It is the season for trial balloons. They seem to be a required part of campaign rhetoric. As presidential hopefuls jockey for position and recognition, they float ideas to see if they resonate with voters and donors. Sen. Elizabeth Warren, D-Mass., for example, is proposing to use antitrust laws to break up our large tech companies.
“Tech” is not defined very well in her proposal, which is focused on size as measured by revenue. Different fates await firms with annual revenue of $25 billion or more and those with yearly revenue in excess of $90 billion.
The largest firms would have to “structurally separate” their products from the marketplace — meaning the Internet. This seems specifically aimed at Amazon and its success in retail markets, including, most recently, food shopping. The lesser tech giants would be subjected to more regulation but would not be forcibly broken up.
How deeply this will resonate with voters is not clear at this point. And, in truth, while most people respond negatively to descriptive terms like “giant,” “abusive,” “monopoly” and “freeloading billionaires,” how much animosity the public actually has toward these companies isn’t known.
The underlying legal reason for the breakup of these companies is not size as such but market influence. The economic model of competition requires that each market participant not be large enough to control supply and price. There are other aspects of unfair competition and restraint of trade under the law, but this is the core of the argument if a company breakup is sought.
One of the problems with using the existing antitrust laws to break up Amazon —- a target named in the proposal — is that its operations do not appear to be aimed at restraint of trade or controlling price. There could be information about this that might be discovered but barring that sort of revelation it seems like an unlikely path to take to justify a breakup.
Amazon’s growth and success was built by taking on the entrenched competition with a combination of “doing it differently” and “doing it better.” These markets were already saturated with competition and subsequently low profit margins. The company’s recent moves into the retail food market indicate that the basic shape of the company’s growth model has not changed.
In its beginning, Amazon took on the retail book market which at the time was dominated by a small number of retail chains and large number of independent bookstores. Other than remainder tables, there weren’t many discounts available.
Amazon had no consumer habits to build on. Potential customers generally had to know what book they wanted before they even visited the website. Browsing was a clumsy process at first and did not compare with holding a book and looking through it. A purchase provided “instant gratification,” which was thought to be very important to consumer satisfaction. Amazon’s readers had to wait for their book to be delivered.
What Amazon provided was a lower price, larger inventory, and the ability of the customer to order a book and have it delivered to their home — avoiding a trip to the mall or retail store.
Eventually, with improved warehouse technology and shipping logistics innovations, the company shortened the time gap between purchase and delivery, which is now remarkably short.
The advantage that Amazon held was not monopoly power but simple economics. If you cut out the costs of staffing and of the bricks-and-mortar store overhead, you could deliver a lower price to the consumer. It’s called competition. It turned out that due to several factors, a significant number of book-reading consumers grew to like both the convenience of online shopping and, of course, the lower prices.
There is a problem, too, with the other objective of Warren’s proposal: bringing the wealthy tech barons to heel. She has said, “I am sick of freeloading billionaires.”
Antitrust is not the way to achieve that objective. In fact, even in the unlikely outcome of forcing a breakup, this will not necessarily reduce the freeloading billionaires’ wealth. The smaller parts of these companies will be sold, after all, and their wealth is in the stock.
If the public believes that tech billionaires are not paying enough taxes then Congress should take responsibility and change the Internal Revenue Code. Of course, it is exactly that responsibility dimension that makes it difficult.
Trial balloons often deflate, and it is possible that more consideration will be given to what we really hope to achieve by attacking the tech industry. Whether it is personal privacy, consumer protection, or simply the desire to regain the control of our pre-tech lives, antitrust laws are not the route to take us there. More thought; less rhetoric.
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