producer-specified prices on certain goods.”).
59. See Dr. Miles Med. Co. v. John D. Park & Sons Co., U.S. ().
60. Pub. L. No. -, Stat. ().
61. Schwegmann Bros. v. Calvert Distillers Corp., U.S. ().
62. McGuire Act, Pub. L. No. -, Stat. ().
63. Pub. L. No. -, Stat. (codified as amended at U.S.C. , ()).
64. See FTC v. Henry Broch & Co., U.S. , () (“The Robinson-Patman Act was
enacted in to curb and prohibit all devices by which large buyers gained discriminatory
preferences over smaller ones by virtue of their greater purchasing power.”).
65. U.S.C. (a) ().
66. , Stat. at .
amazon's antitrust paradox
The Court upheld the Robinson-Patman Act numerous times, holding that the
relevant factors were whether a retailer intended to destroy competition
through its pricing practices and whether its conduct furthered that purpose.
67
However, not all instances of below-cost pricing were illegitimate. Liquidating
excess or perishable goods, for example, was considered fair game.
68
Only
“sales made below cost without legitimate commercial objective and with spe-
cific intent to destroy competition” would clearly violate section .
69
In other
cases, the Court distinguished between competitive advantages drawn from
superior skill and production, and those drawn from the brute power of size
and capital.
70
The latter, the Court ruled, were illegitimate.
71
In Utah Pie Co. v. Continental Baking Co., the Court further reinforced the
illegitimacy of predatory pricing.
72
Utah Pie and Continental Baking were
competing manufacturers of frozen dessert pies. A locational advantage gave
Utah Pie cheaper access to the Salt Lake City market, which it used to price
goods below those sold by competitors. Other frozen pie manufacturers, in-
cluding Continental, began selling at below-cost prices in the Salt Lake City
market, while keeping prices in other regions at or above cost. Utah Pie
brought a predatory pricing case against Continental. The Supreme Court
ruled for Utah Pie, noting that the pricing strategies of its competitors had di-
verted business from Utah Pie and compelled the company to further lower its
prices, leading to a “declining price structure” overall.
73
Additionally, Continen-
tal had admitted to sending an industrial spy to Utah Pie’s plant to gain infor-
67. See United States v. Nat’l Dairy Prods. Corp., U.S. , () (“[I]n prohibiting sales
at unreasonably low prices for the purpose of destroying competition, [the Act] listed as el-
ements of the illegal conduct not only the intent to achieve a result—destruction of competi-
tion—but also the act—selling at unreasonably low prices—done in furtherance of that de-
sign or purpose.”).
68. See id. at .
69. Id.
70. See, e.g., Moore v. Mead’s Fine Bread Co., U.S. , ().
71. Id. This basis for distinguishing legitimate from illegitimate price-cutting echoed other deci-
sions. See FTC v. Morton Salt Co., U.S. , () (“The legislative history of the
Robinson-Patman Act makes it abundantly clear that Congress considered it to be an evil
that a large buyer could secure a competitive advantage over a small buyer solely because of
the large buyer’s quantity purchasing ability. The Robinson-Patman Act was passed to de-
prive a large buyer of such advantages . . . .”); United States v. N.Y. Great Atl. & Pac. Tea
Co., F.d (th Cir. ).
72. U.S. ().
73. Id. at .
the yale law journal :
mation to sabotage Utah’s business relations with retailers, a fact the Court
used to establish “intent to injure.”
74
The decision was controversial. Continental’s conduct had loosened the
grip of a quasi-monopolist. Prior to the alleged predation, Utah Pie had con-
trolled . of the Salt Lake City market, but following Continental’s practic-
es, its share dropped to ..
75
Penalizing conduct that had made a market
more competitive as predatory seemed perverse. As Justice Stewart noted in the
dissent, “I cannot hold that Utah Pie’s monopolistic position was protected by
the federal antitrust laws from eective price competition . . . .”
76
The case presented an opportunity for critics of predatory pricing laws to
attack the doctrine as misguided. In an article labeling Utah Pie “the most anti-
competitive antitrust decision of the decade,” Ward Bowman, an economist at
Yale Law School, argued that the premise of predatory pricing laws was
wrong.
77
He wrote, “The Robinson-Patman Act rests upon a presumption that
price discrimination can or might be used as a monopolizing technique. This,
as more recent economic literature confirms, is at best a highly dubious pre-
sumption.”
78
Bork, meanwhile, said of the decision, “There is no economic the-
ory worthy of the name that could find an injury to competition on the facts of
the case. Defendants were convicted not of injuring competition but, quite
simply, of competing.”
79
He described predatory pricing generally as “a phe-
nomenon that probably does not exist” and the Robinson-Patman Act as “the
misshapen progeny of intolerable drasmanship coupled to wholly mistaken
economic theory.”
80
Other scholars, particularly those from the rising Chicago
School, also weighed in to criticize Utah Pie.
81
As the writings of Bowman and Bork suggest, the Chicago School critique
of predatory pricing doctrine rests on the idea that below-cost pricing is irra-
74. Id. at -.
75. Id. at .
76. Id. at (Stewart, J., dissenting).
77. Ward S. Bowman, Restraint of Trade by the Supreme Court: The Utah Pie Case, YALE L.J.
, ().
78. Id. at .
79. BORK, supra note , at .
80. Id. at , .
81. See PHILLIP AREEDA & DONALD F. TURNER, ANTITRUST LAW: AN ANALYSIS OF ANTITRUST
PRINCIPLES AND THEIR APPLICATION - (); HERBERT HOVENKAMP, ECONOMICS AND
FEDERAL ANTITRUST LAW - (); RICHARD A. POSNER, ANTITRUST LAW: AN ECO-
NOMIC
PERSPECTIVE - ().
amazon's antitrust paradox
tional and hence rarely occurs.
82
For one, the critics argue, there was no guar-
antee that reducing prices below cost would either drive a competitor out or
otherwise induce the rival to stop competing. Second, even if a competitor
were to drop out, the predator would need to sustain monopoly pricing for
long enough to recoup the initial losses and successfully thwart entry by poten-
tial competitors, who would be lured by the monopoly pricing. The uncertainty
of its success, coupled with its guarantee of costs, made predatory pricing an
unappealing—and therefore highly unlikely—strategy.
83
As the influence and credibility of these scholars grew, their thinking
shaped government enforcement. During the s, for example, the number
of Robinson-Patman Act cases that the FTC brought dropped dramatically, re-
flecting the belief that these cases were of little economic concern.
84
Under the
Reagan Administration, the FTC all but entirely abandoned Robinson-Patman
Act cases.
85
Bork’s appointment as Solicitor General, meanwhile, gave him a
prime platform to influence the Supreme Court on antitrust issues and enabled
him “to train and influence many of the attorneys who would argue before the
Supreme Court for the next generation.”
86
The Chicago School critique came to shape Supreme Court doctrine on
predatory pricing. The depth and degree of this influence became apparent in
Matsushita Electric Industrial Co. v. Zenith Radio Corp.
87
Zenith, an American
manufacturer of consumer electronics, brought a Sherman Act section case
accusing Japanese firms of conspiring to charge predatorily low prices in the
U.S. market in order to drive American companies out of business.
88
The Su-
82. See Jonathan B. Baker, Predatory Pricing Aer Brooke Group: An Economic Perspective, AN-
TITRUST
L.J. , () (“The Chicago School view of predatory pricing was perhaps
best captured by a dispute between two FTC Commissioners over the aptness of a met-
aphor: the animal that best represents price predation. For one Commissioner, predatory
pricing was a ‘white tiger,’ an extremely rare creature. For the other Commissioner, price
predation more closely resembled a ‘unicorn,’ a complete myth. The narrow spectrum of
views between a white tiger and a unicorn fairly reflects the Chicago School view that preda-
tory pricing is almost always irrational, and so is unlikely actually to occur.” (citations omit-
ted)).
83. See BORK, supra note , at -.
84. See D. Daniel Sokol, The Transformation of Vertical Restraints: Per Se Illegality, the Rule of Rea-
son, and Per Se Legality, A
NTITRUST L.J. , - ().
85. Id.
86. Id. at .
87. U.S. (). The government argued in the case as amicus curiae in support of
Matsushita. Brief for the United States as Amicus Curiae Supporting Petitioners, Matsushita
Elec. Indus. Co. v. Zenith Radio Corp., U.S. (No. -), WL .
88. Matsushita, U.S. at -.
the yale law journal :
preme Court granted certiorari to review whether the Third Circuit had applied
the correct standard in reversing the district court’s grant of summary judg-
ment to Matsushita—an inquiry that led the Court to assess the reasonableness
of assuming the alleged predation.
89
Citing to Bork’s The Antitrust Paradox, the Court concluded that predatory
pricing schemes were implausible and therefore could not justify a reasonable
assumption in favor of Zenith. “As [Bork’s work] shows, the success of such
schemes is inherently uncertain: the short-run loss is definite, but the long-run
gain depends on successfully neutralizing the competition,” the Court wrote.
90
“For this reason, there is a 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, the Court echoed his
concern that price competition could be mistaken for predation. In The Anti-
trust Paradox, Bork wrote, “The real danger for the law is less that predation
will be missed than that normal competitive behavior will be wrongly classified
as predatory and suppressed.”
92
Justice Powell, writing for the - majority in
Matsushita, echoed Bork: “[C]utting prices in order to increase business oen
is the very essence of competition. Thus mistaken inferences in cases such as
this one are especially costly, because they chill the very conduct the antitrust
laws are designed to protect.”
93
Although Matsushita focused on a narrow issue—the summary judgment
standard for claims brought under Section of the Sherman Act, which targets
coordination among parties
94
—it has been widely influential in monopolization
cases, which fall under Section . In other words, reasoning that originated in
one context has wound up in jurisprudence applying to totally distinct circum-
stances, even as the underlying violations dier vastly.
95
Subsequent courts ap-
plied Matsushita’s predatory pricing analysis to cases involving monopolization
and unilateral anticompetitive conduct, shaping the jurisprudence of Section
89. Id. at , -.
90. Id. at .
91. Id.
92. BORK, supra note , at .
93. Matsushita, U.S. at ; see also Cargill, Inc. v. Monfort of Colo., Inc., U.S. ,
() (finding that a meat-packing company’s price-cutting practices constituted vigorous
competition rather than an antitrust violation).
94. Christopher R. Leslie, Predatory Pricing and Recoupment, COLUM. L. REV. ,
().
95. Id.
amazon's antitrust paradox
of the Sherman Act.
96
The lower courts seized on Matsushita’s central point: the
idea that “predatory pricing schemes are rarely tried, and even more rarely suc-
cessful.”
97
The phrase became a talisman against the existence of predatory
pricing, routinely invoked by courts in favor of defendants.
In Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.,
98
the Supreme
Court formalized this premise into a doctrinal test. The case involved cigarette
manufacturing, an industry dominated by six firms.
99
Liggett, one of the six,
introduced a line of generic cigarettes, which it sold for about less than the
price of branded cigarettes.
100
Liggett alleged that when it became clear that its
generics were diverting business from branded cigarettes, Brown & William-
son, a competing manufacturer, began selling its own generics at a loss.
101
Lig-
gett sued, claiming that Brown & Williamson’s tactic was designed to pressure
Liggett to raise prices on its generics, thus enabling Brown & Williamson to
maintain high profits on branded cigarettes. A jury returned a verdict 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 re-
coup its losses through raising prices on branded cigarettes, not the generics
cigarettes it was steeply discounting. Building on the analysis introduced in
Matsushita, the Court held that Liggett had failed to show that Brown & Wil-
liamson would be able to execute the scheme successfully by recouping its loss-
es through supracompetitive pricing. “Evidence of below-cost pricing is not
alone sucient to permit an inference of probable recoupment and injury to
competition,” Justice Kennedy wrote for the majority.
103
Instead, the plainti
“must demonstrate that there is a likelihood that the predatory scheme alleged
would cause a rise in prices above a competitive level that would be sucient to
compensate for the amounts expended on the predation, including the time
value of the money invested in it”
104
—a requirement now known as the “re-
coupment test.”
96. See, e.g., A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., F.d (th Cir. ).
97. Matsushita, U.S. at .
98. U.S. ().
99. Id. at .
100. Id. at .
101. Id. at .
102. Id. at .
103. Id. at .
104. Id.
the yale law journal :
In placing recoupment at the center of predatory pricing analysis, the Court
presumed that direct profit maximization is the singular goal of predatory pric-
ing.
105
Furthermore, by establishing that harm occurs only when predatory
pricing results in higher prices, the Court collapsed the rich set of concerns that
had animated earlier critics of predation, including an aversion to large firms
that exploit their size and a desire to preserve local control. Instead, the Court
adopted the Chicago School’s narrow conception of what constitutes this harm
(higher prices) and how this harm comes about—namely, through the alleged
predator raising prices on the previously discounted good.
106
Today, succeeding on a predatory pricing claim requires a plainti to meet
the Brooke Group recoupment test by showing that the defendant would be able
to recoup its losses through sustaining supracompetitive prices. Since the
Court introduced this recoupment requirement, the number of cases brought
and won by plaintis has dropped dramatically.
107
Despite the Court’s conten-
tion—that “predatory pricing schemes are rarely tried and even more rarely
successful”—a host of research shows that predatory pricing can be “an attrac-
tive anticompetitive strategy” and has been used by dominant firms across sec-
tors to squash or deter competition.
108
105. See id. at (“Recoupment is the ultimate object of an unlawful predatory pricing scheme;
it is the means by which a predator profits from predation. Without it, predatory pricing
produces lower aggregate prices in the market, and consumer welfare is enhanced.”).
106. As some commentators have noted, the Court’s reliance on scholarship advocating a re-
trenchment of enforcement against predatory pricing schemes did not reflect a dearth of op-
posing views. See, e.g., F.M. Scherer, Conservative Economics and Antitrust: A Variety of Influ-
ences, in H
OW THE CHICAGO SCHOOL OVERSHOT THE MARK , (Robert Pitofsky ed.,
) (“Already by the time of the Matsushita decision, there was a substantial scholarly lit-
erature documenting what should have passed for predation by any reasonable definition
and showing the rationality of sharp price-cutting by a dominant firm to discourage new en-
trants. Since there was a diversity of scholarly views at the time key Supreme Court pro-
nouncements were rendered on predation, the fault for ignoring one side of the scholarship
must be attributed to the Court’s myopia or (without the obiter dictum) compelling facts,
and not to economists’ contributions.” (citation omitted)); id. at (“If there was favorit-
ism, it was not in the economic literature evaluated, but in the weighing of alternative per-
spectives.”).
107. Sokol, supra note , at (“The recoupment prong eviscerated the Utah Pie standard and
made it nearly impossible in practice for plaintis to win a primary line Robinson-Patman
claim going forward.”). The only recent case in which plaintis survived a motion for sum-
mary judgment is Spirit Airlines, Inc. v. Northwest Airlines, Inc., F.d (th Cir. ),
where the court denied summary judgment on the grounds that a reasonable trier of fact
could find sucient evidence of predatory pricing.
108. Sandeep Vaheesan, Reconsidering Brooke Group: Predatory Pricing in Light of the Empirical
Learning, B
ERKELEY BUS. L.J. , (); see also Richard O. Zerbe, Jr. & Michael T.
Mumford, Does Predatory Pricing Exist? Economic Theory and the Courts Aer Brooke Group,
amazon's antitrust paradox
B. Vertical Integration
Analysis of vertical integration has similarly moved away from structural
concerns. Vertical integration arises when “two or more successive stages of
production and/or distribution of a product are combined under the same con-
trol.”
109
For most of the last century, enforcers reviewed vertical integration un-
der the same standards as horizontal mergers, as set out in the Sherman Act,
the Clayton Act, and the Federal Trade Commission Act. Vertical integration
was banned whenever it threatened to “substantially lessen competition”
110
or
constituted a “restraint of trade”
111
or an “unfair method[] of competition.”
112
However, the Chicago School’s view that vertical mergers are generally pro-
competitive has led enforcement in this area to significantly drop.
Serious concern about vertical integration took hold in the wake of the
Great Depression, when both the law and economic theory became sharply
critical of the phenomenon.
113
Thurman Arnold, the Assistant Attorney Gen-
eral in the s, targeted vertical ownership achieved through both mergers
and contractual provisions, and by the s courts and antitrust authorities
generally viewed vertical integration as anticompetitive. Partly because it be-
lieved that the Supreme Court had failed to use existing law to block vertical
integration through acquisitions, Congress in amended section of the
Clayton Act to make it applicable to vertical mergers.
114
Critics of vertical integration primarily focused on two theories of potential
harm: leverage and foreclosure. Leverage reflects the idea that a firm can use its
dominance in one line of business to establish dominance in another. Because
“horizontal power in one market or stage of production creates ‘leverage’ for
the extension of the power to bar entry at another level,” vertical integration
ANTITRUST BULL. , - () (discussing the empirical research that companies
engage in predatory pricing).
109. Robert H. Cole, General Discussion of Vertical Integration, in VERTICAL INTEGRATION IN MAR-
KETING
, (Nugent Wedding ed., ).
110. Clayton Act, ch. , , Stat. , () (codified as amended at U.S.C.
()).
111. Sherman Act, ch. , , , Stat. , () (codified as amended at U.S.C.
()).
112. Federal Trade Commission Act, ch. , , Stat. , () (codified as amended at
U.S.C. (a)() ()).
113. See Herbert Hovenkamp, Robert Bork and Vertical Integration: Leverage, Foreclosure, and E-
ciency, A
NTITRUST L.J. , - ().
114. Clayton Act, ch. , , Stat. , - () (codified as amended at U.S.C.
()); see Hovenkamp, supra note , at .
the yale law journal :
combined with horizontal market power “can impair competition to a greater
extent than could the exercise of horizontal power alone.”
115
Foreclosure,
meanwhile, occurs when a firm uses one line of business to disadvantage rivals
in another line. A flourmill that also owned a bakery could hike prices or de-
grade quality when selling to rival bakers—or refuse to do business with them
entirely. In this view, even if an integrated firm did not directly resort to exclu-
sionary tactics, the arrangement would still increase barriers to entry by requir-
ing would-be entrants to compete at two levels.
When seeking to block vertical combinations or arrangements, the gov-
ernment frequently built its case on one of these theories—and, through the
s, courts largely accepted them.
116
In Brown Shoe v. United States, for ex-
ample, the government sought to block a merger between a leading manufac-
turer and a leading retailer of shoes on the grounds that the tie-up would “fore-
clos[e] competition” and “enhanc[e] Brown’s competitive advantage over other
producers, distributors and sellers of shoes.”
117
The Court acknowledged that
the Clayton Act did not “render unlawful all . . . vertical arrangements,” but
held that this merger would undermine competition by “fore-
clos[ing] . . . independent manufacturers from markets otherwise open to
them.”
118
In other words, the concern was that—once merged—the combined
entity would forbid its retailing arm from stocking shoes made by competing
independent manufacturers. Calling this form of foreclosure “the primary vice
of a vertical merger,”
119
the Court noted it was also largely inevitable: “Every
extended vertical arrangement by its very nature, for at least a time, denies to
competitors of the supplier the opportunity to compete for part or all of the
trade of the customer-party to the vertical arrangement.”
120
In his partial con-
currence, Justice Harlan observed that the deal would enable Brown to “turn an
independent purchaser into a captive market for its shoes,” thereby “dimin-
115. Friedrich Kessler & Richard H. Stern, Competition, Contract, and Vertical Integration, YALE
L.J. , ().
116. See, e.g., FTC v. Consol. Foods Corp., U.S. , - (); United States v. Yellow
Cab Co., U.S. , - (); Miss. River Corp. v. FTC, F.d , (th Cir.
); see also Anchor Serum Co. v. FTC, F.d , (th Cir. ) (“It would require
a naive mind to conclude, as petitioner would have us do, that the arrangements under con-
sideration could result in other than an adverse eect upon competition.”). But see United
States v. Columbia Steel Co., U.S. , - () (finding that a vertical combina-
tion did not violate antitrust law).
117. U.S. , ().
118. Id. at , .
119. Id. at .
120. Id. at .
amazon's antitrust paradox
ish[ing] the available market for which shoe manufacturers compete.”
121
The
Court enjoined the merger.
122
Another reason courts cited for blocking these arrangements was that verti-
cal deals eliminated potential rivals—a recognition of how a merger would re-
shape industry structure. Upholding the FTC’s challenge of Ford purchasing an
equipment manufacturer, the Court noted that before the acquisition, Ford had
helped check the power of the manufacturers and had a “soothing influence”
over prices.
123
An outside firm “may someday go in and set the stage for notice-
able deconcentration,” the Court wrote.
124
“While it merely stays near the edge,
it is a deterrent to current competitors.”
125
In other words, the threat of poten-
tial entry by Ford—the fact that, pre-merger, it could have internally expanded
into equipment manufacturing—had played an important disciplining role. Re-
latedly, the Court observed that when a company in a competitive market inte-
grates with a firm in an oligopolistic one, the merger can have “the result of
transmitting the rigidity of the oligopolistic structure” of one industry to the
other, “thus reducing the chances of future deconcentration” of the market.
126
The Court required Ford to divest the manufacturer.
127
In the s—while Congress, enforcement agencies, and the courts recog-
nized potential threats posed by vertical arrangements—Chicago School schol-
ars began to cast doubt on the idea that vertical integration has anticompetitive
eects.
128
By replacing market transactions with administrative decisions with-
in the firm, they argued, vertical arrangements generated eciencies that anti-
trust law should promote. And if integration failed to yield eciencies, then
the integrated firm would have no cost advantages over unintegrated rivals,
therefore posing no risk of impeding entry. They further argued that vertical
deals would not aect a firm’s pricing and output policies, the primary metrics
121. Id. at (Harlan, J., concurring in part and dissenting in part).
122. Id. at (majority opinion).
123. Ford Motor Co. v. United States, U.S. , () (quoting United States v. Ford
Motor Co., F. Supp. , (E.D. Mich. )).
124. Id. (quoting Ford Motor Co., F. Supp. at ).
125. Id. (quoting Ford Motor Co., F. Supp. at ).
126. Id. at .
127. Id. at .
128. In an influential essay that presaged his later arguments in The Antitrust Paradox, Bork
defended vertical integration as nearly always procompetitive. Robert Bork, Vertical Integra-
tion and the Sherman Act: The Legal History of an Economic Misconception, U.
CHI. L. REV.
, - (); see also Ward S. Bowman, Jr., Tying Arrangements and the Leverage Prob-
lem, Y
ALE L.J. () (arguing that tying arrangements—a form of vertical control—
cannot be used to leverage monopoly power from one market to another).
the yale law journal :
in their analysis. Under this framework, only horizontal mergers aect compe-
tition, as “[h]orizontal mergers increase market share, but vertical mergers do
not.”
129
Chicago School theory holds that concerns about both leverage and fore-
closure are misguided. Under the “single monopoly profit theorem,” the
amount of profit that a firm can extract from one market is fixed and cannot be
expanded through extending into an adjacent market if the two products are
used in fixed proportions.
130
Under this premise, not only does monopoly lev-
eraging not pose any competitive concern, but—since it can only be motivated
by eciencies, not profits—it is actually procompetitive when it does occur.
The traditional worries about foreclosure, Bork claimed, were unfounded,
as “[p]redation through vertical merger is extremely unlikely.”
131
A manufac-
turer would not favor its retail subsidiary over others unless it was cheaper to
do so—in which case, Bork argued, discriminating would yield eciencies that
the firm would pass on to consumers. Additionally, any manufacturer that
sought to privilege its own retailer would face “entrants who would arrive in
sky-darkening swarms for the profitable alternatives.”
132
In other words, Bork’s
take was that vertical integration generally would not create forms of market
power that firms could use to hike prices or constrain output. In the rare case
that vertical integration did create this form of market power, he believed that it
would be disciplined by actual or potential entry by competitors.
133
In light of
129. BORK, supra note , at .
130. See, e.g., id. at -, -; Posner, supra note , at , (“[I]t makes no sense for a
monopoly producer to take over distribution in order to earn monopoly profits at the distri-
bution as well as the manufacturing level. The product and its distribution are comple-
ments, and an increase in the price of distribution will reduce the demand for the product.
Assuming that the product and its distribution are sold in fixed proportions . . . the conclu-
sion is reached that vertical integration must be motivated by a desire for eciency rather
than for monopoly.”); id. at (“If the [service] is already being priced at the optimal mo-
nopoly level, an increase in the price of [one component] above the competitive level will
raise the total price of the service to the consumer above the optimal monopoly level and will
thereby reduce the monopolist’s profits.”).
131. BORK, supra note , at .
132. Id. at .
133. Bork later modified his position on entry barriers when he consulted for Netscape in the An-
titrust Division’s challenge to Microso’s exclusionary practices, which the company had
employed primarily against Netscape. Although Bork had been a fierce critic of “leverage
theory,” he described Microso’s attempt to tie its operating system to its soware as a way
“to leverage the [Windows] asset to make people use [Internet Explorer] instead of
[Netscape] Navigator.” Hovenkamp, supra note , at - (citing Robert Bork, High-
Stakes Antitrust: The Last Hurrah?, in H
IGH-STAKES ANTITRUST: THE LAST HURRAH? ,
(Robert W. Hahn ed., )). But in an article later commissioned by Google, Bork re-
amazon's antitrust paradox
this, antitrust law’s aversion to vertical arrangements was, Bork argued, irra-
tional. “The law against vertical mergers is merely a law against the creation of
eciency.”
134
With the election of President Reagan, this view of vertical integration be-
came national policy. In and , the Department of Justice (DOJ) and
the FTC issued new merger guidelines outlining the framework that ocials
would use when reviewing horizontal deals.
135
The version included
guidelines specific to vertical deals.
136
Part of a sweeping eort to overhaul an-
titrust enforcement, the new guidelines narrowed the circumstances in which
the agencies would challenge vertical mergers.
137
Although the guidelines
acknowledged that vertical mergers could sometimes give rise to competitive
concerns, in practice the change constituted a de facto approval of vertical
deals. The DOJ and FTC did not challenge even one vertical merger during
President Reagan’s tenure.
138
Although subsequent administrations have continued reviewing vertical
mergers, the Chicago School’s view that these deals generally do not pose
threats to competition has remained dominant.
139
Rejection of vertical tie-
turned to a critique of leverage theory, deriding the idea that Google could leverage its posi-
tion in the general search market to gain additional profits in downstream markets. See
Robert H. Bork & J. Gregory Sidak, What Does the Chicago School Teach About Internet Search
and the Antitrust Treatment of Google, J.
COMPETITION L. & ECON. , – ().
134. BORK, supra note , at .
135. 1982 Merger Guidelines, supra note ; 1984 Merger Guidelines, U.S. DEP’T JUST.
(), http://www.justice.gov/sites/default/files/atr/legacy////.pdf [http://
perma.cc/YJL-PQS].
136. 1984 Merger Guidelines, supra note , at -.
137. Id.
138. William E. Kovacic, Built To Last? The Antitrust Legacy of the Reagan Administration, FED.
B. NEWS & J. , () (“Since , the government antitrust agencies have issued no
complaints or consent agreements in Robinson-Patman matters that originated aer the ar-
rival of Reagan appointees to head the FTC and the Justice Department. Reagan FTC lead-
ership has said the Commission has not abandoned Robinson-Patman enforcement, but the
government’s failure to initiate new enforcement actions during the Reagan Administration
suggests that firms are virtually immune from federal prosecution for conduct the statute
proscribes.”); Joseph Guinto, Antitrust Targets Vertical Deals, I
NV.’ S BUS. DAILY, June , ,
at A.
139. For example, Democrat-appointed antitrust leaders have also adopted the Chicago School
view that most vertical mergers are benign. As then-FTC Commissioner Christine Varney
(who would later go on to be assistant attorney general for antitrust in the Obama Admin-
istration) observed in a speech, “[M]ost vertical arrangements raise few competitive con-
cerns.” Christine A. Varney, Comm’r, FTC, Vertical Merger Enforcement Challenges at
the FTC (July , ), http://www.c.gov/public-statements///vertical-merger
-enforcement-challenges-c [http://perma.cc/JDQ-HKB].
the yale law journal :
ups—standard through the s and s—is extremely rare today;
140
in in-
stances where agencies spot potential harm, they tend to impose conduct rem-
edies or require divestitures rather than block the deal outright.
141
The Obama
Administration took this approach with two of the largest vertical deals of the
last decade: Comcast/NBC and Ticketmaster/LiveNation. In each case, con-
sumer advocates opposed the deal
142
and warned that the tie-up would concen-
trate significant power in the hands of a single company,
143
which it could use
to engage in exclusionary practices, hike prices for consumers, and dock pay-
ments to content producers, such as TV screenwriters and musicians. Nonethe-
less, the DOJ attached certain behavioral conditions and required a minor di-
vestiture, ultimately approving both deals.
144
The district court held the
consent decrees to be in the public interest.
140. James B. Stewart, Why a Media Merger that Should Go Through Might Not, N.Y. TIMES
(Oct. , ), http://www.nytimes.com////business/economy/why-a-media
-merger-that-should-go-through-might-not.html [http://perma.cc/NTN-LBN] (“‘Over
the last to years, antitrust law has evolved to be almost completely indierent to verti-
cal mergers,’ said Tim Wu, an antitrust and internet expert at Columbia Law School . . . .”).
141. By imposing conduct remedies, the antitrust agencies set out behavioral conditions that the
merging parties must comply with, subject to agency oversight. By requiring divestitures,
the antitrust agencies ask the merging parties to sell o a part of their business to another
entity.
142. Martin H. Bosworth, Consumer Groups Oppose Comcast-NBC Merger, CONSUMER AFF., (Dec.
, ), http://www.consumeraairs.com/news///comcast_nbc.html [http://
perma.cc/N-MTKQ]; David Segal, Calling Almost Everyone’s Tune, N.Y.
TIMES (Apr.
, ), http://www.nytimes.com////business/ticket.html [http://perma.cc
/TT-FHYA] (“To say this new conglomerate has inspired fear in the live-concert business
doesn’t capture the extent of the quaking.”); Ethan Smith & Thomas Catan, Concert
Deal Wins Antitrust Approval, W
ALL ST. J. (Jan. , , : AM), http://www.wsj
.com/articles/SB [http://perma.cc/FWR
-WUSR].
143. As Bork pointed out, the vertical deals would not increase the market share of either compa-
ny. See B
ORK, supra note , at . In Ticketmaster/LiveNation’s case, the deal instead “cre-
ates one company that will have a hand in just about every corner of the music business,”
Smith & Catan, supra note , while in Comcast/NBC’s case, the merger created “a bil-
lion media behemoth that controls not just how television shows and movies are made but
how they are delivered to people’s homes,” Yinka Adegoke & Dan Levine, Comcast Completes
NBC Universal Merger, R
EUTERS (Jan. , , : AM), http://www.reuters.com/article
/us-comcast-nbc-idUSTRESWZ [http://perma.cc/EXC-PAU].
144. Press Release, Oce of Pub. Aairs, U.S. Dep’t of Justice, Justice Department Allows Com-
cast-NBCU Joint Venture To Proceed with Conditions (Jan. , ), http://www.just
ice.gov/opa/pr/justice-department-allows-comcast-nbcu-joint-venture-proceed-conditions
[http://perma.cc/FHZ-ALW]; Press Release, Oce of Pub. Aairs, U.S. Dep’t of Justice,
Justice Department Requires Ticketmaster Entertainment Inc. To Make Significant Changes
to Its Merger with Live Nation Inc. (Jan. , ), http://www.justice.gov/opa/pr/justice
amazon's antitrust paradox
ii. why competitive process and structure matter
The current framework in antitrust fails to register certain forms of anti-
competitive harm and therefore is unequipped to promote real competition—a
shortcoming that is illuminated and amplified in the context of online plat-
forms and data-driven markets. This failure stems both from assumptions em-
bedded in the Chicago School framework and from the way this framework as-
sesses competition.
Notably, the present approach fails even if one believes that antitrust
should promote only consumer interests. Critically, consumer interests 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 legislative history, which reveals
that Congress passed antitrust laws to promote a host of political economic
ends—including our interests as workers, producers, entrepreneurs, and citi-
zens. It also mistakenly supplants a concern about process and structure (i.e.,
whether power is suciently distributed to keep markets competitive) with a
calculation regarding outcome (i.e., whether consumers are materially better
o).
Antitrust law and competition policy should promote not welfare but com-
petitive markets. By refocusing attention back on process and structure, this
approach would be faithful to the legislative history of major antitrust laws. It
would also promote actual competition—unlike the present framework, which
is overseeing concentrations of power that risk precluding real competition.
A. Price and Output Eects Do Not Cover the Full Range of Threats to
Consumer Welfare
As discussed in Part I, modern doctrine assumes that advancing consumer
welfare is the sole purpose of antitrust. But the consumer welfare approach to
antitrust is unduly narrow and betrays congressional intent, as evident from
-department-requires-ticketmaster-entertainment-inc-make-significant-changes-its [http://
perma.cc/PZE-XFL]; see also Jeremy Pelofsky & Yinka Adegoke, LiveNation, Ticketmaster
Merge; Agree to U.S. Terms, R
EUTERS (Jan. . , : PM), http://www.reuters.com
/article/us-ticketmaster-livenation-idUSTREOE [http://perma.cc/QTK
-LPHA] (“‘The conditions seem to be relatively benign,’ said Tuna Amobi, equity analyst at
Standard & Poor’s. ‘There are no major divestitures required. I don’t know that is going to
create the kind of even, competitive field that was intended.’”); Smith & Catan, supra note
.
the yale law journal :
legislative history and as documented by a vast body of scholarship. I argue in
this Note that the rise of dominant internet platforms freshly reveals the short-
comings of the consumer welfare framework and that it should be abandoned.
Strikingly, the current approach fails even if one believes that consumer in-
terests should remain paramount. Focusing primarily on price and output un-
dermines eective antitrust enforcement by delaying intervention until market
power is being actively exercised, and largely ignoring whether and how it is
being acquired. In other words, pegging anticompetitive harm to high prices
and/or lower output—while disregarding the market structure and competitive
process that give rise to this market power—restricts intervention to the mo-
ment when a company has already acquired sucient dominance to distort
competition.
This approach is misguided because it is much easier to promote competi-
tion at the point when a market risks becoming less competitive than it is at the
point when a market is no longer competitive. The antitrust laws reflect this
recognition, requiring that enforcers arrest potential restraints to competition
“in their incipiency.”
145
But the Chicago School’s hostility to false positives—
and insistence that market power and high concentration both reflect and gen-
erate eciency
146
—has undermined this incipiency standard and enfeebled en-
forcement as a whole. Indeed, enforcers have largely abandoned section mo-
nopolization claims,
147
which—by virtue of assessing how a single company
amasses and exercises its power—traditionally involved an inquiry into struc-
ture. By instead relying primarily on price and output eects as metrics of
competition, enforcers risk overlooking the structural weakening of competi-
145. Clayton Act, ch. , Stat. () (codified as amended at U.S.C. -,
U.S.C. - ()). Former Assistant Attorney General for Antitrust Bill Baer described
the incipiency standard as seeking to “prevent competitive conditions from deteriorating
even when competition was not clearly problematic at the time of the lawsuit.” He contin-
ued, “Second, in order to arrest potential restraints ‘in their incipiency,’ the Act banned these
practices where their eect ‘may be to substantially lessen competition.’ The intent was to
consider likely future eect—not just palpable impact—in determining whether these prac-
tices were illegal.” Bill Baer, Assistant Att’y Gen., Antitrust Div., Dep’t of Justice, Remarks at
the American Bar Association Clayton Act th Anniversary Symposium (Dec. , ).
146. See Hovenkamp, supra note , at .
147. Daniel A. Crane, Has the Obama Justice Department Reinvigorated Antitrust Enforcement?,
S
TAN. L. REV. ONLINE (July , ), http://www.stanfordlawreview.org/online
/has-the-obama-justice-department-reinvigorated-antitrust-enforcement [http://perma.cc
/J-NNSP] (“The final category is monopolization cases. Over the eight years of the Bush
Administration, the Justice Department filed no monopolization cases. To date, the Obama
Administration has filed only one case, hardly evidencing a major shi in tactics.”).
amazon's antitrust paradox
tion until it becomes dicult to address eectively, an approach that under-
mines consumer welfare.
Indeed, growing evidence shows that the consumer welfare frame has led
to higher prices and few eciencies, failing by its own metrics.
148
It arguably
has further contributed to a decline in new business growth, resulting in re-
duced opportunities for entrepreneurs and a stagnant economy.
149
The long-
term interests of consumers include product quality, variety, and innovation—
factors best promoted through both a robust competitive process and open
markets. By contrast, allowing a highly concentrated market structure to persist
endangers these long-term interests, since firms in uncompetitive markets need
not compete to improve old products or tinker to create news ones. Even if we
accept consumer welfare as the touchstone of antitrust, ensuring a competitive
process—by looking, in part, to how a market is structured—ought to be key.
Empirical studies revealing that the consumer welfare frame has resulted in
higher prices—failing even by its own terms—support the need for a dierent
approach.
B. Antitrust Laws Promote Competition To Serve a Variety of Interests
Legislative history reveals that the idea that “Congress designed the Sher-
man Act as a ‘consumer welfare prescription’”
150
is wrong.
151
Congress enacted
antitrust laws to rein in the power of industrial trusts, the large business organ-
izations that had emerged in the late nineteenth century. Responding to a fear
148. A growing body of work shows that the consumer welfare frame has failed even on its own
terms—namely, by leading to higher prices without any clear eciency gains. See J
OHN
KWOKA, MERGERS, MERGER CONTROL, AND REMEDIES: A RETROSPECTIVE ANALYSIS OF U.S.
POLICY (); Benefits of Competition and Indicators of Market Power, COUNCIL ECON.
A
DVISERS (Apr. ), http://www.whitehouse.gov/sites/default/files/page/files/
_cea_competition_issue_brief.pdf [http://perma.cc/NMS-UL]; Divs. of Research &
Statistics & Monetary Aairs, Evidence for the Eects of Mergers on Market Power and
Eciency, F
ED. RES. (), http://www.federalreserve.gov/econresdata/feds//files
/pap.pdf [http://perma.cc/CYY-DGB].
149. See Barry C. Lynn & Lina Khan, The Slow Motion Collapse of American Entrepreneur-
ship, W
ASH. MONTHLY (July/Aug. ), http://washingtonmonthly.com/magazine
/julyaugust-/the-slow-motion-collapse-of-american-entrepreneurship [http://perma.cc
/PVM-FM]; see also Ian Hathaway & Robert E. Litan, What’s Driving the Decline in the
Firm Formation Rate? A Partial Explanation, B
ROOKINGS INST. (Nov. ) (document
-ing business consolidation as a contributing factor in the declining formation
of new firms), http://www.brookings.edu/wp-content/uploads///driving_decline
_firm_formation_rate_hathaway_litan.pdf [http://perma.cc/QAM-ZGAT].
150. Reiter v. Sonotone Corp., U.S. , ().
151. Heaps of scholarship delve into this legislative history. See, e.g., sources cited supra note .
the yale law journal :
of concentrated power, antitrust sought to distribute it. In this sense, antitrust
was “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 , Senator John Sherman called it “a bill of
rights, a charter of liberty,” and stressed its importance in political terms.
154
On
the floor of the Senate he declared,
If we will not endure a king as a political power, we should not endure a
king over the production, transportation, and sale of any of the necessi-
ties of life. If we would not submit to an emperor, we should not sub-
mit to an autocrat of trade, with power to prevent competition and to
fix the price of any commodity.”
155
In other words, what was at stake in keeping markets open—and keeping them
free from industrial monarchs—was freedom.
Animating this vision was the understanding that concentration of eco-
nomic power also consolidates political power, “breed[ing] antidemocratic po-
litical pressures.”
156
This would occur through enabling a small minority to
amass outsized wealth, which they could then use to influence government.
But it would also occur by permitting “private discretion by a few in the eco-
nomic sphere” to “control[] the welfare of all,” undermining individual and
business freedom.
157
In the lead up to the passage of the Sherman Act, Senator
George Hoar warned that monopolies were “a menace to republican institu-
tions themselves.”
158
This vision encompassed a variety of ends. For one, competition policy
would prevent large firms from extracting wealth from producers and consum-
ers in the form of monopoly profits.
159
Senator Sherman, for example, de-
scribed overcharges by monopolists as “extortion which makes the people
poor,”
160
while Senator Richard Coke referred to them as “robbery.”
161
Repre-
152. Eleanor Fox, Against Goals, FORDHAM L. REV. , ().
153. Id.
154. CONG. REC. () (statement of Sen. Sherman).
155. Id. at (statement of Sen. Sherman).
156. Robert Pitofsky, The Political Content of Antitrust, U. PA. L. REV. , ().
157. Id.
158. CONG. REC. () (statement of Sen. Hoar).
159. Lande, Wealth Transfers, supra note , at -.
160. CONG. REC. () (statement of Sen. Sherman, quoting Sen. George).
amazon's antitrust paradox
sentative John Heard announced that trusts had “stolen millions from the peo-
ple,”
162
and Congressman Ezra Taylor noted that the beef trust “robs the farmer
on the one hand and the consumer on the other.”
163
In the words of Senator
James George, “[t]hey aggregate to themselves great enormous wealth by ex-
tortion which makes the people poor.”
164
Notably, this focus on wealth transfers was not solely economic. Leading up
to the passage of the Sherman Act, price levels in the United States were stable
or slowly decreasing.
165
If the exclusive concern had been higher prices, then
Congress could have focused on those industries where prices were, indeed,
high or still rising. The fact that Congress chose to denounce unjust redistribu-
tion suggests that something else was at play—namely, that the public was “an-
gered less by the reduction in their wealth than by the way in which the wealth
was extracted.”
166
In other words, though the harm was being registered
through an economic eect—a wealth transfer—the underlying source of the
grievance was also political.
167
Another distinct goal was to preserve open markets, in order to ensure that
new businesses and entrepreneurs had a fair shot at entry. Several Congress-
men advocated for the Federal Trade Commission Act because it would help
promote small business. Senator James Reed expressly noted that Congress’s
aim in passing the law was to keep markets open to independent firms.
168
When discussing the Sherman Act, Senator George lamented that if large-scale
161. Id. at (statement of Sen. Coke).
162. Id. at (statement of Rep. Heard).
163. Id. at (statement of Rep. Taylor).
164. Id. at (statement of Sen. Sherman, quoting Sen. George).
165. Lande, Wealth Transfers, supra note , at -.
166. Id. at .
167. For a seminal discussion of why antitrust laws must take political values into account, see
Pitofsky, supra note , at (“It is bad history, bad policy, and bad law to exclude certain
political values in interpreting the antitrust laws. By ‘political values,’ I mean, first, a fear
that excessive concentration of economic power will breed antidemocratic political pressures,
and second, a desire to enhance individual and business freedom by reducing the range
within which private discretion by a few in the economic sphere controls the welfare of all. A
third and overriding political concern is that if the free-market sector of the economy is al-
lowed to develop under antitrust rules that are blind to all but economic concerns, the likely
result will be an economy so dominated by a few corporate giants that it will be impossible
for the state not to play a more intrusive role in economic aairs.”).
168. CONG. REC. , () (statement of Sen. Reed).
the yale law journal :
industry were allowed to grow unchecked, it would “crush out all small men,
all small capitalists, all small enterprises.”
169
Through the s, courts and enforcers applied antitrust laws to promote
this variety of aims. While the vigor and tenor of enforcement varied, there was
an overarching understanding that antitrust served to protect what Justice Lou-
is Brandeis called “industrial liberty.”
170
Key to this vision was the recognition
that excessive concentrations of private power posed a public threat, empower-
ing the interests of a few to steer collective outcomes. “Power that controls the
economy should be in the hands of elected representatives of the people, not in
the hands of an industrial oligarchy,” Justice William O. Douglas wrote.
171
De-
centralizing this power would ensure that “the fortunes of the people will not
be dependent on the whim or caprice, the political prejudice, the emotional
stability of a few self-appointed men.”
172
As described in Part I, Chicago School scholars upended this traditional
approach, concluding that the only legitimate goal of antitrust is consumer
welfare, best promoted through enhancing economic eciency. Notably, some
prominent liberals—including John Kenneth Galbraith—ratified this idea,
championing centralization.
173
In the wake of high inflation in the s,
Ralph Nader and other consumer advocates also came to support an antitrust
regime centered on lower prices, according with the Chicago School’s view.
174
By orienting antitrust toward material rather than political ends, both the neo-
classical school and its critics eectively embraced concentration over competi-
tion.
175
169. CONG. REC. () (statement of Sen. George).
170. LOUIS D. BRANDEIS, THE CURSE OF BIGNESS (Osmond K. Fraenkel ed., ).
171. United States v. Columbia Steel Co., U.S. , () (Douglas, J., dissenting).
172. Id.
173. In Economics and the Public Purpose, Galbraith concluded that centralized planning, rather
than open markets, was the best way to stabilize industries and boost prosperity. J
OHN
KENNETH GALBRAITH, ECONOMICS AND THE PUBLIC PURPOSE ().
174. See MICHAEL SANDEL, DEMOCRACY’S DISCONTENT () (“Although Nader and his fol-
lowers did not disparage, as did Bork, the civic tradition of antitrust, they too rested their
arguments on considerations of consumer welfare . . . . According to Nader, the ‘modern rel-
evance’ of traditional antitrust wisdom lay in its consequences for ‘the prices people pay for
their bread, gasoline, auto parts, prescription drugs, and houses.’”).
175. See Lina Khan, New Tools To Promote Competition, DEMOCRACY (Fall ), http://
democracyjournal.org/magazine//new-tools-to-promote-competition [http://perma.cc
/VZN-CZBN].
amazon's antitrust paradox
Focusing antitrust exclusively on consumer welfare is a mistake.
176
For one,
it betrays legislative intent, which makes clear that Congress passed antitrust
laws to safeguard against excessive concentrations of economic power. This vi-
sion promotes a variety of aims, including the preservation of open markets,
the protection of producers and consumers from monopoly abuse, and the dis-
persion of political
177
and economic control.
178
Secondly, focusing on consumer
welfare disregards the host of other ways that excessive concentration can harm
us—enabling firms to squeeze suppliers and producers, endangering system
stability (for instance, by allowing companies to become too big to fail),
179
or
undermining media diversity,
180
to name a few. Protecting this range of inter-
176. I am by no means alone in arguing this. See, e.g., BARRY C. LYNN, CORNERED: THE NEW
MONOPOLY CAPITALISM AND THE ECONOMICS OF DESTRUCTION (); Fox, supra note , at
-; Maurice E. Stucke, Better Competition Advocacy, S
T. JOHN’S L. REV. ,
(); Stucke, supra note , at .
177. For a more recent argument in favor of rebalancing antitrust away from technocracy and
toward democracy, see Harry First & Spencer Weber Waller, Antitrust’s Democracy Deficit,
F
ORDHAM L. REV. , () (“[A]ntitrust is also public law designed to serve public
ends. Today’s unbalanced system puts too much control in the hands of technical experts,
moving antitrust enforcement too far away from its democratic roots.”).
178. See Fox, supra note , at - (“Rather than standing for eciency, the American anti-
trust laws stand against private power. Distrust of power is the one central and common
ground that over time has unified support for antitrust statutes. Interests of consumers have
been a recurrent concern because consumers have been perceived as victims of the abuse of
too much power. Interests of entrepreneurs and small business have been a recurrent con-
cern because independent entrepreneurs have been seen as the heart and lifeblood of Ameri-
can free enterprise, and freedom of economic activity and opportunity has been thought
central to the preservation of the American free enterprise system. One overarching idea has
unified these three concerns (distrust of power, concern for consumers, and commitment to
opportunity of entrepreneurs): competition as process. The competition process is the pre-
ferred governor of markets. If the impersonal forces of competition, rather than public or
private power, determine market behavior and outcomes, power is by definition dispersed,
opportunities and incentives for firms without market power are increased, and the results
are acceptable and fair.” (citations omitted)).
179. For more on this connection, see SIMON JOHNSON & JAMES KWAK, BANKERS: THE WALL
STREET TAKEOVER AND THE NEXT FINANCIAL MELTDOWN (); and LYNN, supra note .
180. The Justice Department recently cited the importance of media diversity when
suing to block a merger between two newspapers. See Michaela Ross, Even for Ailing
Newspapers, U.S. Says a Monopoly Is a Monopoly, B
LOOMBERG (Mar. , ), http://
www.bloomberg.com/news/articles/--/tribune-loses-out-on-local-newspaper-deal
-over-antitrust-issues [http://perma.cc/UE-ZHM]. For why competition policy is im-
portant for promoting media diversity, see Maurice E. Stucke & Allen P. Grunes, Toward a
Better Competition Policy for the Media: The Challenge of Developing Antitrust Policies that Sup-
port the Media Sector’s Unique Role in Our Democracy, C
ONN. L. REV. ().
the yale law journal :
ests requires an approach to antitrust that focuses on the neutrality of the com-
petitive process and the openness of market structures.
C. Promoting Competition Requires Analysis of Process and Structure
The Chicago School’s embrace of consumer welfare as the sole goal of anti-
trust is problematic for at least two reasons. First, as described in Section II.B,
this idea contravenes legislative history, which shows that Congress passed an-
titrust laws to safeguard against excessive concentrations of private power. It
recognized, in turn, that this vision would protect a host of interests, which the
sole focus on “consumer welfare” disregards. Second, by adopting this new
goal, the Chicago School shied the analytical emphasis away from process—the
conditions necessary for competition—and toward an outcome—namely, con-
sumer welfare.
181
In other words, a concern about structure (is power su-
ciently distributed to keep markets competitive?) was replaced by a calculation
(did prices rise?).
182
This approach is inadequate to promote real competition,
a failure that is amplified in the case of dominant online platforms.
Antitrust doctrine has evolved to reflect this redefinition. The recoupment
requirement in predatory pricing, for example, reflects the idea that competi-
tion is harmed only if the predator can ultimately charge consumers su-
pracompetitive prices.
183
This logic is agnostic about process and structure; it
measures the health of competition primarily through eects on price and out-
put. The same is true in the case of vertical integration. The modern view of
integration largely assumes away barriers to entry, an element of structure, pre-
suming that any advantages enjoyed by the integrated firm trace back to e-
ciencies.
184
More generally, modern doctrine assumes that market power is not inher-
ently harmful and instead may result from and generate eciencies. In practice,
this presumes that market power is benign unless it leads to higher prices or re-
181. See Fox, supra note .
182. For one perspective on how the Chicago School’s philosophy has shaped antitrust, see gen-
erally
HOW THE CHICAGO SCHOOL OVERSHOT THE MARK: THE EFFECT OF CONSERVATIVE
ECONOMIC ANALYSIS ON U.S. ANTITRUST supra note . In his essay within this collection,
Richard Schmalensee states, “Competition . . . generally means now, consumer or total wel-
fare.” Richard Schmalensee, Thoughts on the Chicago Legacy in U.S. Antitrust, in H
OW THE
CHICAGO SCHOOL OVERSHOT THE MARK: THE EFFECT OF CONSERVATIVE ECONOMIC ANALYSIS
ON
U.S. ANTITRUST supra note , at .
183. See supra Section I.A.
184. See BORK, supra note , at (“Absent the power to restrict output, the decision to elimi-
nate rivalry can only be made in order to achieve eciency.”); see supra Section I.B.
amazon's antitrust paradox
duced output—again glossing over questions about the competitive process in
favor of narrow calculations.
185
In other words, this approach equates harm en-
tirely with whether a firm chooses to exercise its market power through price-
based levers, while disregarding whether a firm has developed this power, dis-
torting the competitive process in some other way.
186
But allowing firms to
amass market power makes it more dicult to meaningfully check that power
when it is eventually exercised. Companies may exploit their market power in a
host of competition-distorting ways that do not directly lead to short-term
price and output eects.
I propose that a better way to understand competition is by focusing on
competitive process and market structure.
187
By arguing for a focus on market
structure, I am not advocating a strict return to the structure-conduct-
performance paradigm. Instead, I claim that seeking to assess competition
without acknowledging the role of structure is misguided. This is because the
best guardian of competition is a competitive process, and whether a market is
competitive is inextricably linked to—even if not solely determined by—how
that market is structured. In other words, an analysis of the competitive process
and market structure will oer better insight into the state of competition than
do measures of welfare.
Moreover, this approach would better protect the range of interests that
Congress sought to promote through preserving competitive markets, as de-
scribed in Section II.B. Foundational to these interests is the distribution of
ownership and control—inescapably a question of structure. Promoting a com-
petitive process also minimizes the need for regulatory involvement. A focus on
185. See Hovenkamp, supra note , at (“[T]he guiding principle of the Chicago School cri-
tique of the S-C-P paradigm was that market power is not inherently a bad thing. Indeed,
oen market power as well as high concentration result from eciency.”).
186. One line of argument holds that the concentration of private control—and the power it
hands to a few over our economy—is itself problematic, and if and how those wielding this
power choose to exercise it is beside the point. See, e.g., United States v. Columbia Steel Co.,
U.S. , () (Douglas, J., dissenting) (“In final analysis, size in steel is the
measure of the power of a handful of men over our economy. That power can be utilized
with lightning speed. It can be benign or it can be dangerous. The philosophy of the Sher-
man Act is that it should not exist.”).
187. I am not the first to argue that preserving a competitive process is vital to promoting compe-
tition. See, e.g., Fox, supra note , at -. Instead, my contribution here is in () identi-
fying how a consumer welfare-based approach is failing to detect and deter anticompetitive
harms in the context of internet platforms, thereby () highlighting the need for a process-
based approach as applied to internet platforms, and () detailing that this process-based
approach would pay particular attention to entry barriers, conflicts of interest, the emer-
gence of gatekeepers and bottlenecks, the use of and control over data, and dynamics of bar-
gaining power.
the yale law journal :
process assigns government the task of creating background conditions, rather
than intervening to manufacture or interfere with outcomes.
188
In practice, adopting this approach would involve assessing a range of fac-
tors that give insight into the neutrality of the competitive process and the
openness of the market. These factors include: () entry barriers, () conflicts
of interest, () the emergence of gatekeepers or bottlenecks, () the use of and
control over data, and () the dynamics of bargaining power. An approach that
took these factors seriously would involve an assessment of how a market is
structured and whether a single firm had acquired sucient power to distort
competitive outcomes.
189
Key questions involving these factors would be:
What lines of business is a firm involved in and how do these lines of business
interact? Does the structure of the market create or reflect dependencies? Has a
dominant player emerged as a gatekeeper so as to risk distorting competition?
Attention to structural concerns and the competitive process are especially
important in the context of online platforms, where price-based measures of
competition are inadequate to capture market dynamics, particularly given the
role and use of data.
190
As internet platforms mediate a growing share of both
communications and commercial activity, ensuring that our framework fits
how competition actually works in these markets is vital. Below I document
facets of Amazon’s power, trace the source of its growth, and analyze the eects
of its dominance. Doing so through the lens of structure and process enables us
to make sense of the company’s strategy and illuminates anticompetitive as-
pects of its business.
iii. amazon’s business strategy
Amazon has established dominance as an online platform thanks to two el-
ements of its business strategy: a willingness to sustain losses and invest ag-
188. This is one line of argument President Franklin Roosevelt oered in favor of robust anti-
trust. In a speech to Congress he said, “The enforcement of free competition is the least
regulation business can expect.” Franklin D. Roosevelt, Message to Congress on Curbing Mo-
nopolies, A
M. PRESIDENCY PROJECT http://www.presidency.ucsb.edu/ws/?pid= [http://
perma.cc/WPP-RF].
189. By “distorting,” I mean that a single player has enough control to dictate outcomes. This is
the definition oered by Milton Friedman, a figure popular with the neoclassical school. See
M
ILTON FRIEDMAN, CAPITALISM AND FREEDOM - () (“Monopoly exists when a spe-
cific individual or enterprise has sucient control over a particular product or service to de-
termine significantly the terms on which other individuals shall have access to it.”). The Chi-
cago School accepts this definition with regard to price and output, but ignores other
metrics of control.
190. See STUCKE & GRUNES, supra note , at -.
amazon's antitrust paradox
gressively at the expense of profits, and integration across multiple business
lines.
191
These facets of its strategy are independently significant and closely
interlinked—indeed, one way it has been able to expand into so many areas is
through foregoing returns. This strategy—pursuing market share at the ex-
pense of short-term returns—defies the Chicago School’s assumption of ration-
al, profit-seeking market actors. More significantly, Amazon’s choice to pursue
heavy losses while also integrating across sectors suggests that in order to fully
understand the company and the structural 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 of business and assessing prices in that segment fails to capture
both () the true shape of the company’s dominance and () the ways in which
it is able to leverage advantages gained in one sector to boost its business in an-
other.
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 computing business.
192
Its
North America retail business runs on much thinner margins, and its interna-
tional retail business still runs at a loss.
193
But for the vast majority of its twen-
ty years in business, losses—not profits—were the norm. Through , Ama-
zon had generated a positive net income in just over half of its financial
reporting quarters. Even in quarters in which it did enter the black, its margins
were razor-thin, despite astounding growth. The graph below captures the
general trend.
191. I am using “dominance” to connote that the company controls a significant share of market
activity in a sector. I do not mean to attach the legal significance that sometimes attends
“dominance.”
192. See Greg Bensinger, Cloud Unit Pushes Amazon To Record Profit, WALL ST. J. (Apr. , ,
: PM), http://www.wsj.com/articles/amazon-reports-surge-in-profit-
[http://perma.cc/LQS-RJ] (“The cloud division’s sales rose to . billion. While
that is less than one-tenth of Amazon’s overall revenue, [Amazon Web Services] generated
of the company’s operating income in the quarter.”).
193. Id.
the yale law journal :
FIGURE 1.
A
MAZON’S PRICES
194
Just as striking as Amazon’s lack of interest in generating profit has been
investors’ willingness to back the company.
195
With the exception of a few
quarters in , Amazon’s shareholders have poured money in despite the
company’s penchant for losses. On a regular basis, Amazon would report loss-
es, and its share price would soar.
196
As one analyst told the New York Times,
194. Amazon’s Profits, BEN-EVANS (Aug. ), http://ben-evans.com/benedictevans///
/amazons-profits [http://perma.cc/GJC-XBL]; Amazon.com Inc., M
ARKETWATCH,
http://www.marketwatch.com/investing/stock/amzn/historical [http://perma.cc/JW
-A].
195. See Streitfeld, supra note (“In its years as a public company, Amazon has received unique
permission from Wall Street to concentrate on expanding its infrastructure, increasing reve-
nue at the expense of profit. Stockholders have pushed Amazon shares up to a record level,
even though the company makes only pocket change. Profits were always promised tomor-
row.”).
196. See, e.g., Justin Dini, Amazon Losses Widen but Shares Rise Aer-Hours, THESTREET (Feb,
, , : PM), http://www.thestreet.com/story///amazon-losses-widen-but
-shares-rise-aer-hours.html [http://perma.cc/PHJ-VDG]; Quick Pen, What’s Driving
the Amazon Stock Up Despite 188% Full Year Income Drop?, G
URUFOCUS (Feb.
, ), http://www.gurufocus.com/news//whats-driving-the-amazon-stock-up
-despite--full-year-income-drop [http://perma.cc/KFJ-JWNA].
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Revenue (millions of $) Profit (millions of $)
amazon's antitrust paradox
“Amazon’s stock price doesn’t seem to be correlated to its actual experience in
any way.”
197
Analysts and reporters have spilled substantial ink seeking to understand
the phenomenon. As one commentator joked in a widely circulated post, “Ama-
zon, as best I can tell, is a charitable organization being run by elements of the
investment community for the benefit of consumers.”
198
In some ways, the puzzlement is for naught: Amazon’s trajectory 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 success will be the share-
holder value we create over the long term. This value will be a direct re-
sult of our ability to extend and solidify our current market leadership
position . . . . We first measure ourselves in terms of the metrics most
indicative of our market leadership: customer and revenue growth, the
degree to which our customers continue to purchase from us on a re-
peat basis, and the strength of our brand. We have invested and will
continue to invest aggressively to expand and leverage our customer
base, brand, and infrastructure as we move to establish an enduring
franchise.
199
In other words, the premise of Amazon’s business model was to establish
scale. To achieve scale, the company prioritized growth. Under this approach,
aggressive investing would be key, even if that involved slashing prices or
spending billions on expanding capacity, in order to become consumers’ one-
stop-shop. This approach meant that Amazon “may make decisions and weigh
tradeos dierently than some companies,” Bezos warned.
200
“At this stage, we
197. David Streitfeld, Amazon Reports Unexpected Profit, and Stock Soars, N.Y. TIMES (July ,
), http://www.nytimes.com////technology/amazon-earnings-q.html [http://
perma.cc/WJX-CYG]; see also Philip Elmer-DeWitt, This Is What Drives Apple Investors
Nuts About Amazon, F
ORTUNE (July , , : PM), http://fortune.com///
/apple-amazon-profits [http://perma.cc/U-ZE] (noting the same).
198. Matthew Yglesias, Amazon Profits Fall 45 Percent, Still the Most Amazing Company in the
World, S
LATE: MONEYBOX (Jan. , , : PM), http://www.slate.com/blogs/moneybox
////amazon_q_profits_fall_ _percent.html [http://perma.cc/JAZ-RS].
199. Jerey P. Bezos, Letter to Shareholders, AMAZON.COM, INC. (Mar. , ), http://
media.corporate-ir.net/media_files/irol///reports/Shareholderletter.pdf [http://
perma.cc/G-YML].
200. Id. at .
the yale law journal :
choose to prioritize growth because we believe that scale is central to achieving
the potential of our business model.”
201
The insistent emphasis on “market leadership” (Bezos relies on the term six
times in the short letter)
202
signaled that Amazon intended to dominate. And,
by many measures, Amazon has succeeded. Its year-on-year revenue growth far
outpaces that of other online retailers.
203
Despite eorts by big-box competi-
tors like Walmart, Sears, and Macy’s to boost their online operations, no rival
has succeeded in winning back market share.
204
One of the primary ways Amazon has built a huge edge is through Amazon
Prime, the company’s loyalty program, in which Amazon has invested aggres-
sively. Initiated in , Amazon Prime began by oering consumers unlimited
two-day shipping for .
205
In the years since, Amazon has bundled in other
deals and perks, like renting e-books and streaming music and video, as well as
one-hour or same-day delivery. The program has arguably been the retailer’s
single biggest driver of growth.
206
Amazon does not disclose the exact number
201. Id.
202. Id. at -.
203. Tonya Garcia, Amazon Accounted for 60% of U.S. Online Sales Growth in 2015,
M
ARKETWATCH, (May , , : PM), http://www.marketwatch.com/story/ama
zon-accounted-for--of-online-sales-growth-in---- [http://perma.cc/CW
-NYW] (“Amazon makes up a larger percentage of e-commerce in the U.S. than any
other player, and its retail growth has outpaced overall online retail.”); see also The
Everything Shipper: Amazon and the New Age of Delivery, BI
INTELLIGENCE (June
, ), http://www.businessinsider.com/the-everything-shipper-amazon-and-the-new
-age-of-delivery-- [http://perma.cc/SGJ-ADY].
204. See Phil Wahba, This Chart Shows Just How Dominant Amazon Is, FORTUNE (Nov. , ,
: AM), http://fortune.com////amazon-retailers-ecommerce [http://perma.cc
/YPV-SKM]. The fact that Amazon was exempt from sales taxes for the first fieen years
of its existence gave it an - price advantage over brick-and-mortar stores. Its pricing
lead over both traditional and online retailers, however, has been and still continues to be far
greater than -. A review of a new price comparison tool stated: “And, as expected, it re-
ported that Amazon indeed had the best prices for nearly everything we searched.” Zach Ep-
stein, Amazon Isn’t Always the Cheapest Option—Here’s How To Find the Best Prices, BGR
(July , , : PM), http://bgr.com////amazon-price-comparison-tool
-lowest-price [http://perma.cc/JP-BBY].
205. Dawn Kawamoto, Amazon Unveils Flat-Fee Shipping, CNET (Feb. , ), http://www.cnet
.com/news/amazon-unveils-flat-fee-shipping [http://perma.cc/QFS-SQ].
206. It has also been a key force driving up Amazon’s stock price. “Analysts describe Prime as one
of the main factors driving Amazon’s stock price—up percent in the last two years—and
the main reason Amazon’s sales grew percent during the recession while other retailers
flailed.” Brad Stone, What’s in Amazon’s Box? Instant Gratification, B
LOOMBERG BUSI-
NESSWEEK
(Nov. , , : PM), http://www.bloomberg.com/news/articles/-
-/whats-in-amazons-box-instant-gratification [http://perma.cc/QVL-DQ]; see also
amazon's antitrust paradox
of Prime subscribers, but analysts believe the number of users has reached
million— million more than in .
207
Membership doubled between
and ; analysts expect it to “easily double again by .”
208
By , it is es-
timated that half of U.S. households may be enrolled.
209
As with its other ventures, Amazon lost money on Prime to gain buy-in. In
it was estimated that each Prime subscriber cost Amazon at least a
year— in shipping, in digital video—and that the company therefore
took an loss annually for each customer.
210
One Amazon expert tallies that
Amazon has been losing billion to billion a year on Prime member-
ships.
211
The full cost of Amazon Prime is steeper yet, given that the company
has been investing heavily in warehouses, delivery facilities, and trucks, as part
of its plan to speed up delivery for Prime customers—expenditures that regu-
larly push it into the red.
212
Despite these losses—or perhaps because of them—Prime is considered
crucial to Amazon’s growth as an online retailer. According to analysts, custom-
Tom DiChristopher, Prime Will Grow Amazon Revenue Longer than You Think: Analyst,
CNBC (Sept. , , : AM), http://www.cnbc.com////prime-will-grow
-amazon-revenue-longer-than-you-think-analyst.html [http://perma.cc/QGH-ZA]
(“During Amazon’s second quarter conference call, management said growing Prime adop-
tion was one factor behind acceleration in domestic and international revenue growth.”).
207. Devin Leonard, Will Amazon Kill FedEx?, BLOOMBERG (Aug. , ), http://www
.bloomberg.com/features/-amazon-delivery [http://perma.cc/GEF-DBE].
208. Brad Tuttle, Amazon Prime: Bigger, More Powerful, More Profitable than Anyone Imagined,
T
IME (Mar. , ), http://business.time.com////amazon-prime-bigger-more
-powerful-more-profitable-than-anyone-imagined [http://perma.cc/WNL-MC].
209. Dan Frommer, Half of US Households Could Have Amazon Prime by 2020, QUARTZ (Feb.
, ), http://qz.com//half-of-us-households-could-have-amazon-prime-by-
[http://perma.cc/ZWZ-UY].
210. Stu Woo, Amazon ‘Primes’ Pump for Loyalty, WALL ST. J. (Nov. , ), http://www.wsj
.com/articles/SB [http://perma.cc/WW
-TVNW].
211. Deepa Seetharaman & Nathan Layne, Free Delivery Creates Holiday Boon for U.S. Consumers
at High Cost, R
EUTERS (Jan. , , : PM), http://www.reuters.com/article/us-retail
-shipping-holidays-analysis-idUSKBNKBP [http://perma.cc/CPH-W].
212. See Elizabeth Weise, Amazon Prime Is Big, but How Big?, USA TODAY (Feb. . ,
: PM), http://www.usatoday.com/story/tech////amazon-prime--years-old
-anniversary/ [http://perma.cc/KA-MHA]. Amazon’s filings with the SEC show
that its shipping costs have grown as a percentage of sales each year since . See Ama-
zon.com, Inc., supra note , at ; Amazon.com, Inc., Annual Report (Form -K) (Jan.
, ), http://www.sec.gov/Archives/edgar/data///dd
k.htm [http://perma.cc/RX-RJ]; Amazon.com, Inc., Annual Report (Form -K)
(Jan. , ), http://www.sec.gov/Archives/edgar/data//
/dk.htm [http://perma.cc/LR-CHUY].
the yale law journal :
ers increase their purchases from Amazon by about aer they become
Prime members.
213
Prime members comprise of Amazon’s U.S. shop-
pers.
214
Amazon Prime members also spend more on the company’s website—
an average of , annually, compared to spent annually by non-Prime
members.
215
Business experts note that by making shipping free, Prime “suc-
cessfully strips out paying for . . . the leading consumer burden of online shop-
ping.”
216
Moreover, the annual fee drives customers to increase their Amazon
purchases in order to maximize the return on their investment.
217
As a result, Amazon Prime users are both more likely to buy on its platform
and less likely to shop elsewhere. “[Sixty-three percent] of Amazon Prime
members carry out a paid transaction on the site in the same visit,” compared to
of non-Prime members.
218
For Walmart and Target, those figures are
and respectively.
219
One study found that less than of Amazon Prime
members are likely to consider competitor retail sites in the same shopping ses-
sion. Non-Prime members, meanwhile, are eight times more likely than Prime
members to shop between both Amazon and Target in the same session.
220
In
the words of one former Amazon employee who worked on the Prime team, “It
was never about the . It was really about changing people’s mentality so
213. Stone, supra note .
214. Brad Tuttle, How Amazon Prime Is Crushing the Competition, TIME (Jan. , ), http://
time.com/money//amazon-prime-subscribers-spending [http://perma.cc/YVT
-VHD].
215. Chad Rubin, The Evolution of Amazon Prime and Their Followed Success, SKUBANA (Mar. ,
), http://www.skubana.com/e-commerce-trends/evolution-of-amazon-prime [http://
perma.cc/TET-CV].
216. Ben Fox Rubin, As Amazon Marks 20 Years, Prime Grows to 44 Million Members in US, CNET
(July , , : AM), http://www.cnet.com/news/amazon-prime-grows-to-estimated
--million-members-in-us [http://perma.cc/CEQ-G].
217. See Brad Tuttle, How Amazon Gets You To Stop Shopping Anywhere Else, TIME (Dec. ,
), http://business.time.com////how-amazon-gets-you-to-stop-shopping-any
where-else [http://perma.cc/GLQ-AT].
218. Clare O’Connor, Walmart and Target Being Crowded Out Online by Amazon Prime,
F
ORBES (Apr. , , : PM), http://www.forbes.com/sites/clareoconnor///
/walmart-and-target-being-crowded-out-online-by-amazon-prime [http://perma.cc/CME
-GPER].
219. Id.
220. Id.
amazon's antitrust paradox
they wouldn’t shop anywhere else.”
221
In that regard, Amazon Prime seems to
have proven successful.
222
In , Amazon hiked its Prime membership fee to .
223
The move
prompted some consumer ire, but of Prime members surveyed said they
would either definitely or probably renew their membership regardless,
224
sug-
gesting that Amazon has created significant buy-in and that no competitor is
currently oering a comparably valuable service at a lower price. It may, how-
ever, also reveal the general stickiness of online shopping patterns. Although
competition for online services may seem to be “just one click away,” research
drawing on behavioral tendencies shows that the “switching cost” of changing
web services can, in fact, be quite high.
225
No doubt, Amazon’s dominance stems in part from its first-mover ad-
vantage as a pioneer of large-scale online commerce. But in several key ways,
Amazon has achieved its position through deeply cutting prices and 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 a central
premise of contemporary predatory pricing doctrine, which assumes that pre-
dation is irrational precisely because firms prioritize profits over growth.
226
In
this way, Amazon’s strategy has enabled it to use predatory pricing tactics with-
out triggering the scrutiny of predatory pricing laws.
221. Stone, supra note .
222. See Tuttle, supra note (“What this program has done is something that’s normally very
dicult to accomplish: It’s changed consumer habits, and, perhaps even more remarkably,
it’s changed them in ways that solely favor Amazon. The service is better than any freebie
promotion, which even if it’s good at driving trac to the website, is short-lived. Instead,
the Prime membership program gets consumers in the regular habit of at least checking
with Amazon before making any online purchase.”).
223. Greg Bensinger, Amazon Raises Prime Subscription Price to $99 a Year, WALL ST. J. (Mar. ,
, : PM), http://www.wsj.com/articles/SB
[http://perma.cc/TK-GS].
224. Lance Whitney, Amazon Prime Members Will Renew Despite Price Hike, Survey Finds, CNET
(July , ), http://www.cnet.com/news/amazon-prime-members-will-almost-all
-renew-despite-price-increase [http://perma.cc/Z-YUP].
225. See Adam Candeub, Behavioral Economics, Internet Search, and Antitrust, I/S ,
() (“[O]nline market behavior may dier from the brick and mortar world . . . . In par-
ticular, behavioral tendencies related to habit and information costs may disrupt conven-
tional economic assumptions.”).
226. As Justice White wrote in his dissent in Matsushita, “The Court, in discussing the unlikeli-
hood of a predatory conspiracy, also consistently assumes that petitioners valued profit-
maximization over growth.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., U.S. ,
() (White, J., dissenting).
the yale law journal :
B. Expansion into Multiple Business Lines
Another key element of Amazon’s strategy—and one partly enabled by its
capacity to thrive despite posting losses—has been to expand aggressively into
multiple business lines.
227
In addition to being a retailer, Amazon is a market-
ing platform, a delivery and logistics network, a payment service, a credit lend-
er, an auction house, a major book publisher, a producer of television and films,
a fashion designer, a hardware manufacturer, and a leading provider of cloud
server space and computing power.
228
For the most part, Amazon has expanded
into these areas by acquiring existing firms.
229
Involvement in multiple, related business lines means that, in many in-
stances, Amazon’s rivals are also its customers. The retailers that compete with
it to sell goods may also use its delivery services, for example, and the media
companies that compete with it to produce or market content may also use its
platform or cloud infrastructure. At a basic level this arrangement creates con-
flicts of interest, given that Amazon is positioned to favor its own products over
those of its competitors.
Critically, not only has Amazon integrated across select lines of business,
but it has also emerged as central infrastructure for the internet economy. Re-
ports suggest this was part of Bezos’s vision from the start. According to early
227. Indeed, to get a sense of Amazon’s breadth, it is helpful to see the range of actors Amazon
lists among its “current and potential competitors”:
() online, oine, and multichannel retailers, publishers, vendors, distributors, manu-
facturers, and producers of the products we oer and sell to consumers and businesses;
() publishers, producers, and distributors of physical, digital, and interactive media of
all types and all distribution channels; () web search engines, comparison shopping
websites, social networks, web portals, and other online and app-based means of dis-
covering, using, or acquiring goods and services, either directly or in collaboration with
other retailers; () companies that provide e-commerce services, including website de-
velopment, advertising, fulfillment, customer service, and payment processing;
() companies that provide fulfillment and logistics services for themselves or for third
parties, whether online or oine; () companies that provide information technology
services or products, including on-premises or cloud-based infrastructure and other
services; and () companies that design, manufacture, market, or sell consumer elec-
tronics, telecommunication, and electronic devices.
Amazon.com, Inc., Annual Report (Form -K) (Apr. , ), http://phx.corporate
-ir.net/External.File?item=UGFyZWSUQNjINTgfENoaWxkSUQMzINTMwfFR
cGUMQ==&t= [http://perma.cc/HQ-TZDT].
228. See generally id. (describing Amazon’s businesses).
229. As of , Amazon had acquired or invested in over seventy companies. See SUCHARITA
MULPURU & BRIAN K. WALKER, FORRESTER, WHY AMAZON MATTERS NOW MORE THAN EV-
ER
().
amazon's antitrust paradox
Amazon employees, when the CEO founded the business, “his underlying
goals were not to build an online bookstore or an online retailer, but rather a
‘utility’ that would become essential to commerce.”
230
In other words, Bezos’s
target customer was not only end-consumers but also other businesses.
Amazon controls key critical infrastructure for the Internet economy—in
ways that are dicult for new entrants to replicate or compete against. This
gives the company a key advantage over its rivals: Amazon’s competitors have
come to depend on it. Like its willingness to sustain losses, this feature of Ama-
zon’s power largely confounds contemporary antitrust analysis, which assumes
that rational firms seek to drive their rivals out of business. Amazon’s game is
more sophisticated. By making itself indispensable to e-commerce, Amazon en-
joys receiving business from its rivals, even as it competes with them. Moreo-
ver, Amazon gleans information from these competitors as a service provider
that it may use to gain a further advantage over them as rivals—enabling it to
further entrench its dominant position.
iv. establishing structural dominance
Amazon now controls of all e-commerce in the United States.
231
Not
only is it the fastest-growing major retailer, but it is also growing faster than e-
commerce as a whole.
232
In , it employed , workers; by June , it
had ,.
233
It is enjoying rapid success even in sectors that it only recently
entered. For example, the company “is expected to triple its share of the U.S.
apparel market over the next five years.”
234
Its clothing sales recently rose by
230. Id. at .
231. See LaVecchia & Mitchell, supra note , at .
232. Tiernan Ray, Amazon: All Retail’s SKUs Are Belong to Them, Goldman Tells CNBC, BARRONS:
TECH TRADER DAILY (June , , : AM), http://blogs.barrons.com/techtrader
daily////amazon-all-retails-skus-are-belong-to-them-goldman-tells-cnbc [http://
perma.cc/ZR-JYGR] (quoting a Goldman Sachs analyst as saying, “[p]rojected e-
commerce growth of this year is largely thanks to Amazon,” and “Amazon ‘is going to
outgrow that,’ with perhaps ‘mid to high s growth,’ . . . given ‘Amazon is taking share, and
seeing acceleration in their international business’”). See generally Leonard, supra note
(“Amazon’s growth has been preposterous . . . . The company is the fih-most valuable in
the world: Its market capitalization is about billion, which is roughly equal to the
combined worth of Walmart, FedEx, and Boeing.”).
233. Leonard, supra note .
234. Shelly Banjo, Amazon Eats the Department Store, BLOOMBERG: GADFLY (Sept. , ,
: AM), http://www.bloomberg.com/gadfly/articles/--/amazon-clothing-sales
-could-soon-top-macy-s [http://perma.cc/UJ-Y].
the yale law journal :
. billion—even as online sales at the six largest U.S. department stores fell
by over million.
235
These figures alone are daunting, but they do not capture the full extent of
Amazon’s role and power. Amazon’s willingness to sustain losses and invest ag-
gressively at the expense of profits, coupled with its integration across sectors,
has enabled it to establish a dominant structural role in the market.
In the Sections that follow, I describe several examples of Amazon’s conduct
that illustrate how the firm has established structural dominance.
236
These ex-
amples—its handling of e-books and its battle with an independent online re-
tailer—focus on predatory pricing practices. These cases suggest ways in which
Amazon may benefit from predatory pricing even if the company does not raise
the price of the goods on which it lost money. The other examples, Fulfillment-
by-Amazon and Amazon Marketplace, demonstrate how Amazon has become
an infrastructure company, both for physical delivery and e-commerce, and
how this vertical integration implicates market competition. These cases high-
light how Amazon can use its role as an infrastructure provider to benefit its
other lines of business. These examples also demonstrate how high barriers to
entry may make it dicult for potential competitors to enter these spheres,
locking in Amazon’s dominance for the foreseeable future. All four of these ac-
counts raise concerns about contemporary antitrust’s ability to register and ad-
dress the anticompetitive threat posed by Amazon and other dominant online
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 below cost. Alt-
hough this strategic pricing helped Amazon to establish dominance in the e-
book market, the government perceived Amazon’s cost cutting as benign, fo-
cusing on the profitability of e-books in the aggregate and characterizing the
company’s pricing of bestsellers as “loss leading” rather than predatory pricing.
This failure to recognize Amazon’s conduct as anticompetitive stems from a
misunderstanding of online markets generally and of Amazon’s strategy specifi-
cally. Additionally, analyzing the issues raised in this case suggests that Amazon
235. Its clothing sales are greater than the combined online sales of its five largest online apparel
competitors: Macy’s, Nordstrom, Kohl’s, Gap, and Victoria’s Secret’s parent. Id.
236. In some contexts, “dominance” connotes a legal definition. I am not using it in this way. See
supra note .
amazon's antitrust paradox
could recoup its losses through means not captured by current antitrust analy-
sis.
In late , Amazon rolled out the Kindle, its e-reading device, and
launched a new e-book library.
237
Before introducing the device, CEO Je Be-
zos had decided to price bestseller e-books at .,
238
significantly below the
to that a new hardback typically costs.
239
Critically, the wholesale price
at which Amazon was buying books from publishers had not dropped; it was
instead choosing to price e-books below cost.
240
Analysts estimate that Amazon
sold the Kindle device below manufacturing cost too.
241
Bezos’s plan was to
dominate the e-book selling business in the way that Apple had become the go-
to platform for digital music.
242
The strategy worked: through , Amazon
dominated the e-book retail market, selling around of all e-books.
243
237. See Caroline McCarthy, Amazon Debuts Kindle E-Book Reader, CNET (Nov. , , :
AM), http://www.cnet.com/news/amazon-debuts-kindle-e-book-reader [http://perma.cc
/VFZ-V].
238. See id.
239. See BRAD STONE, THE EVERYTHING STORE (); George Packer, Cheap Words, NEW YORK-
ER
(Feb. , ), http://www.newyorker.com/magazine////cheap-words [http://
perma.cc/AN-YUT].
240. Prior to , many publishers set a wholesale price for e-books at a discount from the
equivalent physical book, at which point Amazon’s . price point roughly matched the
wholesale price of many of its e-books. In , publishers eliminated the wholesale dis-
count, yet Amazon continued to price e-books at .. This is the point at which it clearly
sold e-books below cost. See United States v. Apple, Inc., F. Supp. d , -
(S.D.N.Y. ); see also Packer, supra note (“The price was below wholesale in some
cases, and so low that it represented a serious threat to the market in twenty-six-dollar hard-
covers.”); Jerey A. Trachtenberg, E-Book Sales Fall Aer New Amazon Contracts, W
ALL ST.
J.
(Sept. , ), http://www.wsj.com/article_email/e-book-sales-weaken-amid-higher
-prices--lMyQjAxMTEMzAxNDUwMjQWj [http://perma.cc/LVZ-DKY]
(“Amazon was willing to buy a title for . and sell it for ., taking a loss to grab
market share and encourage adoption of its Kindle e-reader.”).
241. See Eric Savitz, Amazon Selling Kindle Fire Below Cost, Analyst Contends, FORBES (Sept. ,
, : PM), http://www.forbes.com/sites/ericsavitz////amazon-selling-kindle
-fire-below-cost-analyst-contends [http://perma.cc/AQ-XLZ]; Woo, supra note
(“Mr. Munster estimated that Amazon sells each Kindle model at a loss of to .”).
242. See Packer, supra note (“In the mid-aughts, Bezos, having watched Apple take over the
music-selling business with iTunes and the iPod, became determined not to let the same
thing happen with books. In , he set up a lab in Silicon Valley that would build Ama-
zon’s first piece of consumer hardware: a device for reading digital books. According to
Stone’s book, Bezos told the executive running the project, ‘Proceed as if your goal is to put
everyone selling physical books out of a job.’”).
243. Apple, F. Supp. d at .
the yale law journal :
Publishers, fearing that Amazon’s . price point for e-books would
permanently drive down the price that consumers were willing to pay for all
books, sought to wrest back some control. When the opportunity came to
partner with Apple to sell e-books through the iBookstore store, five of the
“Big Six” publishers introduced agency pricing, whereby publishers would set
the final retail price and Apple would get a cut.
244
Aer securing this deal,
MacMillan, one of the “Big Six,” demanded that Amazon, too, adopt this pric-
ing model.
245
Though it initially refused and delisted MacMillan’s books,
246
Amazon ultimately relented, explaining to readers that “we will have to capitu-
late and accept Macmillan’s terms because Macmillan has a monopoly over
their own titles.”
247
Other publishers followed suit, halting Amazon’s ability to
price e-books at ..
248
In , the DOJ sued the publishers and Apple for colluding to raise e-
book prices.
249
In response to claims that the DOJ was going aer the wrong
actor—given that it was Amazon’s predatory tactics that drove the publishers
and Apple to join forces—the DOJ investigated Amazon’s pricing strategies and
found “persuasive evidence lacking” to show that the company had engaged in
predatory practices.
250
According to the government, “from the time of its
launch, Amazon’s e-book distribution business has been consistently profitable,
even when substantially discounting some newly released and bestselling ti-
tles.”
251
Judge Cote, who presided over the district court trial, refrained from
arming the government’s conclusion.
252
Still, the government’s argument il-
lustrates the dominant framework that courts and enforcers use to analyze pre-
dation—and how it falls short. Specifically, the government erred by analyzing
244. Id. at -.
245. Id. at .
246. Id. at .
247. Announcement: Macmillan E-Books, AMAZON (Jan. , , : PM), http://www
.amazon.com/forum/kindle/TxMEGQWTNGIMHV [http://perma.cc/KA-RFC]; see
also Apple, F. Supp. d at - (describing the struggle between the publishing houses
and Amazon leading up to Amazon’s capitulation).
248. Apple, F. Supp. d at .
249. Id. at .
250. Response of Plainti United States to Public Comments on the Proposed Final Judgment at
, Apple, F. Supp. d (No. -CV--DLC).
251. Id. at - (quoting Complaint at , Apple, F. Supp. d (No. -CV--DLC)).
252. Apple, F. Supp. d at (“This trial has not been the occasion to decide whether Ama-
zon’s choice to sell NYT Bestsellers or other New Releases as loss leaders was an unfair trade
practice or in any other way a violation of law.”).
amazon's antitrust paradox
the profitability of Amazon’s e-book business in the aggregate and by charac-
terizing the conduct as “loss leading” rather than potentially predatory pric-
ing.
253
These missteps suggest a failure to appreciate two critical aspects of
Amazon’s practices: () how steep discounting by a firm on a platform-based
product creates a higher risk that the firm will generate monopoly power than
discounting on non-platform goods and () the multiple ways Amazon could
recoup losses in ways other than raising the price of the same e-books that it
discounted.
On the first point, the government argued that Amazon was not engaging
in predation because in the aggregate, Amazon’s e-books business was profita-
ble. This perspective overlooks 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 as a whole was profitable. That the DOJ chose to
define the relevant market as e-books—rather than as specific lines, like best-
seller e-books—reflects a deeper mistake: the failure to recognize how the eco-
nomics of platform-based products dier in crucial ways from non-platform
goods.
254
As a result, the DOJ analyzed the e-book market as it would the mar-
ket for physical books.
One indication of this failure to appreciate the dierence between physical
books and e-books is that the government and Judge Cote treated Amazon’s be-
low-cost pricing as loss leading,
255
rather than as predatory pricing.
256
The
dierence between loss leading and predatory pricing is not spelled out in law,
but the distinction turns on the nature of the below-cost pricing, specifically its
intensity and the intent motivating it. Judge Cote’s use of “loss leading” re-
vealed a view that “Amazon’s below-cost pricing was (a) selective rather than
pervasive, and (b) not intended to generate monopoly power.”
257
On this view,
253. See id. at (noting that Amazon “continued to sell many NYT Bestsellers as loss lead-
ers”); Complaint, supra note , at (“From the time of its launch, Amazon’s e-book distri-
bution business has been consistently profitable, even when substantially discounting some
newly released and bestselling titles.”); Response of Plainti United States to Public Com-
ments on the Proposed Final Judgment, supra note , at -.
254. See generally Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets,
J. E
UR. ECON. ASS’N () (explaining the dynamics of competition in two-sided mar-
kets).
255. Traditionally, a retailer loss-leads when it prices one good below cost in order to sell more of
another good, assuming that discounts on one good will attract and retain consumers.
Walmart choosing to price t-shirts below cost to sell more shorts would be an example of
loss leading.
256. John B. Kirkwood, Collusion To Control a Powerful Customer: Amazon, E-Books, and Antitrust
Policy, U. M
IAMI L. REV. , - ().
257. Id. at .
the yale law journal :
Amazon’s aim was to trigger additional sales of other products sold by Amazon,
rather than to drive out competing e-book sellers and acquire the power to in-
crease e-book prices.
258
In other words, because Amazon’s alleged short-term
aim was to sell more e-readers and e-books—rather than to harm its rivals and
raise prices—its conduct is considered loss leading rather than predatory pric-
ing. What both the DOJ and the district court missed, however, is the way in
which below-cost pricing in this instance entrenched and reinforced Amazon’s
dominance in ways that loss leading by physical retailers does not.
Unlike with online shopping, each trip to a brick-and-mortar store is dis-
crete. 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. On Thursday, the fact that Walmart had discounted
socks on Monday does not necessarily exert any tug; you may return to
Walmart because you now know that Walmart oen has good bargains, but
the fact that you purchased socks from Walmart on Monday is not, in itself, a
reason to return.
Internet retail is dierent. Say on Monday, Amazon steeply discounts the e-
book version of Harper Lee’s Go Set a Watchman, and you purchase both a Kin-
dle and the e-book. On Thursday, you would be inclined to revisit Amazon—
and not simply because you know 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 locks them into future e-book purchases from Ama-
zon.
260
Moreover, buying—or even browsing—e-books on Amazon’s platform
258. See id.
259. See Cory Doctorow, Why the Death of DRM Would Be Good News for Readers, Writers
and Publishers,
GUARDIAN (May , , : AM), http://www.theguardian.com
/technology//may//death-of-drm-good-news [http://perma.cc/HL-KZ] (“If
Tor sells you one of my books for the Kindle locked with Amazon’s DRM, neither I, nor Tor,
can authorise you to remove that DRM. If Amazon demands a deeper discount (something
Amazon has been doing with many publishers as their initial ebook distribution deals come
up for renegotiation) and Tor wants to shi its preferred ebook retail to a competitor like
Waterstone’s, it will have to bank on its readers being willing to buy their books all over
again.”).
260. See Ana Carolina Bittar, Unlocking the Gates of Alexandria: DRM, Competition and Access
to E-Books (July , ) (unpublished manuscript), http://ssrn.com/abstract=
[http://perma.cc/RHH-QM] (“[S]ince each bookseller uses a dierent proprietary
DRM scheme on their e-books, compatible with a limited number of reading platforms,
consumers face problems with interoperability. For example, a Kindle owner cannot buy
books from Barnes & Noble, and a Nook owner cannot buy books from Apple. This lack of
interoperability can increase barriers to entry, switching costs, and network eects. Conse-
amazon's antitrust paradox
hands the company information about your reading habits and preferences, da-
ta the company uses to tailor recommendations and future deals.
261
Replicated
across a few more purchases, Amazon’s lock-in becomes strong. It becomes un-
likely that a reader will then purchase a Nook and switch to buying e-books
through Barnes & Noble, even if that company is slashing prices.
Put dierently, loss leading pays higher returns with platform-based e-
commerce—and specifically with 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 higher for e-books than for print books because there
are lock-in eects at play, due both to technical design and the possibilities for
and value of personalization.
By treating e-commerce and digital goods the same as physical stores and
goods, both the government and Judge Cote missed the anticompetitive impli-
cations of Amazon’s below-cost pricing. Though the immediate eect of Ama-
zon’s pricing of bestseller e-books may have been to sell more e-books general-
ly, that tactic has also positioned Amazon to dominate the market in a way that
sets it up to raise future prices. In this context, the traditional distinction be-
tween loss leading and predatory pricing is strained.
Instead of recognizing that the economics of platforms meant that below-
cost pricing on a platform-hosted good would tend to facilitate long-term
dominance, the government took comfort that the industry was “dynamic and
evolving” and concluded that the “presence and continued investment by tech-
nology giants, multinational book publishers, and national retailers in e-books
businesses” rendered an Amazon-dominated market unlikely.
262
Yet Amazon’s
early lead has, in fact, translated to long-term dominance. It controls around
of the e-book market today,
263
while its share of the e-reader market hov-
quently, consumers are oen locked into an e-book ecosystem, which permits booksellers to
act as gatekeepers of the e-book market.”).
261. See Alexandra Alter, Your E-Book Is Reading You, WALL ST. J. (July , , : PM),
http://www.wsj.com/articles/SB [http://
perma.cc/LQW-BCKJ] (“The major new players in e-book publishing—Amazon, Apple
and Google—can easily track how far readers are getting in books, how long they spend
reading them and which search terms they use to find books. Book apps for tablets like the
iPad, Kindle Fire and Nook record how many times readers open the app and how much
time they spend reading. Retailers and some publishers are beginning to si through the da-
ta, gaining unprecedented insight into how people engage with books.”).
262. Response of Plainti United States to Public Comments on the Proposed Final Judgment,
supra note , at .
263. October 2015 – Apple, B&N, Kobo, and Google: A Look at the Rest of the Ebook Market, AUTHOR
EARNINGS (Oct. ), http://authorearnings.com/report/october--apple-bn-kobo-and
the yale law journal :
ers around .
264
Players that appeared up-and-coming even a few years ago
are now retreating from the market. Sony closed its U.S. Reader store and is no
longer introducing new e-readers to the U.S. market.
265
Barnes & Noble,
meanwhile, has slashed funding for the Nook by .
266
The only real e-books
competitor le standing is Apple.
267
Because the government deflected predatory pricing claims by looking at
aggregate profitability, neither the government nor the court reached the ques-
tion of recoupment. Given that—under current doctrine—whether below-cost
pricing is predatory or not turns on whether a firm recoups its losses, we
should examine how Amazon could use its dominance to recoup its losses in
ways that are more sophisticated than what courts generally consider or are
able to assess.
Most obviously, Amazon could earn back the losses it generated on bestsell-
er e-books by raising prices of either particular lines of e-books or e-books as a
whole. This intra-product market form of recoupment is what courts look for.
However, it remains unclear whether Amazon has hiked e-book prices because,
as the New York Times noted, “[i]t is dicult to comprehensively track the
movement of prices on Amazon,” which means that any evidence of price
trends is “anecdotal and fragmentary.”
268
As Amazon customers can attest, Am-
azon’s prices fluctuate rapidly and with no explanation.
269
This underscores a basic challenge of conducting recoupment analysis with
Amazon: it may not be apparent when and by how much Amazon raises prices.
Online commerce enables Amazon to obscure price hikes in at least two ways:
-google-a-look-at-the-rest-of-the-ebook-market [http://perma.cc/GKN-SA] (noting
that Amazon also sells of indie e-books).
264. Statistics and Facts About Amazon, STATISTA (), http://www.statista.com/topics/
/amazon [http://perma.cc/YRQ-DYE].
265. Sony Gives Up on Selling E-Readers, BBC (Aug. , ), http://www.bbc.com/news
/technology- [http://perma.cc/DU-WNZ].
266. Jim Milliot, B&N Cut Nook Investment by 74% in Third Quarter, PUBLISHERS WEEKLY
(Mar. , ), http://www.publishersweekly.com/pw/by-topic/industry-news/booksell
ing/article/-b-n-cut-nook-investment-by--in-third-quarter.html [http://perma.cc
/M
-HZ].
267. Nor is the decline of Amazon competitors unique to e-books. “Now, with Borders dead,
Barnes & Noble struggling and independent booksellers greatly diminished, for many con-
sumers there is simply no other way to get many books than through Amazon.” Streitfeld,
supra note .
268. Id.
269. See id.
amazon's antitrust paradox
rapid, constant price fluctuations and personalized pricing.
270
Constant price
fluctuations diminish our ability to discern pricing trends. By one account,
Amazon changes prices more than . million times each day.
271
Amazon is also
able to tailor prices to individual consumers, known as first-degree price dis-
crimination. There is no public evidence that Amazon is currently engaging in
personalized pricing,
272
but online retailers generally are devoting significant
resources to analyzing how to implement it.
273
A major topic of discussion at
the National Retail Federation annual convention, for example, was how
to introduce discriminatory pricing without triggering consumer backlash.
274
One mechanism discussed was highly personalized coupons sent at the point of
sale, which would avoid the need to show consumers dierent prices but
would still achieve discriminatory pricing.
275
If retailers—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 would measure price hikes for the purpose of recoupment analysis in that
scenario. There would be no obvious conclusions if some consumers faced
higher prices while others enjoyed lower ones. But given the magnitude and
270. Several journalists have tracked instances of price discrimination in e-commerce. See, e.g.,
Julia Angwin et al., The Tiger Mom Tax: Asians Are Nearly Twice as Likely To Get a Higher
Price from Princeton Review, P
ROPUBLICA (Sept. , ), http://www.propublica.org/article
/asians-nearly-twice-as-likely-to-get-higher-price-from-princeton-review [http://perma.cc
/LN-SZKR]; Jennifer Valentino-Devries et al., Websites Vary Prices, Deals Based
on User Information, W
ALL ST. J. (Dec. , ), http://www.wsj.com/articles
/SB [http://perma.cc/BFS-ZXC].
271. Roberto A. Ferdman, Amazon Changes Its Prices More than 2.5 Million Times a Day, QUARTZ
(Dec. , ), http://qz.com//amazon-changes-its-prices-more-than---million
-times-a-day [http://perma.cc/WA-EUNP].
272. But recent reporting does suggest that Amazon manipulates how it presents pricing
in order to favor its own products. See Julia Angwin & Surya Mattu, Amazon Says
It Puts Customers First. But Its Pricing Algorithm Doesn’t, P
ROPUBLICA (Sept.
, ), http://www.propublica.org/article/amazon-says-it-puts-customers-first-but-its
-pricing-algorithm-doesnt [http://perma.cc/RRC-FTS] (“[T]he company appears to be
using its market power and proprietary algorithm to advantage itself at the expense of
sellers and many customers.”).
273. See Lina Khan, Why You Might Pay More than Your Neighbor for the Same Bottle of Salad Dress-
ing, Q
UARTZ (Jan. , ), http://qz.com//why-you-might-pay-more-than-your
-neighbor-for-the-same-bottle-of-salad-dressing [http://perma.cc/KVL-QCBC].
274. Id.
275. Id. (“‘Coupons will be the doorway in to dierential pricing,’ said Scott Anderson, principal
consultant at FICO, which provides data analytics and decision-making services. In other
words, we could all end up paying significantly dierent amounts for the same items, even if
we see the same prices while browsing.”).
the yale law journal :
accuracy of data that Amazon has collected on millions of users, tailored pricing
is not simply a hypothetical power.
276
Discerning whether and by how much
Amazon raises book prices will be more dicult than the Matsushita or Brooke
Group Courts could have imagined.
277
It is true that brick-and-mortar stores also collect data on customer pur-
chasing habits and send personalized coupons. But the types of consumer be-
havior that internet firms can access—how long you hover your mouse on a
particular item, how many days an item sits in your shopping basket before
you purchase it, or the fashion blogs you visit before looking for those same
items through a search engine—is uncharted ground. The degree to which a
firm can tailor and personalize an online shopping experience is dierent in
kind from the methods available to a brick-and-mortar store—precisely be-
cause the type of behavior that online firms can track is far more detailed and
nuanced. And unlike brick-and-mortar stores—where everyone at least sees a
common price (even if they go on to receive discounts)—internet retail enables
firms to entirely personalize consumer experiences, which eliminates any col-
lective baseline from which to gauge price increases or decreases.
The decision of which product market in which Amazon may choose to
raise prices is also an open question—and one that current predatory pricing
doctrine ignores. Courts generally assume that a firm will recoup by increasing
prices on the same goods on which it previously lost money. But recoupment
across markets is also available as a strategy, especially for firms as diversified
across products and services as Amazon. Reporting suggests the company did
just this in , by hiking prices on scholarly and small-press books and creat-
ing the risk of a “two-tier system where some books are priced beyond an audi-
276. As a group of authors stated in a recent letter to the Justice Department:
[T]he corporation’s detailed knowledge of the buying habits of millions of read-
ers—which it amasses through a minute-by-minute tracking of their actions
online—puts it in a powerful position to use such ‘personalized’ pricing and mar-
keting to influence the decisions of readers and thereby extract the most amount
of cash possible from each individual.
Letter from Authors United to William J. Baer, Assistant Att’y Gen., Antitrust Div., Dep’t
of Justice (July , ), http://www.authorsunited.net/july/longdocument.html
[http://perma.cc/LRN-YESR]; see also David Streitfeld, Accusing Amazon of Antitrust
Violations, Authors and Booksellers Demand Inquiry, N.Y.
TIMES (July , ), http://www
.nytimes.com////technology/accusing-amazon-of-antitrust-violations-authors-and
-booksellers-demand-us-inquiry.html [http://perma.cc/GQF-LYY] (reporting on the Au-
thors United letter to the Assistant Attorney General and its claim that Amazon seems to be
“engag[ing] in content control” in its decisions to sell certain books).
277. See supra Section I.A. For accounts of how some retailers have successfully implemented dis-
criminatory pricing online, see supra note and accompanying text.
amazon's antitrust paradox
ence’s reach.”
278
Although Amazon may be recouping its initial losses in e-
books through markups on physical books, this cross-market recoupment is
not a scenario that enforcers or judges generally consider.
279
One possible rea-
son for this neglect is that Chicago School scholarship, which assumes re-
coupment in single-product markets is unlikely, also holds recoupment in mul-
ti-product scenarios to be implausible.
280
Although current predatory pricing doctrine focuses only on recoupment
through raising prices for consumers, Amazon could also recoup its losses by
imposing higher fees on publishers. Large book retailer chains like Barnes &
Noble have long used their market dominance to charge publishers for favora-
ble product placement, such as displays in a storefront window or on a promi-
nent table.
281
Amazon’s dominance in the e-book market has enabled it to de-
mand similar fees for even the most basic of services. For example, when
renewing its contract with Hachette last year, Amazon demanded payments for
services including the pre-order button, personalized recommendations, and
an Amazon employee assigned to the publisher.
282
In the words of one person
close to the negotiations, Amazon “is very inventive about what we’d call
standard service. . . . They’re teasing out all these layers and saying, ‘If you
want that service, you’ll have to pay for it.’”
283
By introducing fees on services
that it previously oered for free, Amazon has created another source of reve-
nue. Amazon’s power to demand these fees—and recoup some of the losses it
sustained in below-cost pricing—stems from dominance partly built through
278. Streitfeld, supra note .
279. See PHILLIP AREEDA & HERBERT HOVENKAMP, FUNDAMENTALS OF ANTITRUST LAW -
() (“There may be cases in which a predator who makes more than one product or op-
erates in more than one region selects only one for below-cost pricing but reaps recoupment
benefits in all . . . . The courts have not dealt adequately with this problem.”); Leslie, supra
note , at (“Courts apparently do not appreciate the prospect of recoupment in anoth-
er market.”); Timothy J. Trujillo, Note, Predatory Pricing Standards Under Recent Supreme
Court Decisions and Their Failure To Recognize Strategic Behavior as a Barrier to Entry, J.
CORP. L. , , () (“The . . . recoupment analysis in Matsushita, Cargill, and
Brooke refers to recoupment only in the market in which the predation actually occurs. Thus,
the Court’s analyses and test . . . ignore the possibility that successful predation could occur
because the dominant firm can spread its gains from predation over several markets.”).
280. See Leslie, supra note , at -.
281. See Randy Kennedy, Cash Up Front, N.Y. TIMES (June , ), http://www.nytimes.com
////books/review/cash-up-front.html [http://perma.cc/HL-RUPU].
282. See James B. Stewart, Booksellers Score Some Points in Amazon’s Spat with Hachette, N.Y. TIMES
(June , ), http://www.nytimes.com////business/booksellers-score-some
-points-in-amazons-stando-with-hachette.html [http://perma.cc/PD-MS].
283. Id.
the yale law journal :
that same below-cost pricing. The fact that Amazon has itself vertically inte-
grated into book publishing—and hence can promote its own content—may
give it additional leverage to hike fees. Any publisher that refuses could see
Amazon favor its own books over the publisher’s, reflecting a conflict of inter-
est I discuss further in Section IV.D. It is not uncommon for half of the titles on
Amazon’s Kindle bestseller list to be its own.
284
While not captured by current antitrust doctrine, the pressure Amazon puts
on publishers merits concern.
285
For one, consolidation among book sellers—
partly spurred by Amazon’s pricing tactics and demands for better terms from
publishers—has also spurred consolidation among publishers. Consolidation
among publishers last reached its heyday in the s—as publishing houses
sought to bulk up in response to the growing clout of Borders and Barnes &
Noble—and by the early s, the industry had settled into the “Big Six.”
286
This trend has cost authors and readers alike, leaving writers with fewer paths
to market and readers with a less diverse marketplace. Since Amazon’s rise, the
major publishers have merged further—thinning down to five, with rumors of
more consolidation to come.
287
Second, the increasing cost of doing business with Amazon is upending the
publishers’ business model in ways that further risk sapping diversity. Tradi-
tionally, publishing houses used a cross-subsidization model whereby they
would use their best sellers to subsidize weightier and riskier books requiring
greater upfront investment.
288
In the face of higher fees imposed by Amazon,
284. See LaVecchia & Mitchell, supra note , at .
285. Acquisition and maintenance of monopsony power are still recognized harms under the
Sherman and Clayton Acts, even though few cases are brought today. But cf. Complaint at
-, United States v. George’s Foods, LLC, No. :-cv--gec (W.D. Va. May , )
(arguing that a company’s acquisition of a chicken complex would “substantially lessen
competition for the purchase of broiler grower [chicken farmer] services . . . in violation of
Section of the Clayton Act”).
286. Boris Kachka, Book Publishing’s Big Gamble, N.Y. TIMES (July , ), http://www
.nytimes.com////opinion/book-publishings-big-gamble.html [http://perma.cc
/APX] (“The merger, announced last October and completed on July aer regulatory ap-
proval, shrinks the Big Six, which publish about two-thirds of books in the United States,
down to the Big Five.”).
287. Id. Publishers have also merged divisions internally. See, e.g., Alex Shephard, The Vanishing
Mass Market: Penguin Merges Two Mass Market Publishing Houses To Create New Mass Market
Publishing House, M
ELVILLE HOUSE (June , ), http://www.mhpbooks.com/the
-vanishing-mass-market-penguin-merges-two-mass-market-publishing-houses-merge-to
-create-new-mass-market-publishing-house [http://perma.cc/FV-GGLU].
288. Cross-subsidization schemes can have widely dierent eects, depending on how the two
submarkets are or are not interrelated. In Amazon’s case, losses do have cross-market eects:
Amazon prices below cost in order to generate higher sales in another line of business; its
amazon's antitrust paradox
publishers say they are less able to invest in a range of books. In a recent letter
to DOJ, a group of authors wrote that Amazon’s actions have “extract[ed] vital
resources from the [book] industry in ways that lessen the diversity and quality
of books.”
289
The authors noted that publishers have responded to Amazon’s
fees by both publishing fewer titles and focusing largely on books by celebrities
and bestselling authors.
290
The authors also noted, “Readers are presented with
fewer books that espouse unusual, quirky, oeat, or politically risky ideas, as
well as books from new and unproven authors. This impoverishes America’s
marketplace of ideas.”
291
Amazon’s conduct would be readily cognizable as a threat under the pre-
Chicago School view that predatory pricing laws specifically and antitrust gen-
erally promoted a broad set of values. Under the predatory pricing jurispru-
dence of the early and mid-twentieth century, harm to the diversity and vibran-
cy of ideas in the book market may have been a primary basis for government
intervention. The political risks associated with Amazon’s market dominance
also implicate some of the major concerns that animate antitrust laws. For in-
stance, the risk that Amazon may retaliate against books that it disfavors—
either to impose greater pressure on publishers or for other political reasons—
raises concerns about media freedom. Given that antitrust authorities previous-
ly considered diversity of speech and ideas a factor in their analysis, Amazon’s
degree of control, too, should warrant concern.
Even within the narrower “consumer welfare” framework, Amazon’s at-
tempts to recoup losses through fees on publishers should be understood as
harmful. A market with less choice and diversity for readers amounts to a form
of consumer injury. That DOJ ignored this concern in its suit against Apple
and the publishers suggests that its conception of predatory pricing fails to
captureoverlooks the full suite of harms that Amazon’s actions may cause.
292
losses in one market actively boost another market. By contrast, the cross-subsidization model
used by publishers has no analogous crossover eects. A publisher might decide to publish
an obscure book, even if it knows it will lose money, and subsidize those losses through
profits made on a more popular book. However, the publisher’s choice to sustain a loss on
the obscure book does not boost sales of its popular books. The major dierence in Amazon’s
case is that it is an online platform. The market eects across its dierent segments are sig-
nificant in ways that do not hold for brick-and-mortar stores or other non-platform entities.
289. Letter from Authors United to William J. Baer, supra note .
290. Id.
291. Id.
292. That said, the DOJ did consider how rising consolidation in the media sector—specifically in
the context of a proposed merger between two newspapers—would risk undermining the
spread of ideas. Press Release, Oce of Pub. Aairs, U.S. Dep’t of Justice, Justice Depart-
ment Files Antitrust Lawsuit To Stop L.A. Times Publisher from Acquiring Competing
the yale law journal :
Amazon’s below-cost pricing in the e-book market—which enabled it to
capture of that market,
293
a sizable share by any measure—strains predato-
ry pricing doctrine in several ways. First, Amazon is positioned to recoup its
losses by raising prices 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 it sustained losses (bestseller e-books), so courts are unlikely to
look for or consider these scenarios. Additionally, constant fluctuations in pric-
es and the ability to price discriminate enable Amazon to raise prices with little
chance of detection. Lastly, Amazon could recoup its losses by extracting more
from publishers, who are dependent on its platform to market both e-books
and print books. This may diminish the quality and breadth of the works that
are published, but since this is most directly a supplier-side rather than buyer-
side harm, it is less likely that a modern court would consider it closely. The
current predatory pricing framework fails to capture the harm posed to the
book market by Amazon’s tactics.
B. Acquisition of Quidsi and Flawed Assumptions About Entry and Exit Barriers
In addition to using below-cost pricing to establish a dominant position in
e-books, Amazon has also used this practice to put pressure on and ultimately
acquire a chief rival. This history challenges contemporary antitrust law’s as-
sumption that predatory pricing cannot be used to establish dominance. While
theory may predict that entry barriers for online retail are low, this account
shows that in practice significant investment is needed to establish a successful
platform that will attract trac. Finally, Amazon’s conduct suggests that psy-
chological intimidation can discourage new entry that would challenge a domi-
nant player’s market power.
In , Quidsi was one of the world’s fastest growing e-commerce com-
panies.
294
It oversaw several subsidiaries: Diapers.com (focused on baby care),
Soap.com (focused on household essentials), and BeautyBar.com (focused on
Newspapers (Mar. , ), http://www.justice.gov/opa/pr/justice-department-files
-antitrust-lawsuit-stop-la-times-publisher-acquiring-competing [http://perma.cc/MNY
-XZE] (“‘Newspapers continue to play an important role in the dissemination of news and
information to readers . . . .’” (quoting Assistant Attorney General Bill Baer of the DOJ’s An-
titrust Division)).
293. At the height of its market share, this figure was closer to . Aer Apple entered the
market, Amazon’s share fell slightly and then stabilized around . See Packer, supra note
.
294. STONE, supra note , at (“Quidsi [grew] from nothing to million in annual sales
in just a few years. . . .”).
amazon's antitrust paradox
beauty products). Amazon expressed interest in acquiring Quidsi in , but
the company’s founders declined Amazon’s oer.
295
Shortly aer Quidsi rejected Amazon’s overture, Amazon cut its prices for
diapers and other baby products by up to .
296
By reconfiguring their prices,
Quidsi executives saw that Amazon’s pricing bots—soware “that carefully
monitors other companies’ prices and adjusts Amazon’s to match”—were track-
ing Diapers.com and would immediately slash Amazon’s prices in response to
Quidsi’s changes.
297
In September , Amazon rolled out Amazon Mom, a
new service that oered a year’s worth of free two-day Prime shipping (which
usually cost a year).
298
Customers could also secure an additional dis-
count on diapers by signing up for monthly deliveries as part of a service
known as “Subscribe and Save.”
299
Quidsi executives “calculated that Amazon
was on track to lose million over three months 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 pricing pressure.”
301
Investors, mean-
while, “grew wary of pouring more money” into Quidsi, given the challenge
from Amazon.
302
Struggling to keep up with Amazon’s pricing war, Quidsi’s
owners began talks with Walmart about potentially selling the business. Ama-
zon intervened and made an aggressive counteroer.
303
Although Walmart
295. Id. at -.
296. Id. at .
297. Id.; Brad Stone, The Secrets of Bezos: How Amazon Became the Everything Store, BLOOMBERG
(Oct. , , : AM), http://www.bloomberg.com/news/articles/--/je
-bezos-and-the-age-of-amazon-excerpt-from-the-everything-store-by-brad-stone [http://
perma.cc/TD-GHV].
298. Brad Tuttle, It’s Target Versus Amazon in the Battle for Moms, TIME (Sept.
, ), http://business.time.com////its-target-versus-amazon-in-the-battle-for
-moms [http://perma.cc/UJE-YR].
299. STONE, supra note , at .
300. Id. at .
301. Jason Del Ray, How Je Bezos Crushed Diapers.com so Amazon Could Buy Diapers.com, ALL
THINGS D (Oct. , , : AM), http://allthingsd.com//how-je
-bezos-crushed-diapers-com-so-amazon-could-buy-diapers-com [http://perma.cc/KD
-VGNP].
302. Will Oremus, The Time Je Bezos Went Thermonuclear on Diapers.com, SLATE (Oct. , ,
: PM), http://www.slate.com/blogs/future_tense////amazon_book_how
_je_bezos_went_thermonuclear_on_diapers_com.html [http://perma.cc/AJE-VNWR].
303. Stone, supra note (noting that Amazon oered million, giving Quidsi a forty-
eight-hour window in which to respond and “rachet[ing] up the pressure,” telling Quidsi
the yale law journal :
oered a higher final bid, “the Quidsi executives stuck with Amazon, largely
out of fear.”
304
The FTC reviewed the Amazon-Quidsi deal and decided that it
did not trigger anticompetitive concerns.
305
Through its purchase of Quidsi,
Amazon eliminated a leading competitor in the online sale of baby products.
Amazon achieved this by slashing prices and bleeding money,
306
losses that its
investors have given it a free pass to incur—and that a smaller and newer ven-
ture like Quidsi, by contrast, could not maintain.
Aer completing its buy-up of a key rival—and seemingly losing hundreds
of millions of dollars in the process—Amazon went on to raise prices. In No-
vember , a year aer buying out Quidsi, Amazon shut down new member-
ships in its Amazon Mom program.
307
Though the company has since reo-
pened the program, it has continued to scale back the discounts and generous
shopping terms of the original oer. As of February , discounts that had
previously been were reduced to , and the one year of free Prime
membership was cut to three months.
308
In November , the company
hiked prices further: members purchasing more than four items in a month
would no longer receive the general discount, and the discount on
baby wipes—one of the program’s top-selling products—was cut to .
309
that Bezos was “such a furious competitor [that he] would drive diaper prices to zero if they
went with Walmart,” in which case “the Amazon Mom onslaught would continue”).
304. Id.
305. The FTC reviewed the deal under Section of the Clayton Act, the provision that governs
mergers, as well as section of the Federal Trade Commission Act, which targets general un-
fair practices. See Letter from Donald S. Clark, Sec’y, FTC, to Peter C. Thomas, Simpson
Thacher & Bartlett LLP (Mar. , ), http://www.c.gov/sites/default/files/documents
/closing_letters/amazon.com-inc./quidsi-inc./amazonthomas.pdf [http://perma.cc
/EA-LYMB]; see also Stone, supra note (“The Federal Trade Commission scrutinized
the acquisition for four and a half months, going beyond the standard review to the second-
request phase, where companies must provide more information about a transaction. The
deal raised a host of red flags, such as the elimination of a major player in a competitive cat-
egory, according to an FTC ocial familiar with the review.”).
306. See STONE, supra note , at .
307. “At this time, [Amazon Mom is] not accepting new members,” a company spokesman stat-
ed, declining to explain why. Thad Rueter, Let’s Hope Amazon Doesn’t Make Them Wait Until
Potty Training Ends, I
NTERNET RETAILER (Nov. , , : PM), http://www.internetre
tailer.com////now-amazon-closes-membership-moms-discount-program [http://
perma.cc/LR-XEHP].
308. Thad Rueter, Amazon Tweaks Its Diaper Program, Moms Vent and a Competitor Pounces, IN-
TERNET
RETAILER (Feb. , , : PM), http://www.internetretailer.com///
/amazon-tweaks-diaper-program-moms-vent-competitor-pounces [http://perma.cc/GBU
-KYNF].
309. Id.
amazon's antitrust paradox
Summarizing the series of changes, one journalist observed, “The Amazon
Mom program has become much less generous than it was when it was intro-
duced in .”
310
In online forums where consumers expressed frustrations
with the changes, several users said they would 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 posi-
tion in the baby-product market.
312
Amazon’s conduct runs counter to contemporary predatory pricing think-
ing, which contends that predation is no path to buying up a competitor. In
The Antitrust Paradox, Bork wrote, “[T]he modern law of horizontal mergers
makes it all but impossible for the predator to bring the war to an end by pur-
chasing his victim. To accomplish the predator’s purpose, the merger must cre-
ate a monopoly” and law “would preclude the attainment of the monopoly nec-
essary to make predation profitable.”
313
For sectors with low entry costs, Bork
writes, this strategy is precluded by the constant possibility of reentry by other
players. “A shoe retailer can be driven out rapidly, but reentry will be equally
rapid.”
314
In fields in which entry costs are high, Bork argued that exit by com-
petitors is unlikely because management would need to believe that the preda-
tion had rendered the value of their facilities negligible. For instance,
“[r]ailroading, which involves specialized facilities, is dicult to enter, but the
potential victim of predation would be dicult to drive out precisely because
railroad facilities are not useful in other industries.”
315
310. Laura Owen, Amazon Cuts the Benefits Again in Amazon Mom, Its Prime Program for Parents,
G
IGAOM (Sept. , , : AM), http://gigaom.com////amazon-cuts-the
-benefits-again-in-amazon-mom-its-prime-program-for-parents [http://perma.cc/P
-JPZN].
311. In response to complaints about Amazon’s abrupt change, followed by customers recom-
mending Diapers.com, one customer stated, “Diapers.com has a dierent shipping pro-
gram, but they were recently bought out by Amazon. I would think that their shipping poli-
cies might change soon as well.” Shopaholic, Comment to Amazon Mom Benefits Misleading!,
A
MAZON (June , , : PM), http://www.amazon.com/forum/baby/ref
=cm_cd_pg_pg?_encoding=UTF&cdForum=FxSKWDWQRZWU&cdPage=&cdThr
ead=TxZCGMKBJEQP [http://perma.cc/ENH-JCJ].
312. Amazon leads the online market for baby supplies, holding . Walmart and Target follow,
with and , respectively. Target, Walmart, Amazon Dominate the Online Baby Goods
Market, B
US. INSIDER (Apr. , , : PM), http://www.businessinsider.com/target
-walmart-amazon-dominate-the-online-baby-goods-market-- [http://perma.cc/KZ
-QQCR].
313. BORK, supra note , at .
314. Id.
315. Id.
the yale law journal :
Does online retailing of baby products resemble shoe retailing or railroad-
ing? Given the absence of formal barriers, entry should be easy: unlike rail-
roading, selling baby products online requires no heavy investment or fixed
costs. However, the economics of online retailing are not quite like traditional
shoe retailing. Given that attracting trac and generating sales as an independ-
ent online retailer involves steep search costs, the vast majority of online com-
merce is conducted on platforms, central marketplaces that connect buyers and
sellers. Thus, in practice, successful entry by a potential diaper retailer carries
with it the cost of attempting to build a new online platform, or of creating a
brand strong enough to draw trac from an existing company’s platform. As
several commentators have observed, the practical barriers to successful and
sustained entry as an online platform are very high, given the huge first-mover
advantages stemming from data collection and network eects.
316
Moreover,
the high exit barriers that Bork assumes for railroads—namely, that they would
have to be convinced their facilities were worth more as scrap than as a rail-
road—do not apply to online platforms. Investment in online platforms lies not
in physical infrastructure that might be repurposed, but in intangibles like
brand recognition. These intangibles can be absorbed by a rival platform or re-
tailer with greater ease than a railroad could take over a competing line.
317
In
other words, online retailers like Quidsi face the high entry barriers of a rail-
road coupled with the relatively low exit costs typical of brick-and-mortar re-
tailers—a combination that Bork, and the courts, failed to consider.
Courts also tend to discount that predators can use psychological intimida-
tion to keep out the competition.
318
Amazon’s history with Quidsi has sent a
clear message to potential competitors—namely that, unless upstarts have deep
pockets that allow them to bleed money in a head-to-head fight with Amazon,
316. See generally TIM WU, THE MASTER SWITCH: THE RISE AND FALL OF INFORMATION EMPIRES
() (arguing that all American information industries since the telephone have resulted
in monopolies); Candeub, supra note (suggesting that network eects may produce an-
ticompetitive results in the online market because of the cognitive eort necessary to switch
search engines); Nathan Newman, Search, Antitrust, and the Economics of the Control of User
Data, Y
ALE J. ON REG. () (proposing a new approach to antitrust investigations
that would focus on the anticompetitive eects of corporations’ control of personal data);
Frank Pasquale, Privacy, Antitrust, and Power, G
EO. MASON L. REV. () (advocat-
ing reforms to privacy and antitrust policy to take into account the connections between
market share and control over data).
317. For example, Amazon acquired Zappos.com in but chose to maintain the brand as a
standalone rather than absorbing it within Amazon.com. Sarah Lacy, Amazon Buys Zappos;
The Price Is $928m., Not $847m., T
ECHCRUNCH (July , ), http://techcrunch.com
////amazon-buys-zappos [http://perma.cc/NGV-PAU].
318. See, e.g., Leslie, supra note , at -.
amazon's antitrust paradox
it may not be worth entering the market. Even as Amazon has raised the price
of the Amazon Mom program, no newcomers have recently sought to challenge
it in this sector, supporting the idea that intimidation may also serve as a prac-
tical barrier.
319
As the world’s largest online retailer, Amazon serves as a default starting
point for many online shoppers: one study estimates that of U.S. consum-
ers “go[] directly to Amazon first to search for products.”
320
Moreover, the
swaths of data that Amazon has collected on consumers’ browsing and search-
ing histories can create the same problem that Google’s would-be competitors
encounter: “an insurmountable barrier to entry for new competition.”
321
Though at least one venture opened shop with an eye to challenging Ama-
zon,
322
its founders recently sold the firm to Walmart
323
—a move that suggests
that the only players positioned to challenge Amazon are the existing giants.
However, even this strategy has skeptics.
324
While established brick-and-
mortar retailers like Target have tried to lure online consumers through dis-
319. Jet.com, the one company that did try to tackle Amazon, was recently purchased by
Walmart. See Steven Davido Solomon, Tech Giants Gobble Start-Ups in an Antitrust Blind
Spot, N.Y.
TIMES: DEALBOOK (Aug. , ), http://www.nytimes.com////bus
iness/dealbook/expect-little-antitrust-challenge-to-walmarts-bid-for-jet-com.html [http://
perma.cc/WRC-QGKR].
320. Moore, supra note . Google has stated that its biggest rival in search is not Bing or Yahoo,
but Amazon. See Jeevan Vasagar & Alex Barker, Amazon Is Our Biggest Search Rival, Says
Google’s Eric Schmidt, F
IN. TIMES (Oct. , ), http://www..com/cms/s//b
-f-e-b-feabde.html [http://perma.cc/PHW-EW].
321. Newman, supra note , at .
322. See Vauhini Vara, Can Jet.com Take On Amazon and Win?, NEW YORKER (July ,
), http://www.newyorker.com/business/currency/can-jet-com-take-on-amazon-and
-win [http://perma.cc/SK-SMHA].
323. Shannon Pettypiece & Selina Wang, Wal-Mart To Acquire Jet.com for $3.3 Billion To Fight
Amazon, B
LOOMBERG (Aug. , ), http://www.bloomberg.com/news/articles/-
-/wal-mart-agrees-to-buy-jet-com-for--billion-to-fight-amazon [http://perma.cc/FEK
-NMR].
324. See Grace Noto, Jet.Com Acquisition Not Enough To Challenge Amazon, Experts Say, BANK IN-
NOVATION
(Aug. , ), http://bankinnovation.net///jet-com-acquisition-not
-enough-to-challenge-amazon-experts-say [http://perma.cc/CQY-JX] (“[T]here re-
mains a healthy amount of skepticism in the industry about anyone’s ability to topple Ama-
zon from its throne. ‘Amazon is quite dominant and will continue to be in the foreseeable
future, because the resources they are putting into ecommerce and all of their other initia-
tives are formidable,’ said vice president and principal analyst at Forester Research Sucharita
Mulpuru-Kodali. ‘Walmart has slowly been gaining some share in some ways, but it’s oen
two steps forward, one step back for them.’”); Pettypiece & Wang, supra note (“Amazon
is such a machine . . . . You aren’t going to out-Amazon Amazon.”).
the yale law journal :
counts and low delivery costs,
325
Amazon remains the major online seller of
baby products.
326
Although Amazon established its dominance in this market
through aggressive price cutting and selling steeply at a loss, its actions have
not triggered predatory pricing claims. In part, this is because prevailing theory
assumes—per Bork’s analysis—that market entry is easy enough for new rivals
to emerge any time a dominant firm starts charging monopoly prices.
In this case, Amazon raised prices by cutting back discounts and (at least
temporarily) refusing to expand the program. Even if a firm viewed the unmet
demand as an invitation to enter, several factors would prove discouraging in
ways that the existing doctrine does not consider. In theory, online retailing it-
self has low entry costs since anyone can set up shop online, without significant
fixed costs. But in practice, successful entry in online markets is a challenge, re-
quiring significant upfront investment. It requires either building up strong
brand recognition to draw users to an independent site, or using an existing
platform, such as Amazon or eBay, which can present other anticompetitive
challenges.
327
Indeed, most independent retailers choose to sell through Ama-
zon
328
—even when the business relationship risks undermining their business.
The fact that no real rival has emerged, even aer Amazon raised prices, under-
cuts the assumption embedded in current antitrust doctrine.
C. Amazon Delivery and Leveraging Dominance Across Sectors
As its history with Quidsi shows, Amazon’s willingness to sustain losses has
allowed it to engage in below-cost pricing in order to establish dominance as
an online retailer. Amazon has translated its dominance as an online retailer in-
to significant bargaining power in the delivery sector, using it to secure favora-
ble conditions from third-party delivery companies. This in turn has enabled
Amazon to extend its dominance over other retailers by creating the Fulfill-
ment-by-Amazon service and establishing its own physical delivery capacity.
This illustrates how a company can leverage its dominant platform to success-
fully integrate into other sectors, creating anticompetitive dynamics. Retail
competitors are le with two undesirable choices: either try to compete with
Amazon at a disadvantage or become reliant on a competitor to handle delivery
and logistics.
325. See Tuttle, supra note .
326. See id. (noting that Amazon’s market share is double Target’s).
327. See infra Section IV.D.
328. See LaVecchia & Mitchell, supra note , at .
amazon's antitrust paradox
As Amazon expanded its share of e-commerce—and enlarged the e-
commerce sector as a whole—it started comprising a greater share of delivery
companies’ business. For example, in , UPS derived billion worth of
business from Amazon alone.
329
The fact that it accounted for a growing share
of these firms’ businesses gave Amazon bargaining power to negotiate for low-
er rates.
330
By some estimates, Amazon enjoyed a discount over regular
delivery prices.
331
Delivery companies sought to make up for the discounts they
gave to Amazon by raising the prices they charged to independent sellers,
332
a
phenomenon recently termed the “waterbed eect.”
333
As scholars have de-
scribed,
329. Laura Stevens & Greg Bensinger, Amazon Seeks To Ease Ties with UPS, WALL ST. J.
(Dec. , , : PM), http://www.wsj.com/articles/amazon-seeks-to-ease-ties-with-ups
- [http://perma.cc/-AAJ].
330. In its -K, UPS states that while no single customer accounts for more than of its con-
solidated revenue, its business remains vulnerable to the choices of some big clients.
UPS, Inc., Annual Report (Form -K) (Jan. , ), http://www.sec.gov
/Archives/edgar/data///ups-xk.htm [http://perma
.cc/TUT-BQ] (“[S]ome of our large customers might account for a relatively significant
portion of the growth in revenue in a particular quarter or year . . . . These customers could
choose to divert all or a portion of their business with us to one of our competitors, demand
pricing concessions for our services, require us to provide enhanced services that increase
our costs, or develop their own shipping and distribution capabilities. If these factors drove
some of our large customers to cancel all or a portion of their business relationships with us,
it could materially impact the growth in our business and the ability to meet our current and
long-term financial forecasts.”).
331. See Stephanie Cliord & Claire Cain Miller, Wal-Mart Says ‘Try This On’: Free Shipping,
N.Y.
TIMES (Nov. , ), http://www.nytimes.com////business/shipping.html
[http://perma.cc/ULM-ASC] (“[A]ir shipping prices for big retailers are about per-
cent less than for a small company. Shipping at Amazon costs about percent of sales, and
Amazon loses money on it because it oers marketing benefits . . . . [S]hipping at small sites
usually costs about percent of sales . . . .”). Congress passed the Robinson-Patman Act
precisely to prevent this sort of “waterbed eect.” As I describe earlier, Chicago School hos-
tility to Robinson-Patman has meant that both the antitrust agencies and courts have largely
stopped enforcing the law. See supra text accompanying notes -.
332. See Laura Stevens, ‘Free’ Shipping Crowds Out Small Retailers, WALL ST. J. (Apr. ,
, : PM), http://www.wsj.com/articles/for-online-shoppers-free-shipping-reigns
-supreme- [http://perma.cc/RYL-FTS].
333. See Paul W. Dobson & Roman Inderst, The Waterbed Eect: Where Buying and Selling Power
Come Together, W
IS. L. REV. , - (“If, in contrast, the discounts to one or a few
buyers were to put other buyers in a worse bargaining position to the extent of them paying
even-higher prices (e.g., premiums rather than discounts) then the knock-on consequence
could be higher retail prices and dampened competition. This latter case is an instance of a
waterbed eect—where dierential buyer power means that some buyers gain at both the
relative and absolute expense of other buyers.”); John Kirkwood, Powerful Buyers and Merger
Enforcement, B.U.
L. REV. , () (“[Suppose a firm] demands price or other
the yale law journal :
[T]he presence of a waterbed eect can further distort competition by
giving a powerful buyer now a two-fold advantage, namely, through
more advantageous terms for itself and through higher purchasing
costs for its rivals. What then becomes a virtuous circle for the strong
buyer ends 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 , Amazon introduced
Fulfillment-by-Amazon (FBA), a logistics and delivery service for independent
sellers.
335
Merchants who sign up for FBA store their products in Amazon’s
warehouses, and Amazon packs, ships, and provides customer service on any
orders. Products sold through FBA are eligible for service through Amazon
Prime—namely, free two-day shipping and/or free regular shipping, depending
on the order.
336
Since many merchants selling on Amazon are competing with
Amazon’s own retail operation and its Amazon Prime service, using FBA oers
sellers the opportunity to compete at less of a disadvantage.
Notably, it is partly because independent sellers faced higher rates from
UPS and FedEx—a result of Amazon’s dominance—that Amazon succeeded in
directing sellers to its new business venture.
337
In many instances, orders rout-
ed through FBA were still being shipped and delivered by UPS and FedEx,
since Amazon relied on these firms.
338
But because Amazon had secured dis-
concessions from . . . suppliers . . . . [and] that those concessions nevertheless cause the
suppliers to increase prices to smaller buyers or otherwise worsen their terms.”).
334. Dobson & Inderst, supra note , at .
335. Press Release, Amazon, Amazon Launches New Services To Help Small and Medium-Sized
Businesses Enhance Their Customer Oerings by Accessing Amazon’s Order Fulfillment,
Customer Service, and Website Functionality (Sept. , ), http://phx.corporate
-ir.net/phoenix.zhtml?c=&p=irol-newsArticle&ID= [http://perma.cc/MCG
-LRJ].
336. Id. (“Amazon.com customers can now use oers such as Amazon Prime and Free Super Sav-
er Shipping when buying products with the ‘Fulfilled by Amazon’ icon next to the oering
listing.”).
337. See Paul Cole, Should You Use Amazon Discounted UPS Shipping?, SELLERENGINE
(),
http://sellerengine.com/should-you-use-amazon-discounted-ups-shipping [http://
perma.cc/ND-BWH] (“Probably the most common choice is to use Amazon’s discounted
rate with UPS. For many sellers, this is the way to go. It’s a lower rate than you’re likely to
receive from UPS or FedEx if you have your own account. Currently, Amazon’s UPS rate is
about cheaper than an average FedEx account, ./lb. compared to ./lb.”).
338. Before building out its own delivery operations, Amazon used (among others) UPS and
FedEx. See, e.g., Marcus Wohlsen, Amazon Takes a Big Step Towards Finally Making Its Own
Deliveries, W
IRED (Sept. , , : PM), http://www.wired.com///amazon
-takes-big-step-toward-competing-directly-ups [http://perma.cc/AT-YJK].
amazon's antitrust paradox
counts unavailable to other sellers, it was cheaper for those sellers to go
through Amazon than to use UPS and FedEx directly. Amazon had used its
dominance in the retail sector to create and boost a new venture in the delivery
sector, inserting itself into the business of its competitors.
Amazon has followed up on this initial foray into fulfillment services by
creating a logistics empire. Building out physical capacity lets Amazon 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 it to rapidly establish
an extensive network of physical infrastructure. Since , Amazon has spent
. billion building warehouses,
339
and it spent . billion on shipping in
alone.
340
Amazon has opened more than warehouses,
341
sorting
centers, delivery stations that feed packages to local couriers, and more than
Prime Now hubs.
342
Analysts estimate that the locations of Amazon’s ful-
fillment centers bring it within twenty miles of of the population and
within twenty miles of of its core same-day base.
343
This sprawling net-
work of fulfillment centers—each placed in or near a major metropolitan area—
equips Amazon to oer one-hour delivery in some locations and same-day in
others (a service it oers free to members of Amazon Prime).
344
While several
rivals initially entered the delivery market to compete with Prime shipping,
some are now retreating.
345
As one analyst noted, “Prime has proven exceed-
ingly dicult for rivals to copy.”
346
339. Daniella Kucera, Why Amazon Is on a Building Spree, BLOOMBERG (Aug. ,
: AM), http://www.bloomberg.com/bw/articles/--/why-amazon-is
-on-a-warehouse-building-spree [http://perma.cc/P-MLSN].
340. Leonard, supra note .
341. Greg Bensinger & Laura Stevens, Amazon’s Newest Ambition: Competing Directly with UPS
and FedEx, W
ALL ST. J. (Sept. , , : PM), http://www.wsj.com/articles/ama
zons-newest-ambitioncompeting-directly-with-ups-and-fedex- [http://perma.cc
/BBF-PXJP].
342. Id.
343. Jillian D’Onfro, Here Are All of Amazon’s Warehouses in the US, BUS. INSIDER (Mar. , ,
: PM), http://www.businessinsider.com/how-many-fulfillment-centers-does-amazon
-have-in-the-us--#ixzzfAXzda [http://perma.cc/TFG-BJ].
344. Bensinger & Stevens, supra note .
345. See Spencer Soper, EBay Ends Same-Day Delivery in U.S. in Face of Amazon Eort, BLOOM-
BERG
(July , , : PM), http://www.bloomberg.com/news/articles/--/ebay
-ends-same-day-delivery-in-u-s-in-face-of-amazon-eort [http://perma.cc/TD-XDC].
346. Stone, supra note ; see also JP Mangalindan, Amazon’s Prime and Punishment, FORTUNE
(Feb. , , : PM), http://fortune.com////amazons-prime-and-punishment
[http://perma.cc/KL-CZ] (“‘If you’re a competing retailer, it should be in your plans
that Prime will someday be a next-day or same-day delivery service with , free mov-
the yale law journal :
Most recently, Amazon has also expanded into trucking. Last December, it
announced it plans to roll out thousands of branded semi-trucks, a move that
will give it yet more control over delivery, as it seeks to speed up how quickly it
can transport goods to customers.
347
Amazon now owns four thousand truck
trailers and has also signed contracts for container ships, planes,
348
and
drones.
349
As of October , Amazon had leased at least forty jets.
350
Former
employees say Amazon’s long-term goal is to circumvent UPS and FedEx alto-
gether, though the company itself has said it is looking only to supplement its
reliance on these firms,
not supplant them.
351
The way that Amazon has leveraged its dominance as an online retailer to
vertically integrate into delivery is instructive on several fronts. First, it is a
textbook example of how the company can use its dominance in one sphere to
advantage a separate line of business. To be sure, this dynamic is not intrinsi-
cally anticompetitive. What should prompt concern in Amazon’s case, however,
is that Amazon achieved these cross-sector advantages in part due to its bar-
gaining power. Because Amazon was able to demand heavy discounts from
FedEx and UPS, other sellers faced price hikes from these companies—which
positioned Amazon to capture them as clients for its new business. By over-
looking structural factors like bargaining power, modern antitrust doctrine fails
to address this type of threat to competitive markets.
ies—it’s going in that direction,’ chimes analyst [Matt] Nemer. If that day comes, Prime
won’t just be a nominal loyalty program or balance sheet customer acquisition cost. It’ll be a
monolith few can compete with.”).
347. Jason Del Ray, Amazon Buys Thousands of Its Own Truck Trailers as Its Transportation Ambi-
tions Grow, R
ECODE (Dec. , , : AM), http://recode.net////amazon
-buys-thousands-of-its-own-trucks-as-its-transportation-ambitions-grow [http://perma.cc
/LBF-NCYB]; Leonard, supra note .
348. Robin Lewis, Amazon’s Shipping Ambitions Are Larger than It’s Letting On, FORBES (Apr. ,
, : AM), http://www.forbes.com/sites/robinlewis////planes-trains-trucks
-and-ships/#caac [http://perma.cc/HZV-KCLE].
349. Farhad Manjoo, Think Amazon’s Drone Idea Is a Gimmick? Think Again, N.Y. TIMES (Aug. ,
), http://www.nytimes.com////technology/think-amazons-drone-delivery
-idea-is-a-gimmick-think-again.html [http://perma.cc/AF-VAY].
350. Id.
351. See Del Ray, supra note ; see also Leonard, supra note (“Others believe that Amazon
will make a business out of its delivery network, as it did with Amazon Web Services, there-
by challenging the world’s leading shipping companies . . . . The fear has spread to Wall
Street, where analysts say investors worry about what Amazon’s strategy means for the
shipping industry. ‘The natural inclination among any observers of the market when they
see Amazon is to be scared,’ says David Vernon, a Sanford C. Bernstein analyst who tracks
the shipping market. ‘Amazon is the epitome of a zero-sum game.’”).
amazon's antitrust paradox
Second, Amazon is positioned to use its dominance across online retail and
delivery in ways that involve tying, are exclusionary, and create entry barri-
ers.
352
That is, Amazon’s distortion of the delivery sector in turn creates anti-
competitive challenges in the retail sector. For example, sellers who use FBA
have a better chance 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 its retail platform to whether they also use its delivery business.
353
Ama-
zon is also positioned to use its logistics infrastructure to deliver its own retail
goods faster than those of independent sellers that use its platform and fulfill-
ment service—a form of discrimination that exemplifies traditional concerns
about vertical integration. And Amazon’s capacity for losses and expansive lo-
gistics capacities mean that it could privilege its own goods while still oering
independent sellers the ability to ship goods more cheaply and quickly than
they could by using UPS and FedEx directly.
Relatedly, Amazon’s expansion into the delivery sector also raises questions
about the Chicago School’s limited conception of entry barriers. The company’s
capacity for losses—the permission it has won from investors to show negative
profits—has been key in enabling Amazon to achieve outsized growth in deliv-
ery and logistics. Matching Amazon’s network would require a rival to invest
heavily and—in order to viably compete—oer free or otherwise below-cost
shipping. In interviews with reporters, venture capitalists say there is no appe-
tite to fund firms looking to compete with Amazon on physical delivery.
354
In
this way, Amazon’s ability to sustain losses creates an entry barrier for any firm
that does not enjoy the same privilege.
Third, Amazon’s use of Prime and FBA exemplifies how the company has
structurally placed itself at the center of e-commerce. Already of American
online shoppers begin their online shopping on Amazon’s platform.
355
Given
the trac, it is becoming increasingly clear that in order to succeed in e-
commerce, an independent merchant will need to use Amazon’s infrastructure.
352. A tie is created when a firm requires consumers interested in purchasing good A to purchase
good A (the tying good) and good B (the tied good) from the firm. The practice forces an
unwilling customer to purchase the tied good while a refusal-to-deal turns away a willing
customer. See Einer Elhauge, Tying, Bundled Discounts, and the Death of the Single Monopoly
Profit Theorem, H
ARV. L. REV. , – ().
353. See Will Mitchell, How To Rank Your Products on Amazon—The Ultimate Guide,
S
TARTUPBROS, http://startupbros.com/rank-amazon [http://perma.cc/XE-KNHF].
354. “One of the biggest themes is the challenge of getting product to your consumers, and rely-
ing on [fulfillment companies], but they don’t have another option, they can’t make invest-
ments [if] Amazon is in fulfillment.” Ray, supra note .
355. Moore, supra note .
the yale law journal :
The fact that Amazon competes with many of the businesses that are coming to
depend on it creates a host of conflicts of interest that the company can exploit
to privilege its own products.
The dominant framework in antitrust today fails to recognize the risk that
Amazon’s dominance poses for discrimination and barriers to new entry. In
part, this is because—as with the framework’s view of predatory pricing—the
primary harm that registers within the “consumer welfare” frame is higher con-
sumer prices. On the Chicago School’s account, Amazon’s vertical integration
would only be harmful if and when it chooses to use its dominance in delivery
and retail to hike fees to consumers. Amazon has already raised Prime prices.
356
But antitrust enforcers should be equally concerned about the fact that Amazon
increasingly controls the infrastructure of online commerce—and the ways in
which it is harnessing this dominance to expand and advantage its new busi-
ness ventures. The conflicts of interest that arise from Amazon both competing
with merchants and delivering their wares pose a hazard to competition, par-
ticularly in light of Amazon’s entrenched position as an online platform. Ama-
zon’s conflicts of interest tarnish the neutrality of the competitive process. The
thousands of retailers and independent businesses that must ride Amazon’s
rails to reach market are increasingly dependent on their biggest competitor.
D. Amazon Marketplace and Exploiting Data
As described above, vertical integration in retail and physical delivery may
enable Amazon to leverage cross-sector advantages in ways that are potentially
anticompetitive but not understood as such under current antitrust doctrine.
Analogous dynamics are at play with Amazon’s dominance in the provision of
online infrastructure, in particular its Marketplace for third-party sellers. Be-
cause information about Amazon’s practices in this area is limited, this Section
necessarily will be brief. But to capture fully the anticompetitive features of
Amazon’s business strategy, it is vital to analyze how vertical integration across
internet businesses introduces more sophisticated—and potentially more trou-
bling—opportunities to abuse cross-market advantages and foreclose rivals.
The clearest example of how the company leverages its power across online
businesses is Amazon Marketplace, where third-party retailers sell their wares.
Since Amazon commands a large share of e-commerce trac, many smaller
merchants find it necessary to use its site to draw buyers.
357
These sellers list
356. See Bensinger, supra note .
357. See Angus Loten & Adam Janofsky, Sellers Need Amazon, but at What Cost?, WALL ST. J.
(Jan. , , : PM), http://www.wsj.com/articles/sellers-need-amazon-but-at-what
amazon's antitrust paradox
their goods on Amazon’s platform and the company collects fees ranging from
to of their sales from them.
358
More than two million third-party
sellers used Amazon’s platform as of , an increase from the roughly one
million that used the platform in .
359
The revenue that Amazon generates
through Marketplace has been a major source of its growth: third-party sellers’
share of total items sold on Amazon rose from in
360
to over in
.
361
Third-party sellers using Marketplace recognize that using the platform
puts them in a bind. As one merchant observed, “You can’t really be a high-
volume seller online without being on Amazon, but sellers are very aware of the
fact that Amazon is also their primary competitor.”
362
Evidence suggests that
their unease is well founded. Amazon seems to use its Marketplace “as a vast
laboratory to spot new products to sell, test sales of potential new goods, and
exert more control over pricing.”
363
Specifically, reporting suggests that “Ama-
zon uses sales data from outside merchants to make purchasing decisions in
order to undercut them on price” and give its own items “featured placement
under a given search.”
364
Take the example of Pillow Pets, “stued-animal pil-
lows modeled aer NFL mascots” that a third-party merchant sold through
Amazon’s site.
365
For several months, the merchant sold up to one hundred pil-
lows per day.
366
According to one account, “just ahead of the holiday season,
[the merchant] noticed Amazon had itself beg[u]n oering the same Pillow
Pets for the same price while giving [its own] products featured placement on
the site.”
367
The merchant’s own sales dropped to twenty per day.
368
Amazon
-cost- [http://perma.cc/MYB-PHQN] (“If you say no to Amazon, you’re clos-
ing the door on tons of sales.”).
358. Id.
359. Id.
360. Greg Bensinger, Competing with Amazon on Amazon, WALL ST. J. (June , ,
: PM), http://www.wsj.com/articles/SB
[http://perma.cc/WAG-BDRC].
361. Nancee Halpin, Third-Party Merchants Account for More than Three-Quarters of Items Sold on
Amazon, B
US. INSIDER (Oct. , , : PM), http://www.businessinsider.com/third
-party-merchants-drive-amazon-grow-- [http://perma.cc/XL-NTCQ].
362. Loten & Janofsky, supra note .
363. Bensinger, supra note .
364. Id.
365. Id.
366. Id.
367. Id.
368. Id.
the yale law journal :
has gone head-to-head with independent merchants on price, vigorously
matching and even undercutting them on products that they had originally in-
troduced. By going directly to the manufacturer, Amazon seeks to cut out the
independent sellers.
In other instances, Amazon has responded to popular third-party products
by producing them itself. Last year, a manufacturer that had been selling an
aluminum laptop stand on Marketplace for more than a decade saw a similar
stand appear at half the price. The manufacturer learned that the brand was
AmazonBasics, the private line that Amazon has been developing since .
369
As one news site describes it, initially, AmazonBasics focused on generic goods
like batteries and blank DVDs. “Then, for several years, 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 has used “insights
gleaned from its vast Web store to build a private-label juggernaut that now
includes more than , products.”
371
One study found that in the case of
women’s clothing, Amazon “began selling percent of the top items first sold
through marketplace vendors.”
372
It is true that brick-and-mortar retailers sometimes also introduce private
labels and may use other brands’ sales records to decide what to produce. The
dierence with Amazon is the scale and sophistication of the data it collects.
Whereas brick-and-mortar stores are generally only able to collect information
on actual sales, Amazon tracks what shoppers are searching for but cannot find,
as well as which products they repeatedly return to, what they keep in their
shopping basket, and what their mouse hovers over on the screen.
373
In using its Marketplace this way, Amazon increases sales while shedding
risk. It is third-party sellers who bear the initial costs and uncertainties when
369. Spencer Soper, Got a Hot Seller on Amazon? Prepare for E-Tailer To Make One Too,
B
LOOMBERG (Apr. , , : AM), http://www.bloomberg.com/news/articles/
--/got-a-hot-seller-on-amazon-prepare-for-e-tailer-to-make-one-too [http://perma
.cc/GL-AE].
370. Id. (quoting a report by Skubana, an e-commerce company).
371. Id.
372. George Anderson, Is Amazon Undercutting Third-Party Sellers Using Their Own Data?,
F
ORBES (Oct. , , : AM), http://www.forbes.com/sites/retailwire///
/is-amazon-undercutting-third-party-sellers-using-their-own-data [http://perma.cc/SQE
-SEU].
373. As one analyst said of Amazon employees, “They’re data scientists. They know what people
want and they’re going to mop it up.” Nick Bravo, Amazon Private Labels Threaten Manufac-
turers, T
RENDSOURCE (July , , : AM), http://trustedinsight.trendsource.com
/trusted-insight-trends/amazon-private-labels-threaten-manufacturers [http://perma.cc
/WVE-LXSS].
amazon's antitrust paradox
introducing new products; by merely spotting them, Amazon gets to sell prod-
ucts only once their success has been tested. The anticompetitive implications
here seem clear: Amazon is exploiting the fact that some of its customers are
also its rivals. The source of this power is: () its dominance as a platform,
which eectively necessitates that independent merchants use its site; () its
vertical integration—namely, the fact that it both sells goods as a retailer and
hosts sales by others as a marketplace; and () its ability to amass swaths of da-
ta, by virtue of being an internet company. Notably, it is this last factor—its
control over data—that heightens the anticompetitive potential of the first two.
Evidence suggests that Amazon is keenly aware of and interested in exploit-
ing these opportunities. For example, the company has reportedly used in-
sights gleaned from its cloud computing service to inform its investment deci-
sions.
374
By observing which start-ups are expanding their usage of Amazon
Web Services, Amazon can make early assessments of the potential success of
upcoming firms. Amazon has used this “unique window into the technology
startup world” to invest in several start-ups that were also customers of its
cloud business.
375
How Amazon has cross-leveraged its advantages across distinct lines of
business suggests that the law fails to appreciate when vertical integration may
prove anticompetitive. This shortcoming is underscored with online platforms,
which both serve as infrastructure for other companies and collect swaths of
data that they can then use to build up other lines of business. In this way, the
current antitrust regime has yet to reckon with the fact that firms with concen-
trated control over data can systematically tilt a market in their favor, dramati-
cally reshaping the sector.
376
374. See Alistair Barr, Amazon Finds Startup Investments in the ‘Cloud,’ REUTERS (Nov. ,
, : PM), http://www.reuters.com/article/amazon-cloud-idUSNEAQ
[http://perma.cc/BHQ-JPW].
375. Id.
376. European antitrust authorities do investigate how concentrated control over data may have
anticompetitive eects, and—unlike U.S. antitrust authorities—investigated the Face-
book/WhatsApp merger for this reason. Complaints from companies that their rivals are
acquiring an unfair competitive advantage through acquiring a firm with huge troves of data
may also prompt U.S. authorities to take the exclusionary potential of data more seriously.
In September, Salesforce announced it would urge regulators in the United States and in
Europe to block Microso’s bid to acquire LinkedIn, on grounds that the deal would fore-
close competition by giving Microso too much control over data. See Rachael King,
Salesforce.com To Press Regulators To Block Microso-LinkedIn Deal, W
ALL ST. J. (Sept. ,
, : PM), http://www.wsj.com/articles/salesforce-com-to-press-regulators-to-block
-microso-linkedin-deal- [http://perma.cc/EZE-GVBC].
the yale law journal :
v. how platform economics and capital markets may
facilitate anticompetitive conduct and structures
As Part IV mapped out, aspects of Amazon’s conduct and structure may
threaten competition yet fail to trigger scrutiny under the analytical framework
presently used in antitrust. In part this reflects the “consumer welfare” orienta-
tion of current antitrust laws, as critiqued in Part II. But it also reflects a failure
to update antitrust for the internet age. This Part examines how online plat-
forms defy and complicate assumptions embedded in current doctrine. Specifi-
cally, it considers how the economics and business dynamics of online plat-
forms create incentives for companies to pursue growth at the expense of
profits, and how online markets and control over data may enable new forms
of anticompetitive activity.
Economists have analyzed extensively how platform markets may pose
unique challenges for antitrust analysis.
377
Specifically, they stress that analysis
applicable to firms in single-sided markets may break down when applied to
two-sided markets, given the distinct pricing structures and network externali-
ties.
378
These studies oen focus on the challenge that two-sided platforms face
in attracting both sides—the classic coordination problem of having to attract
buyers without an established line of sellers, and vice versa.
379
Economists tend
to conclude that—given the particular challenges of two-sided markets
380
—
antitrust should be forgiving of conduct that might otherwise be characterized
as anticompetitive.
381
Legal analysis of online platforms is comparatively undertheorized. The
Justice Department’s case against Microso under Section of the Sherman
Act, initiated in the s, remains the government’s most significant case in-
volving two-sided markets—even as platforms have emerged as central arteries
377. See David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets, YALE J. ON
REG. (); King, supra note ; David S. Evans & Richard Schmalensee, The Antitrust
Analysis of Multi-Sided Platform Businesses (Coase-Sandor Inst. for Law & Econ., Working
Paper No. , ).
378. See Julian Wright, One-Sided Logic in Two-Sided Markets, REV. NETWORK ECON. ().
379. See DAVID S. EVANS, PLATFORM ECONOMICS: ESSAYS ON MULTI-SIDED BUSINESS ().
380. Two-sided markets are platforms that have two distinct user groups that oer each other
network benefits.
381. See EVANS, supra note , at (“The pricing and investment strategies that firms in two-
sided markets use to ‘get both sides on board’ and ‘balance the interests of both sides’ raise
novel ones. These pricing and other business strategies are needed to solve a fundamental
economic problem arising from the interdependency of demand on both sides of the market.
In some cases, the product could not even exist without eorts to subsidize one side of the
market or the other.”).
amazon's antitrust paradox
in our modern economy. Starting in , the FTC pursued an investigation in-
to Google, partly in response to allegations that the company uses its domi-
nance as a search engine to cement its advantage and exclude rivals in other
lines of business. While the FTC closed the investigation without bringing any
charges, leaks later revealed that FTC sta had concluded that Google abused
its power on three separate counts.
382
The European Union has brought charg-
es against Google for violating antitrust laws.
383
For the purpose of competition policy, one of the most relevant factors of
online platform markets is that they are winner-take-all. This is due largely to
network eects and control over data, both of which mean that early ad-
vantages become self-reinforcing. The result is that technology platform mar-
kets will yield to dominance by a small number of firms. Walmart’s recent pur-
chase of the one start-up that had sought to challenge Amazon in online
retail—Jet.com—illustrates this reality.
384
Network eects arise when a user’s utility from a product increases as oth-
ers use the product. Since popularity compounds and is reinforcing, markets
with network eects oen tip towards oligopoly or monopoly.
385
Amazon’s user
reviews, for example, serve as a form of network eect: the more users that
have purchased and reviewed items on the platform, the more useful infor-
mation other users can glean from the site.
386
As the Fourth Circuit has noted,
“[O]nce dominance is achieved, threats come largely from outside the domi-
nated market, because the degree of dominance of such a market tends to be-
come so extreme.”
387
In this way, network eects act as a form of entry barrier.
A platform’s control over data, meanwhile, can also entrench its position.
388
Access to consumer data enables platforms to better tailor services and gauge
demand. Involvement across markets, meanwhile, may permit a company to use
382. Brody Mullins et al., Inside the U.S. Antitrust Probe of Google, WALL ST. J. (Mar.
, , : PM), http://www.wsj.com/articles/inside-the-u-s-antitrust-probe-of-google
- [http://perma.cc/HPZ-JZK].
383. Mark Scott & James Kanter, Google Faces New Round of Antitrust Charges in Europe, N.Y.
TIMES (July , ), http://www.nytimes.com////technology/google-european
-union-antitrust-charges.html [http://perma.cc/SYP-ZB].
384. See supra note .
385. STUCKE & GRUNES, supra note , at .
386. This is a form of “scale of data” network eect rather than a “traditional network eect.” Id.
at .
387. Novell Inc. v. Microso Corp., F.d , (th Cir. ).
388. See Guy Rolnik & Asher Schechter, Is the Digital Economy Much Less Competitive than We
Think It Is?, P
ROMARKET (Sept. , ), http://promarket.org/digital-economy-much
-less-competitive-think [http://perma.cc/KR-TBQ].
the yale law journal :
data gleaned from one market to benefit another business line.
389
Amazon’s use
of Marketplace 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 dom-
inant platforms to enter new markets with greater ease. For example, reports
now suggest that Amazon may dramatically expand its footprint in the ad
business, “leveraging its rich supply of shopping data culled from years of op-
erating a massive e-commerce business.”
390
In other words, control over data,
too, acts as an entry barrier.
Given that online platforms operate in markets where network eects and
control over data solidify early dominance, a company looking to compete in
these markets must seek to capture them. The most eective way is to chase
market share and drive out one’s rivals—even if doing so comes at the expense
of short-term profits, since the best guarantee of long-term profits is immedi-
ate growth. Due to this dynamic, striving to maximize market share at the ex-
pense of one’s rivals makes predation highly rational; indeed, it would be irra-
tional for a business not to frontload losses in order to capture the market. Rec-
Recognizing that enduring early 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 charted immense
growth while investing aggressively—both by expanding provision of physical
and online infrastructure and by pricing goods below cost. Amazon’s stock
price has soared despite a history of razor-thin—or even negative—margins. In
essence, investors have given Amazon a free pass to grow without any pressure
to show profits. The firm has used this edge to expand wildly and dominate
online commerce.
The idea that investors are willing to fund predatory growth in winner-
take-all markets also holds in the case of Uber. Although the dynamics of the
online retail market are distinct from those of ride-sharing, Uber’s growth tra-
jectory is worth analyzing for general insight into how investors enable plat-
389. Interestingly, agencies have required vertically merging parties to erect firewalls to prevent
anticompetitive use of data. See, e.g., In re Coca-Cola Co., F.T.C. , WL
() (ordering Coca-Cola to set up a firewall to ensure that its merger with a bottling
subsidiary does not give it access to information from its competitor, Dr. Pepper Snapple
Group); Press Release, FTC, FTC Puts Conditions on Coca-Cola’s . Billion Acquisition
of its Largest North American Bottler (Sept. , ), http://www.c.gov/news
-events/press-releases///c-puts-conditions-coca-colas--billion-acquisition-its
[http://perma.cc/BPU-EY] (discussing the Coca-Cola settlement and a similar PepsiCo
settlement).
390. Mike Shields, Amazon Looms Quietly in Digital Ad Landscape, WALL ST. J. (Oct. , ,
: PM), http://www.wsj.com/articles/amazon-looms-quietly-in-digital-ad-landscape
- [http://perma.cc/ACL-MJD].
amazon's antitrust paradox
form dominance. In , news reports revealed that Uber had an operating
loss of million on million in revenue, confirming suspicions that the
company has been bleeding money for the sake of achieving steep growth and
acquiring market share.
391
In China, the company has lost more than billion
a year.
392
The strategy of aggressive price competition and brazen leadership
coupled with soaring growth prompted immediate comparisons to Amazon.
393
Like Amazon, Uber has drawn immense interest from investors. As of July
, its valuation hit nearly billion, equaling the record set by Facebook in
.
394
It recently secured an additional . billion in investment, bringing its
total funds to . billion—a figure “far greater than most companies raise
even during an initial public oering,” which Uber has avoided.
395
One might dismiss this phenomenon as irrational investor exuberance. But
another way to read it is at face value: the reason investors value Amazon and
Uber so highly is because they believe these platforms will, eventually, generate
huge returns. As one venture capitalist recently remarked, if he had to “put his
entire capital in a single company and hold it for the next years,” he would
choose Amazon. “I don’t see any cleaner monopoly available to buy in the pub-
lic markets right now.”
396
In other words, that these platform companies are
391. See Eric Newcomer, Uber Draws Fresh Amazon Comparisons as Growth Trumps Profit, BLOOM-
BERG
(July , , : AM), http://www.bloomberg.com/news/articles/--/uber
-draws-fresh-comparison-with-amazon-as-growth-trumps-profit [http://perma.cc/AYF
-RJ]. Uber does not just lose money in the aggregate by reinvesting more than it gener-
ates, but also by pricing rides below what it pays drivers. In other words, it is pricing below
its variable costs—which enforcers traditionally read as a sign of predatory pricing. “As any-
one who has taken an Uber and talked to the driver knows, sometimes the fare collected
from the rider is less than what Uber pays the driver.” Id.
392. Charles Clover & Leslie Hook, Uber Losing More than $1bn a Year in China, FIN.
T
IMES (Feb. , , : PM), http://www..com/content/ff-d-e-b
-ee [http://perma.cc/UP-JQQ].
393. “‘They’re wise to expand as fast as they can,’ said Lou Shipley, a lecturer at the MIT Sloan
School of Management. ‘I would liken it to what Amazon did with books.’” Newcomer, su-
pra note .
394. Douglas MacMillan & Telis Demos, Uber Valued at More than $50 Billion, WALL ST. J. (July
, , : PM), http://www.wsj.com/articles/uber-valued-at-more-than--billion
- [http://perma.cc/TGW-SYJ].
395. Leslie Hook, Uber Cranks Up Ride-Hailing Battle with $3.5 bn Saudi Investment, FIN. TIMES
(June , ), http://www..com/content/acc--e-b-fffde [http://
perma.cc/RXV-TPBP].
396. Eugene Kim, Billionaire VC Says that Most Companies Will Eventually Pay an Amazon ‘Tax,’
B
US. INSIDER (Jan. , , : AM), http://www.businessinsider.in/Billionaire-VC
-says-that-most-companies-will-eventually-pay-an-Amazon-tax/articleshow/.cms
[http://perma.cc/ZGS-VSL].
the yale law journal :
undertaking consistent, steep losses and still generating strong investor back-
ing suggests that the markets expect Amazon and Uber to recoup these losses.
While investors have unambiguously endorsed and funded online plat-
forms’ quest to bleed money in their race to draw users, antitrust doctrine fails
to acknowledge this strategy. In the past, the Supreme Court’s analysis has em-
braced the Ecient Market Hypothesis (EMH), the idea that market prices re-
flect all available information.
397
The Justice Department also acknowledges
that market information—for example, the financial terms of an acquisition—
may “be informative regarding competitive eects.”
398
Applying EMH in this
instance overwhelmingly suggests that these platforms are positioned to recoup
their losses. Yet bringing a predatory pricing suit against an online platform
would be 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 make predation
especially rational, current doctrine also fails to appreciate how a platform
might recoup losses. For one, investor support allows Amazon to strategize and
operate on a time horizon far longer than what the Brooke Group or Matsushita
Courts confronted. Raising prices in a third year aer enduring losses for two
is dierent from engaging in a decade-long quest to become the dominant
online retailer and provider of internet infrastructure. That longer timeline,
meanwhile, makes available more recoupment mechanisms. Not only has Ama-
zon inaugurated an entire generation into online shopping through its plat-
form, but it has expanded into a suite of additional businesses and amassed
significant troves of data on users. This data enables it both to extend its tug
over customers through highly tailored personal shopping experiences, and,
potentially, to institute forms of price discrimination, as described in Section
IV.A. Both the latitude granted by investors and control over data equip an in-
397. The Supreme Court has armed the validity of EMH. See Halliburton Co. v. Erica P. John
Fund, S. Ct. , -, ().
398. Horizontal Merger Guidelines, supra note , at (“For example, a purchase price in excess of
the acquired firm’s stand-alone market value may indicate that the acquiring firm is paying a
premium because it expects to be able to reduce competition or to achieve eciencies.”).
399. Ironically, the logic that is motivating investors—the idea that it is worth encouraging plat-
forms to bleed money to establish a dominant position and capture the market, at which
point these firms will be able to recoup those losses—maps on to the logic underpinning
current predatory pricing doctrine. The main issue is how narrowly the law currently con-
ceives of recoupment, which does not account for how Amazon can leverage its multiple
lines of business.
amazon's antitrust paradox
cumbent platform to recoup losses in ways less obviously connected to the ini-
tial form of below-cost pricing.
These recoupment mechanisms may also be more sophisticated than what a
judge or even rivals would be able to spot. This last point becomes even more
apparent in the context of Uber, whose dynamic pricing has conditioned users
not to expect a stable or regular price. While Uber claims that its algorithms set
prices to reflect real-time supply and demand, initial research has found that
the company manipulates the availability of both.
400
Moreover, it routinely
gives away discount coupons to select users, eectively charging users dierent
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 suggests that predatory pricing and integration across relat-
ed business lines are emerging as key paths to establishing dominance—aided
by the control over data that dominant platforms enjoy. But because current
predatory pricing doctrine defines recoupment in overly narrow terms, com-
petitors generally have not been able to make an eective legal case. Similarly,
because current doctrine largely discounts entry barriers, the anticompetitive
eects of vertical integration are dicult to cognize under the existing frame-
work. Roadblocks to these claims persist even as Amazon’s valuation and share
price point to a strong market expectation of recoupment and profits.
There are signs that enforcers are becoming more attuned to the special fac-
tors that may render current antitrust analysis inadequate to promote competi-
tion in internet platform markets. For example, in the United States suc-
cessfully challenged a merger between two leading providers of online ratings
and reviews platforms. In its complaint, DOJ acknowledged that data-driven
industries can be characterized by network eects, which increase switching
costs and entry barriers.
403
Recent comments by FTC Commissioner Terrell
400. See Tim Hwang & Madeleine Clare Elish, The Mirage of the Marketplace: The
Disingenuous Ways Uber Hides Behind Its Algorithm, S
LATE (July , , :
AM), http://www.slate.com/articles/technology/future_tense///uber_s_algorithm
_and_the_mirage_of_the_marketplace.html [http://perma.cc/BUR-PPN].
401. See Felix Salmon, Why the Internet Is Perfect for Price Discrimination, REUTERS (Sept.
, ), http://blogs.reuters.com/felix-salmon////why-the-internet-is-perfect-
for-price-discrimination [http://perma.cc/NZE-SVJJ].
402. See David Singh Grewal, Before Peer Production: Infrastructure Gaps and the Architecture of
Openness in Synthetic Biology, S
TAN. TECH. L. REV. (forthcoming ).
403. The Justice Department wrote, “[A]s more retailers purchase Bazaarvoice’s PRR platform,
the Bazaarvoice network becomes more valuable for manufacturers because it will allow[ ]
them to syndicate content to a greater number of retail outlets. The feedback between the
manufacturers and retailers creates a network eect that is a significant and durable compet-
the yale law journal :
McSweeny—noting that data can act as a barrier to entry and that “competition
enforcers can and should assess the competitive implications of data”—also
suggest that top ocials are assessing how to revise their tools and framework
for gauging competition in platform markets.
404
While this burgeoning recognition is heartening, the unique features of
platform markets require a more thorough evaluation of how antitrust is ap-
plied. Because scale is both vital to platforms’ business model and helps en-
trench their dominant position, antitrust should reckon with the fact that pur-
suing growth at the expense of returns is—contra to current doctrine—highly
rational. An approach more attuned to the realities of online platform markets
would also recognize the variety of mechanisms that businesses may use to re-
coup losses, the longer time horizon on which recoupment might occur, and
the ways that vertical integration and concentrated control over data may ena-
ble new forms of anticompetitive conduct. Revising antitrust to reflect the dy-
namics of online platforms is vital, especially as these companies come to medi-
ate a growing share of communications and commerce.
vi. two models for addressing platform power
If it is true that the economics of platform markets may encourage anti-
competitive market structures, there are at least two approaches we can take.
Key is deciding whether we want to govern online platform markets through
competition, or want to accept that they are inherently monopolistic or oligop-
olistic and regulate them instead. If we take the former approach, we should
reform antitrust law to prevent this dominance from emerging or to limit its
scope. If we take the latter approach, we should adopt regulations to take ad-
vantage of these economies of scale while neutering the firm’s ability to exploit
its dominance.
A. Governing Online Platform Markets Through Competition
Reforming antitrust to address the anticompetitive nature of platform mar-
kets could involve making the law against predatory pricing more robust and
strictly policing forms of vertical integration that firms can use for anticompeti-
itive advantage for Bazaarvoice.” Complaint at , United States v. Bazaarvoice, Inc., No. -
(N.D. Cal. Jan. , ), WL .
404. Terrell McSweeny, Comm’r, FTC, Remarks to the U.S. Chamber of Commerce at TecNation
(Sept. , ), http://www.c.gov/system/files/documents/public_statements
//mcsweeny_-_tecnation__--.pdf [http://perma.cc/NGA-YNP].
amazon's antitrust paradox
tive ends. Importantly, each of these doctrinal areas should be reformulated so
that it is sensitive to preserving the competitive process and limiting conflicts
of interest that may incentivize anticompetitive conduct.
1. Predatory Pricing
While predatory pricing technically remains illegal, it is extremely dicult
to win predatory pricing claims because courts now require proof that the al-
leged predator would be able to raise prices and recoup its losses.
405
Revising
predatory pricing doctrine to reflect the economics of platform markets, where
firms can sink money for years given unlimited investor backing, would require
abandoning the recoupment requirement in cases of below-cost pricing by
dominant platforms. And given that platforms are uniquely positioned to fund
predation, a competition-based approach might also consider introducing a
presumption of predation for dominant platforms found to be pricing products
below cost.
Several reasons militate in favor of a presumption of predation in such cas-
es. First, firms may raise prices years aer the original predation, or raise prices
on unrelated goods, in ways dicult to prove at trial. Second, firms may raise
prices through personalized pricing or price discrimination, in ways not easily
detectable. Third, predation can lead to a host of market harms even if the firm
does not raise consumer prices. Within a consumer welfare framework, these
harms include degradation of product quality and sapping diversity of
choice.
406
Such harms may arise if Amazon uses its bargaining power to extract
better terms from producers and suppliers, who, in turn, slash investments to
meet its demands. Within a broader framework—which seeks to protect the
full range of interests that antitrust laws were enacted to safeguard—the poten-
tial harms include lower income and wages for employees, lower rates of new
business creation, lower rates of local ownership, and outsized political and
economic control in the hands of a few.
407
Introducing a presumption of predation would involve identifying when a
price is below cost, a subject of much debate. The Supreme Court has not ad-
dressed the issue, but most appellate courts have said that average variable cost
405. See supra Section I.A.
406. See Stucke, supra note ; Horizontal Merger Guidelines, supra note , at .
407. See K. Sabeel Rahman & Lina Khan, Restoring Competition in the U.S. Economy, in UNTAMED:
HOW TO CHECK CORPORATE, FINANCIAL, AND MONOPOLY POWER , (Nell Abernathy et
al. eds., ).
the yale law journal :
is the right metric.
408
This Note does not advocate the adoption of one particu-
lar measure over others. Admittedly, “below cost” is an imperfect filter, espe-
cially since what constitutes the relevant cost may vary depending on the in-
dustry or cost structure. And the specific definition of “costs” that courts and
enforcers adopt may ultimately be less significant if the test for predatory pric-
ing also permits a business justification defense, which would help screen
against false positives.
409
A business justification defense could cover compen-
sating a buyer for taking the risk of buying a new product, expanding demand
to a level which will allow the entrant to achieve scale economies, keeping pric-
es at competitive levels while expecting costs to decline, and matching competi-
tion.
410
Whether a platform is dominant enough to trigger the presumption could
be assessed through its market share: those holding greater than, say, of
the market in any given line of service (e.g., cloud computing, ride sharing)
might be designated “dominant.” Rather than measuring this market share na-
tionally, enforcers would look to levels of local control; a ride-sharing platform
that held only of the national market but of the Nashville market
would still be considered dominant for the purpose of price-cutting in Nash-
ville.
2. Vertical Integration
The current approach to antitrust does not suciently account for how ver-
tical integration may give rise to anticompetitive conflicts of interest, nor does
it adequately address the way a dominant firm may use its dominance in one
sector to advance another line of business. This concern is heightened in the
context of vertically integrated platforms, which can use insights generated
through data acquired in one sector to undermine rivals in another. Potential
ways to address this deficiency include scrutinizing mergers that would enable
a firm to acquire valuable data and cross-leverage it, or introducing a prophy-
lactic ban on mergers that would give rise to conflicts of interest.
One way to address the concern about a firm’s capacity to cross-leverage da-
ta is to expressly include it in merger review.
411
Under the current approach,
408. See Leslie, supra note , at .
409. See id. at .
410. Id. at .
411. Admittedly, this approach would not reach vertical integration that arose due to internal ex-
pansion. That type of vertical integration could be covered by the prophylactic approach dis-
cussed below.
amazon's antitrust paradox
only mergers over a particular monetary threshold require agency review
412
—
yet the monetary value of a 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 automatical-
ly review any deal that involves exchange of certain forms (or a certain quanti-
ty) of data. Data that gave a player deep and direct insight into a competitor’s
business operations, for example, might trigger review. Under this regime, Fa-
cebook’s purchases of WhatsApp and Instagram,
413
for instance, would have
received greater scrutiny from the antitrust agencies, in recognition of how ac-
quiring data can deeply implicate competition. International transactions
granting foreign corporations access to data on U.S. users would also require
close review. Uber’s decision to sell its China operations to Didi Chuxing, Chi-
na’s dominant ride-sharing service—a deal through which Uber will also gain
partial ownership over its main U.S. rival, Ly
414
—is one deal that would
prompt scrutiny under this regime.
415
A stricter approach would place prophylactic limits on vertical integration
by platforms that have reached a certain level of dominance. This would recog-
nize that a platform’s involvement across multiple related lines of business can
give rise to conflicts of interest by creating circumstances in which a platform
has an incentive to privilege its own business and disadvantage other compa-
nies.
416
Seeking to prevent the industry structures that create these conflicts of
interest may prove more eective than policing these conflicts. Adopting this
prophylactic approach would mean banning a dominant firm from entering
any market that it already serves as a platform—in other words, from compet-
ing directly with the businesses that depend on it.
417
In the case of Amazon, for
412. For a list of FTC thresholds, see Revised Jurisdictional Thresholds for Section A of the
Clayton Act, Fed. Reg. , (Jan. , ).
413. See STUCKE & GRUNES, supra note , at .
414. For some of the potential concerns raised by this deal, see Kevin Carty, Will Uber Rouse the
Trustbusters?, S
LATE (Aug. , , : AM), http://www.slate.com/articles/technology
/future_tense///uber_s_deal_with_didi_chuxing_could_open_it_up_to_antitrust
_scrutiny.html [http://perma.cc/FNT-AYRZ].
415. See id. See generally STUCKE & GRUNES, supra note (analyzing how Big Data issues relate to
competition laws and policy).
416. See, e.g., Scott & Kanter, supra note ; Benjamin Edelman & Damien Geradin, Android and
Competition Law: Exploring and Assessing Google’s Practices in Mobile - (Harvard Bus.
Sch. Negotiation, Orgs. & Mkts. Unit, Working Paper No. -, ), http://
ssrn.com/abstract= [http://perma.cc/JA-RXPN].
417. This is a version of the “Separations Principle” that Tim Wu recommends for information
industries. W
U, supra note , at (“More than anything else, the preceding chapters
chronicle the corrupting eects of vertically integrated power. A strong stake in more than
one layer of the industry leaves a firm in a position of inherent conflict of interest. You can-
the yale law journal :
example, this prophylactic approach would prohibit the company from run-
ning both a dominant retail platform and a dominant platform for third-party
sellers. These two businesses would have to be separated into dierent entities,
in part to prevent Amazon from using insights from its role as a third-party
host to benefit its retail business, as it reportedly does now.
418
This form of prophylactic ban has a long history in banking law.
419
A core
principle of banking law is the separation of banking and commerce.
420
“U.S.
commercial banks generally are not permitted to conduct any activities that do
not fall within . . . the statutory concept of ‘the business of banking.’”
421
More
specifically, the Bank Holding Company Act of forbids firms that own or
control a U.S. bank from engaging in business activities other than banking or
managing banks.
422
The main exception is that a bank that qualifies as a “fi-
nancial holding company” “may conduct broader activities that are ‘financial in
nature,’ including securities dealing and insurance underwriting.”
423
The policy goals of this regime are worth reviewing because they have ana-
logues in antitrust and competition policy. The main justifications for preserv-
ing the separation between banking and commerce have “included the needs to
preserve the safety and soundness of insured depository institutions, to ensure
a fair and ecient flow of credit to productive [businesses], and to prevent ex-
cessive concentration of financial and economic power in the financial sec-
tor.”
424
All three concerns are linked to the fact that banks serve as critical in-
termediaries in our economy. The “safety and soundness” concern traces to the
not serve two masters, and the objectives of creating information are oen at odds with
those of disseminating it. That is the very first reason for the Separations Principle.”).
418. See supra Section IV.D.
419. This prophylactic approach has also been applied in the power industry. For example, in
, the Federal Energy Regulatory Commission issued a mandate requiring vertically in-
tegrated utilities to “functionally separate their generation, transmission, and distribution
business, and provide transmission access to all generators on transparent, nondiscriminato-
ry terms.” Sandeep Vaheesan, Reviving an Epithet: A New Way Forward for the Essential Facili-
ties Doctrine, U
TAH L. REV. , ().
420. See, e.g., Saule T. Omarova, The Merchants of Wall Street: Banking, Commerce, and Commodi-
ties, M
INN. L. REV. , , - (); Bernard Shull, Banking and Commerce in the
United States, J. B
ANKING & FIN. , (); Bernard Shull, The Separation of Banking
and Commerce in the United States: An Examination of Principal Issues, F
IN. MKTS. INSTITU-
TIONS
& INSTRUMENTS , ().
421. Omarova, supra note , at .
422. Bank Holding Company Act of , Pub. L. No. -, , Stat. , - (codified as
amended at U.S.C. - ()).
423. Omarova, supra note , at (citing U.S.C. (k)()(A)).
424. Id. at .
amazon's antitrust paradox
idea that our banking system is too vital to be subject to the risks of other busi-
ness activities.
425
The concern about fairness and eciency centers on the idea
that allowing banks to be aliated with commercial companies may encourage
banks to issue credit on the basis of how those lending decisions will aect
their commercial aliates, thereby distorting competition. The practices this
may trigger—“price discrimination, unfair restriction of access to credit, and
other anticompetitive banking practices”—would both “hurt the individual
commercial companies not aliated with banks” and undermine national
“productivity and growth.”
426
Lastly, seeking “the prevention of excessive con-
centration of economic . . . power” among “large financial-industrial conglom-
erates” recognizes that this market power tends to concentrate political pow-
er
427
while also creating systemic dangers of “too-big-to-fail” conglomerates.
428
Like bank holding companies, Amazon—along with a few other dominant
platforms—now play a crucial role in intermediating swaths of economic activi-
ty. Amazon itself eectively controls the infrastructure of the internet economy.
This level of concentrated control creates hazards analogous to those recog-
nized in banking law. In light of this control, the conflicts of interest created
through Amazon’s expansion into distinct lines of business are especially trou-
bling. As in banking, enabling an essential intermediating entity to compete
with the companies that depend on it creates bad incentives. Allowing a verti-
cally integrated dominant platform to pick and choose to whom it makes its
services available, and on what terms, has the potential to distort fair competi-
tion and the economy as a whole.
The other two concerns—safety and soundness, and excessive economic
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 of involvement in these businesses, at least at
425. See id. at -.
426. Id. at .
427. Id.
428. Id. at -. Notably, several banking regulations that previously sought to prevent concen-
tration of systemic risk in our financial system were repealed by Congress in the s—
leading in part to the “too-big-to-fail” crisis. See J
OHNSON & KWAK, supra note .
429. See Sara E. Needleman & Greg Bensinger, Small Businesses Are Finding an Unlikely Banker:
Amazon, W
ALL ST. J. (Oct. , , : PM), http://www.wsj.com/articles/SB
[http://perma.cc/PUH-XFKS]; Eric Newcomer &
Olivia Zaleski, Inside Uber’s Auto-Lease Machine, Where Almost Anyone Can Get a Car,
B
LOOMBERG (May , , : AM), http://www.bloomberg.com/news/articles/
--/inside-uber-s-auto-lease-machine-where-almost-anyone-can-get-a-car [http://
perma.cc/AAM-VZRJ]; Richard Waters & Barney Jopson, Google Makes First Foray into
the yale law journal :
the current scale, is unlikely to concentrate financial risk in ways that warrant
concern. Rather, the systemic risks created by concentration among platforms
are of a dierent kind. One involves concentration of data. That a huge share of
consumer retail data may be concentrated within a single company makes
hacks of or technical failures by that company all the more disruptive. The
hack into Target’s system—as a result of which up to million consumers
had personal information stolen
430
—could have been orders of magnitude
more disruptive had the hacked entity been Amazon. A few instances where
Amazon Web Services crashed led to disruptions for scores of other businesses,
including Netflix.
431
Lastly, there is sound reason to ask whether permitting Amazon to lever-
age its platform to integrate across business lines hands it undue economic and
political power.
432
While this subject invites much deeper consideration than
Credit Business, FIN. TIMES (Oct. , ), http://www..com/content/bef--e
-af-feabdc [http://perma.cc/NCP-EEG].
430. Chris Isidore, Target: Hacking Hit up to 110 Million Customers, CNN MONEY (Jan. , ,
: PM), http://money.cnn.com////news/companies/target-hacking [http://
perma.cc/DW-TM].
431. There have been some policy debates about whether Google should be considered “critical
infrastructure.” See, e.g., Eric Engleman, Google Exception in Obama’s Cyber Order Questioned
as Unwise Gap, B
LOOMBERG (Mar. , , : AM), http://www.bloomberg.com
/news/articles/--/google-exception-in-obama-s-cyber-order-questioned-as-unwise
-gap [http://perma.cc/ZM-HVU]. That debate has not yet extended to Amazon, but—
given the growth of Amazon Web Services—it may be appropriate.
432. That platforms’ concentration of economic power also concentrates political power is be-
coming increasingly evident. Amazon, Google, and Uber have all shied regulatory debates
and—in some cases—directly shaped outcomes. See Liam Dillon, Uber and Ly Are Winning
at the State Capitol—Here’s Why, L.A. T
IMES (May , , : AM), http:// www.latimes
.com/politics/la-pol-sac-why-uber-is-winning-in-california--snap-htmlstory.html
[http://perma.cc/BRX-FU]; Peter Elkind & Doris Burke, Amazon’s (Not So Secret) War
on Taxes, F
ORTUNE (May , , : AM), http://fortune.com/ ///amazons-not
-so-secret-war-on-taxes [http:// perma .cc/LNG-GTNN]; Simon Marks & Harry Davies,
Revealed: How Google Enlisted Members of US Congress It Bankrolled To Fight $6bn EU Anti-
trust Case, G
UARDIAN, (Dec. , , : AM), http:// www.theguardian.com/world/
/dec//google-lobbyists-congress-antitrust-brussels-eu [http://perma.cc/NLA-KNVC];
Anna Palmer & Scott Wong, Lobbying Drives Uber’s Expansion, P
OLITICO, (Sept. , ,
: PM), http:// www.politico .com/story///uber-taxi-lobbying-expansion-
[http://perma.cc/BLA-WUD]; Sam Jewler & Taylor Lincoln, Mission Creep-y: Google Is
Quietly Becoming One of the Nation’s Most Powerful Political Forces While Expanding Its Infor-
mation-Collection Empire, P
UB. CITIZEN (Nov. ), http://www.citizen.org/documents
/Google-Political-Spending-Mission-Creepy.pdf [http://perma.cc/QR-XPA]; Martin
Moore, Tech Giants and Civil Power, C
TR. FOR STUDY MEDIA, COMM. & POWER
(Apr. ), http:// www .kcl.ac.uk/sspp/policy-institute/CMCP/Tech-Giants-and-Civic
-Power.pdf [http:// perma .cc/DX-NALM].
amazon's antitrust paradox
what this Note will provide, studies interviewing the host of businesses that
now depend on Amazon—retailers, manufacturers, publishers, to name a
few—reveal that the power it wields is acute.
433
History suggests that allowing
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 to split up its retail and Marketplace opera-
tion, for example—would help mitigate this concern.
B. Governing Dominant Platforms as Monopolies Through Regulation
As described above, one option is to govern dominant platforms through
promoting competition, thereby limiting the power that any one actor accrues.
The other is to accept dominant online platforms as natural monopolies or oli-
gopolies, seeking to regulate their power instead. In this Section, I sketch out
two models for this second approach, traditionally undertaken in the form of
public utility regulations and common carrier duties. Industries that historical-
ly have been regulated as utilities include commodities (water, electric power,
gas), transportation (railroads, ferries), and communications (telegraphy, tele-
phones).
434
Critically, a public utility regime aims at eliminating competition:
it accepts the benefits of monopoly and chooses instead to limit how a mo-
nopoly may use its power.
435
Although largely out of fashion today, public utility regulations were widely
adopted in the early s, as a way of regulating the technologies of the in-
dustrial age. Animating public utility regulations was the idea that essential
network industries—such as railroads and electric power—should be made
available to the public in the form of universal service provided at just and rea-
sonable rates. The Progressive movement of the early twentieth century em-
braced public utility as a way to use government to steer private enterprise to-
ward public ends. It was precisely because essential network industries oen
required scale that unregulated private control over these sectors oen led to
abuse of monopoly power. Famously, the Interstate Commerce Commission—
which instituted a form of common carriage for railroads—was created partly
433. See LaVecchia & Mitchell, supra note ; Barry C. Lynn, Killing the Competition: How New
Monopolies Are Destroying Open Markets, H
ARPER’S MAG., Feb. , at .
434. William Boyd, Public Utility and the Low-Carbon Future, UCLA L. REV. , ().
435. Id. at .
the yale law journal :
in response to the abusive conduct of railroads, whose control over an essential
facility enabled them to pick winners and losers among farmers.
436
In the United States, the first case applying public utility regulations to a
private business was Munn v. Illinois, in which the Supreme Court upheld state
legislation establishing maximum rates that companies could charge for the
storage and transportation of grain.
437
When one “devotes his property to a use
in which the public has an interest, he, in eect, grants to the public an interest
in that use, and must submit to be controlled by the public for the common
good,” Chief Justice Waite wrote.
438
“[W]hen private property is devoted to a
public use, it is subject to public regulation.”
439
While the decision ushered into
doctrine the principle of common carriers, the question of when a business was
truly “aected with the public interest” was highly contested.
440
Most importantly, “public utility was seen as a common, collective enter-
prise aimed at managing a series of vital network industries that were too im-
portant to be le exclusively to market forces.”
441
At the level of policy, public
utility regulations also enabled “utilities to secure capital at lower cost and to
channel it into very large technological systems,” and thus was a way to “social-
ize the costs of building and operating” a centralized system while “protecting
consumers from the potential abuses associated with natural monopoly.”
442
Given that Amazon increasingly serves as essential infrastructure across the
internet economy, applying elements of public utility regulations to its business
is worth considering.
443
The most common public utility policies are () re-
quiring nondiscrimination in price and service, () setting limits on rate-
setting, and () imposing capitalization and investment requirements. Of these
three traditional policies, nondiscrimination would make the most sense, while
436. See Christopher Leslie, Antitrust Law as Public Interest Law, U.C. IRVINE L. REV. ,
().
437. U.S. ().
438. Id. at .
439. Id. at .
440. Id.
441. Boyd, supra note , at .
442. Id. at .
443. See K. Sabeel Rahman, From Railroad to Uber: Curbing the New Corporate Power, BOS. REV.
(May , ), http://bostonreview.net/forum/k-sabeel-rahman-curbing-new-corporate
-power [http://perma.cc/YTU-E]; K. Sabeel Rahman, Private Power and Public Pur-
pose: The Public Utility Concept and the Future of Corporate Law in the New Gilded Age,
Address at the Association of American Law Schools’ th Annual Meeting (Jan. , )
(transcript on file with author).
amazon's antitrust paradox
rate-setting and investment requirements would be trickier to implement and,
perhaps, would less obviously address an outstanding deficiency.
A nondiscrimination policy that prohibited Amazon from privileging its
own goods and from discriminating among producers and consumers would
be significant. Given that many of the most notable anticompetitive concerns
around Amazon’s business structure arise from its vertical integration and the
resulting conflicts of interest, applying a nondiscrimination scheme would curb
the anticompetitive risk. This approach would permit the company to maintain
its involvement across multiple lines of business and permit it to enjoy the ben-
efits of scale while mitigating the concern that Amazon could unfairly ad-
vantage its own business or unfairly discriminate among platform users to gain
leverage or market power.
444
Coupling nondiscrimination with common carrier
obligations—requiring platforms to ensure open and fair access to other busi-
nesses—would further limit Amazon’s power to use its dominance in anticom-
petitive ways.
Rate setting would be trickier. This would involve setting a ceiling 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 de-
served for its investment, and then calculated consumer or producer prices ac-
cordingly.
445
But calculating “fair return” may prove more challenging in the
online platform context than it did with traditional public utilities. One poten-
tial source of diculty is that Amazon has invested so widely across such a
range of projects that it is not clear which the government should peg to “rate
of return.” Another complicating factor is that part of Amazon’s investment in
these platforms, so far, has involved losing money through below-cost pricing.
Lastly, it is not clear that imposing capitalization and investment require-
ments would be necessary. A traditional reason for these policies has been that
that the economics of creating and running a utility can be unfavorable, occa-
sionally leading private companies to scrimp on investing and upkeep. In Ama-
zon’s case, the company is choosing to expand at a speed and scale that is push-
ing it into the red—but it is not clear that the activity is intrinsically loss
generating. That said, a public utility regime could also be justified on the basis
444. Net neutrality is a form of common carrier regime. For an exposition of why net neutrality
and search neutrality should apply to major platforms, see Frank Pasquale, Internet Nondis-
crimination Principles: Commercial Ethics for Carriers and Search Engines, U.
CHI. LEGAL
F. .
445. A “fair return” has been variously defined. For an overview of public utility regulatory re-
gimes, see W
ILLIAM A. PRENDERGAST, PUBLIC UTILITIES AND THE PEOPLE () (“What is
a utility? . . . It is commonly used to denote a business the product or use of which serves the
public generally . . . . [It is] a business which cannot choose its clients or customers.”).
the yale law journal :
that succeeding as an online platform requires incurring heavy losses—a model
that Amazon and Uber have pursued. This approach would treat market-share
chasing losses as a capital investment,
446
suggesting the public utility domain
may be appropriate.
Practically, ushering in a public utility regime may prove challenging.
Public utility regulations suered an intellectual and policy attack around mid-
century. For one, critics challenged the theory of natural monopoly as an ongo-
ing rationale for regulation, arguing that rapid economic and technological
change would render monopolies temporary problems. Second, critics por-
trayed public utility as a form of corruption, a system in which private industry
executives colluded with public ocials to enable rent seeking. Ultimately
these lines of criticism substantially thinned the very concept of public utili-
ty.
447
The trend was part of a broader eort to idealize competitive markets and
assume that nonintervention was almost always superior to interference. Alt-
hough the concept of public utility regulation remains somewhat maligned to-
day, there are signs that a robust movement to apply utility-like regulations to
services that widely register as public—such as the internet—can catch wind.
The core of the net neutrality debates, for example, involved foundational dis-
cussions about how to regulate the communication infrastructure of the twen-
ty-first century.
448
The net neutrality regime ultimately adopted falls squarely
in the common carrier tradition.
Given Amazon’s growing share of e-commerce as a whole, and the vast
number of independent sellers and producers that now depend on it, applying
some form of public utility regulation could make sense. Nondiscrimination
principles seem especially apt, given that conflicts of interest are a primary haz-
ard of Amazon’s vertical power. One approach would apply public utility regu-
lations to all of Amazon’s businesses that serve other businesses. Another
would require breaking up parts of Amazon and applying nondiscrimination
principles separately; so, for example, to Amazon Marketplace and Amazon
Web Services as distinct entities. That said, given the political challenges of
ushering in such a regime, strengthening and reinforcing traditional antitrust
principles may—in the short run—prove most feasible.
A lighter version of the regulatory approach would be to apply the essential
facilities doctrine. This doctrine imposes sharing requirements on a natural
446. I am indebted to David Kim for making this connection at the Yale Law Journal Author Sem-
inar Workshop on October , .
447. Boyd, supra note , at .
448. Open Internet, FED. COMM. COMMISSION, http://www.fcc.gov/general/open-internet
[http://perma.cc/ZLS-Q].
amazon's antitrust paradox
monopoly asset that serves as a necessary input in another market. As Sandeep
Vaheesan explains:
This doctrine rests on two basic premises: first, a natural monopolist in
one market should not be permitted to deny access to the critical facility
to foreclose rivals in adjacent markets; second, the more radical remedy
of dividing the facility among multiple owners, while mitigating the
threat of monopoly leveraging, could sacrifice important eciencies.
449
Unlike the prophylactic ban on integration, the essential facilities route ac-
cepts consolidated ownership. But recognizing that a vertically integrated mo-
nopolist may deny access to a rival in an adjacent market, the doctrine requires
the monopolist controlling the essential facility to grant competitors easy ac-
cess. This duty has traditionally been enforced through regulatory oversight.
While the essential facilities doctrine has not been precisely 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 facili-
ty claim today.
450
Under that test, a facility is essential and must be shared if
four conditions are met: () a monopolist controls the essential facility; () a
competitor is unable practically or reasonably to duplicate the essential facility;
() the monopolist is denying use of the facility to a competitor; and ()
providing the facility is feasible.
451
The MCI court also held that, in order 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 articulated a standard
for “essential facility,” three Supreme Court rulings “are seen as having estab-
lished the functional foundation” for the doctrine.
453
In , however, the
Court disavowed the essential facilities doctrine in dicta,
454
leading several
commentators to wonder whether it is a dead letter.
This decision by the Court
to eectively reject its prior case law on essential facilities followed challenges
449. Vaheesan, supra note , at .
450. F.d , - (th Cir. ).
451. Id. This last factor allows for eciency defenses.
452. Vaheesan, supra note , at .
453. Id. at (citing Marianna Lao, Networks, Access, and ‘Essential Facilities,’ SMU L. REV.
()). The three cases that Vaheesan identifies are United States v. Terminal Railroad
Ass’n, U.S. (); United States v. Associated Press, U.S. (); and Otter Tail
Power Co. v. United States, U.S. ().
454. See Verizon Commc’ns Inc. v. Law Oces of Curtis V. Trinko, LLP, U.S. ,
().
the yale law journal :
on other fronts: notably from Congress, enforcement agencies, and academic
scholars, all of whom have critiqued the idea of requiring dominant firms to
share their property.
455
Treating aspects of Amazon’s business as “essential facilities” seems appro-
priate, given that factors two, three, and four of the MCI test are likely to hold
for at least one line of business. The first factor—whether Amazon is a “mo-
nopolist”—is subject to the risk that doctrine takes an excessively narrow view
of what constitutes a “monopolist,” a definition that may be especially out of
touch with dominance in the internet age.
Essential facilities doctrine has traditionally been applied to infrastructure
such as bridges, highways, ports, electrical power grids, and telephone net-
works.
456
Given that Amazon controls key infrastructure for e-commerce, im-
posing a duty to allow access to its infrastructure on a nondiscriminatory basis
make sense. And in light of the company’s current trajectory, we can imagine at
least three aspects of its business could eventually raise “essential facilities”-like
concerns: () its fulfillment services in physical delivery; () its Marketplace
platform; and () Amazon Web Services. While the essential facilities doctrine
has not yet been applied to the internet economy, some proposals have started
exploring what this might look like.
457
Pursuing this regime for online plat-
forms could maintain the benefits of scale while preventing dominant players
from abusing their power.
conclusion
Internet platforms mediate a large and growing share of our commerce and
communications. Yet evidence shows that competition in platform markets is
flagging, with sectors coalescing around one or two giants.
458
The titan in e-
commerce is Amazon—a company that has built its dominance through aggres-
455. See Brett Frischmann & Spencer Weber Waller, Revitalizing Essential Facilities, ANTITRUST
L.J. , ().
456. Id. at .
457. For more pieces grappling with the possibility of applying the “essential facilities” doctrine
to internet platforms, see Frank Pasquale, Dominant Search Engines: An Essential Cultural &
Political Facility, in T
HE NEXT DIGITAL DECADE (Berin Szoka et al. eds., ); and Zacha-
ry Abrahamson, Comment, Essential Data, Y
ALE L.J. ().
458. See a Giant Problem, ECONOMIST (Sept. , ), http://www.economist
.com/news/leaders/-rise-corporate-colossus-threatens-both-competition-and-legiti
macy-business [http://perma.cc/DNN-YKL] (“[T]he most striking feature of business
today is . . . the entrenchment of a group of superstar companies at the heart of the global
economy . . . . But they have two big faults. They are squashing competition, and they are
using the darker arts of management to stay ahead.”); Davido Solomon, supra note .
amazon's antitrust paradox
sively pursuing growth at the expense of profits and that has integrated across
many related lines of business. As a result, the company has positioned itself at
the center of Internet commerce and serves as essential infrastructure for a host
of other businesses that now depend on it. This Note argues that Amazon’s
business strategies and current market dominance pose anticompetitive con-
cerns that the consumer welfare framework in antitrust fails to recognize.
In particular, current law underappreciates the risk of predatory pricing and
how integration across distinct business lines may prove anticompetitive.
These concerns are heightened in the context of online platforms for two rea-
sons. First, the economics of platform markets incentivize the pursuit of
growth over profits, a strategy that investors have rewarded. Under these con-
ditions predatory pricing becomes highly rational—even as existing doctrine
treats it as irrational. Second, because online platforms serve as critical inter-
mediaries, integrating across business lines positions these platforms to control
the essential infrastructure on which their rivals depend. This dual role also en-
ables a platform to exploit information collected on companies using its ser-
vices to undermine them as competitors.
In order to capture these anticompetitive concerns, we should replace the
consumer welfare framework with an approach oriented around preserving a
competitive process and market structure. Applying this idea involves, for ex-
ample, assessing whether a company’s structure creates anticompetitive con-
flicts of interest; whether it can cross-leverage market advantages across dis-
tinct lines of business; and whether the economics of online platform markets
incentivizes predatory conduct and capital markets permit it. More specifically,
restoring traditional antitrust principles to create a presumption of predation
and to ban vertical integration by dominant platforms could help maintain
competition in these markets. If, instead, we accept dominant online platforms
as natural monopolies or oligopolies, then applying elements of a public utility
regime or essential facilities obligations would maintain the benefits of scale
while limiting the ability of dominant platforms to abuse the power that comes
with it.
My argument is part of a larger recent debate about whether the current
paradigm in antitrust has failed. Though relegated to technocrats for decades,
antitrust and competition policy have once again become topics of public con-
cern.
459
Last year, the Wall Street Journal reported that “[a] growing number of
459. In a striking speech welcoming the public and political attention towards antitrust, Assistant
Attorney General for Antitrust Renata Hesse stated, “Antitrust is too important to be le
solely in the hands of antitrust experts.” Renata Hesse, Assistant Att’y Gen., Antitrust Div.,
Dep’t of Justice, Remarks at the Global Antitrust Enforcement Symposium: And Never
the Twain Shall Meet? Connecting Popular and Professional Visions for Antitrust Enforce-
the yale law journal :
industries in the U.S. are dominated by a shrinking number of companies.”
460
In March , the Economist declared, “Profits are too high. America needs a
dose of competition.”
461
Policy elites, too, have weighed in, issuing policy pa-
pers and hosting conferences documenting the decline 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 it into
the presidential campaign: Democrats included competition policy in
their party platform for the first time since , and in October of the same
year, presidential candidate Hillary Clinton released a detailed antitrust plat-
form, highlighting not only a need for more vigorous enforcement but for an
enforcement philosophy that takes into account market structure.
463
Animating these critiques is not a concern about harms to consumer wel-
fare,
464
but the broader set of ills and hazards that a lack of competition breeds.
ment (Sept. , ), http://www.justice.gov/opa/speech/acting-assistant-attorney
-general-renata-hesse-antitrust-division-delivers-opening [http://perma.cc/E-HJB].
460. Theo Francis & Ryan Knutson, Wave of Megadeals Tests Antitrust Limits in U.S., WALL ST. J.
(Oct. , ), http://www.wsj.com/articles/wave-of-megadeals-tests-antitrust-limits-in
-u-s- [http://perma.cc/WAJ-ATZT].
461. Too Much of a Good Thing, ECONOMIST (Mar. , ), http://www.economist.com
/news/briefing/-profits-are-too-high-america-needs-giant-dose-competition-too
-much-good-thing [http://perma.cc/YPA-GHB].
462. See Eduardo Porter, With Competition in Tatters, the Rip of Inequality Widens, N.Y. TIMES
(July , ), http://www.nytimes.com////business/economy/antitrust
-competition-inequality.html [http://perma.cc/ZA-KCFJ];
America’s Monopoly Problem,
N
EW AM., http://www.newamerica.org/open-markets/events/americas-monopoly-problem
[http://perma.cc/YF-KZV]; Marc Jarsulic et al., Reviving Antitrust, C
TR. FOR AM. PRO-
GRESS
(June , ), http://www.americanprogress.org/issues/economy/report
/////reviving-antitrust [http://perma.cc/QCV-TV]; Making Antitrust
Work for the
21st Century, CTR. FOR EQUITABLE GROWTH, http://equitablegrowth.org
/event/making-antitrust-work-for-the-st-century [http://perma.cc/HAX-BRK]; Un-
tamed: How To Check Corporate, Financial, and Monopoly Power,
ROOSEVELT INST.
(), http://rooseveltinstitute.org/wp-content/uploads///Untamed-Final-Single
-Pages.pdf [http://perma.cc/FMR-DXJJ].
463. See Neil Irwin, Liberal Economists Think Big Companies Are Too Powerful. Hillary Clinton
Agrees, N.Y.
TIMES (Oct. , ), http://www.nytimes.com////upshot/lib
eral-economists-think-big-companies-are-too-powerful-hillary-clinton-agrees.html [http://
perma.cc/WXA-RXJ]; Hillary Clinton’s Vision for an Economy Where Our Businesses,
Our Workers, and Our Consumers Grow and Prosper Together, H
ILLARY
C
LINTON, http://www.hillaryclinton.com/briefing/factsheets////hillary-clintons
-vision-for-an-economy-where-our-businesses-our-workers-and-our-consumers-grow-and
-prosper-together [http://perma.cc/EHG-PTZ] (“Promote Free and Fair Competition
and Stopping Big Businesses from Hurting Small Businesses”).
464. One of the most striking aspects of Hesse’s speech is that she distances herself from a strict
consumer-welfare based approach—departing from current orthodoxy:
amazon's antitrust paradox
As Amazon continues both to deepen its existing control over key infrastruc-
ture and to reach into new lines of business, its dominance demands the same
scrutiny. To revise antitrust law and competition policy for platform markets,
we should be guided by two questions. First, does our legal framework capture
the realities of how dominant firms acquire and exercise power in the internet
economy? And second, what forms and degrees of power should the law iden-
tify as a threat to competition? Without considering these questions, we risk
permitting the growth of powers that we oppose but fail to recognize.
But, although we believe competition maximizes consumer welfare, the ultimate
standard by which we judge practices is their eect on competition, not on con-
sumer welfare. It is certainly relevant when a merger will lead to higher prices and
reduced output because these results are hallmarks of reduced competition. But
the law instructs us to examine whether a merger may substantially lessen compe-
tition and that means we must sometimes look to other evidence of harm to com-
petition.
Hesse, supra note .
