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Predatory Pricing and Amazon

I read the article The Slow Erosion of Amazon's Power by Matt Stoller. Comments:

I agree there’s a problem here with Amazon and their “predatory” pricing where they are willing to lose money to fight competitors so that, once the competitors give up, they can raise prices.

But I also have a much more free market perspective than Stoller. So here’s a way I’d look at it differently.

I don’t think we should start by considering what government can do to solve this. We shouldn’t first look to create or more vigorously enforce laws to help with the problem. Instead, a better place to start is by considering what government is doing to make this problem worse. What laws do we already have that are contributing to the problem? Getting rid of counter-productive laws should generally have priority attention over adding laws to try to make things better.

There are several downsides to adding more laws which mean we should prefer to remove bad laws. Basically, removing bad laws is a higher priority tool which we should use first, and then we can add some laws to deal with remaining problems. Why?

Adding laws creates more laws. Everything else being equal, that’s bad. It makes the law more complicated. It increases the cost for people to learn the laws. It increases the cost to enforce the laws. It means judges and lawyers need more training. It makes it harder for lawmakers to keep track of what laws exist and what the current landscape of laws is like.

Adding laws creates more restrictions on liberty. Everything else being equal, freedom is good.

New laws can be bandaid solutions which deal with some kind of symptom without addressing the root cause. These kinds of laws generally aren’t very effective. In cases where removing a bad law could improve the situation, if you instead make a law to try to deal with the negative consequences of the bad law, you’re at major risk of putting a bandaid on the problem instead of actually solving it.

New laws can have unintended negative consequences. This can be due to our lack of perfect foresight. And making good laws is hard. And the more laws we have, the harder it is to understand what’s going on and design great laws.

Laws are ultimately backed up by the force of guns, so that’s a reason to minimize them. They’re potentially dangerous. Bad laws can do a lot of harm.

So what current laws contribute to Amazon’s predatory pricing strategy? Broadly, it’s laws that make it harder to start a new business. The easier and cheaper it is to start new businesses that compete with Amazon, the harder it is for Amazon to lose money trying to destroy each one. If it was very easy to start new businesses, Amazon could become overwhelmed with too many competitors to destroy. Or maybe just a few competitors at a time, or even one at a time, but whenever there were none it’d be cheap and worthwhile for someone to start another competitor.

Why start a competitor if Amazon will take actions to stop having a competitor? A common way of being gotten rid of is being bought. Amazon might find it cheaper to buy your company than lower their prices for long enough that you give up. However, if starting companies is cheap and easy, and Amazon keeps buying them, then people will keep starting more companies and taking Amazon’s money until Amazon gives up on buying out the competition. Buying out the competition only works when their are significant barriers to entry for new competitors. Barriers to entry exist naturally in some industries, but not in many others. Most barriers to entry are due to laws, and many of those laws are bad laws.

If Amazon can’t buy out the competition, what about using low prices to destroy them? That hurts Amazon more than the small business it’s being predatory towards. It still sucks from the point of view of a small business owner. But people with deep pockets can fund it. There are lots of rich people who’d like to see Amazon do worse, and who could profit off that. Funding some one small business each in a bunch of industries, to make Amazon lose money in all those industries, would be cheap and effective for some rich people who have stakes in big companies that compete with Amazon or who bet against Amazon in the stock market. If the small company and Amazon are both taking losses due to the low prices, that might cost a million dollars a year for the small company but a ten million or more per year for Amazon. In other words, you could get Amazon to lose 10x what you lose. That’s powerful and isn’t actually viable for Amazon to do for long or in many industries. It reminds me of Francisco D’Anconia in Atlas Shrugged:

“[…] For instance, look at San Sebastián. It cost me fifteen million dollars, but these fifteen million wiped out forty million belonging to Taggart Transcontinental, thirty-five million belonging to stockholders such as James Taggart and Orren Boyle, and hundreds of millions which will be lost in secondary consequences. That’s not a bad return on an investment, is it, Dagny?”

Also, small companies can compete with Amazon even if they have higher prices. How? Better quality or better customer service are good options. Those things matter in most industries. Doing marketing aimed at a subset of customers can work too. Competing with Amazon is great in some ways as long as it’s not about one of the main pillars of their business. Then it’s hard for them to care much about your industry or allocate any attention from their top people. You’ll be competing with some of their lower tier, more mediocre executives, managers and workers. Sure they have a big budget but on the other hand they also have a big internal bureaucracy. They have that bureaucracy for various reasons including because they don’t trust most of their workers, to protect their highly valuable brand name, and because no one knows how to run a really big organization without significant efficiency losses.

Elliot Temple on August 7, 2022


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