COVID-19 and the Amazon Paradox

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As the country and world persevere through the COVID-19 pandemic,[1] corporations such as Amazon are thriving.[2]  In the words of Vice President Mike Pence, “[the United States will]work in partnership with the private sector, but where an emergency exists—and it’s very important that we get to the bottom line and quickly—we will do what we have to do and immediately exercise all available lawful authorities to get the job done.”[3]  It is exciting to see private industry coming to the rescue as called,[4] even when a public partnership is not required and private industries rise to the occasion.  Where many asked for complete government action with no private industry reliance, private industry is not completely left searching for government bailouts.[5]

When the dust of the pandemic settles, will we be satisfied with the state of private industry?  The companies currently amassing wealth, considered essential to everyday life, are gaining large profits due to the immediate and overwhelming need for delivery of goods and further drive for online shopping.[6]  What will they use these profits for?  Amazon, already facing scrutiny from antitrust academics,[7] previously had its acquisition of Whole Foods, a brick-and-mortar grocery store accounting for approximately 3.5% market share across the United States,[8] investigated by antitrust authorities and was quickly given their blessing to proceed with the acquisition.[9]  Should regulators have so swiftly granted their approval or should a further level of analysis of the markets have been done to determine whether the potential patronization[10] of consumers is necessary?  With the potential for substantial financial gains by Amazon throughout the pandemic, future acquisitions become all the more likely.

Amazon, a company that was already massive before the pandemic,[11] can now rightfully[12] exploit these circumstances to amass a treasure trove of additional wealth.[13]  The issue here is not any anti-competitive action that Amazon has taken, but rather its explicit ability to influence the market either consciously or unconsciously.[14]

Generally, antitrust actions by the Federal Trade Commission (“FTC”) or the Department of Justice (“DOJ”) do not come without either a predatory action taken by an offending business or horizontal integration.[15]  This is due to the influence of the Chicago School’s idea of antitrust solely as a preventative measure to keep markets efficient and effectively competitive.[16]  While the Chicago School is currently rethinking their stance on antitrust law,[17] originally based off of laissez-faire economics, regulators have not taken the call to do what they had done so many times before with companies such as AT&T and Microsoft.[18]  A question arises in this discussion as to what a negative action is: at what point is just doing business considered coercive or anti-competitive?

Amazon and Walmart both are well-known, massive retailers.[19]  Both companies have a history of reselling third-party products, as retailers generally do.[20]  What allowed both companies to grow to such a size is their market power.[21]  Their ability to have manufacturers ramp up production is extraordinary.[22]  These manufacturers gain a reliance on these large retailers for the business that they get, otherwise they would be overproducing for their pre-Walmart/Amazon supply chain.[23]

This then begs the question as to why this is not considered a negative or predatory action in the context of antitrust?  Is the health of our competitive market worth interfering with a corporation’s freedom to contract?  A proponent of the Chicago school would see this question and, somewhat logically, believe that freedom of contract is paramount.  Why would you harm a system when the consumer benefits?  Consumer benefit, in a vacuum, seems to be the purpose of antitrust laws.  In reality, the health of a competitive market, is almost as important.

General laws of microeconomics discuss fixed costs and variable costs.[24]  Vertical integration, as Amazon is clearly engaged in, drops both variable and fixed costs far below the levels that a new retailer could compete with.[25]  Due to these low costs and a willingness to effectively forgo profits, Amazon is able to charge rock-bottom prices and maintain its market share in a way that no smaller company could.[26]

Historically, the solution to the cost-undercutting issue that Amazon presents was to break up a business,[27] illustrated by AT&T being broken up into multiple “Baby Bells.”[28] It is uncontested that AT&T had a monopoly that was not only capable, but indeed actively stifling competition and expansion of the telecom market.[29]  The difference between AT&T and Amazon is that while AT&T was horizontally integrated,[30] dominating the entire telecommunications market, Amazon is vertically integrating by creating their own divisions to satisfy each step of their supply chain, “while growing their horizontal market share organically through low prices and additional services.”[31]

There are fundamental differences in how both vertical and horizontal integration lead to the same end.  Horizontal integration makes it impossible for a competitor to enter the market because, based on economies of scale, it is impossible to offer the same product at a lower price or similar quality.[32]  Vertical integration does the same through lessening costs in the supply chain overall.[33]  Thus, keeping the cost to produce at the same level a competitor would have, but with less profit being withdrawn at each stage of the supply chain, the costs of creating or procuring the products or services falls.[34]  Amazon has already illustrated the power of their vertical integration by essentially forcing fire sales of companies that have defied Amazon’s bids.[35]

What will Amazon’s next step be?  Amazon is paying their employees overtime, hiring 100,000 more employees, and procuring face masks for their employees to keep working during a pandemic that has shut down large swaths of the economy.[36]  What will they do with these new profits?  Will Trader Joe’s become Whole Foods’ lesser sibling?

Current antitrust law needs to be substantially amended  The United States needs to determine whether to allow companies like Amazon to keep accruing wealth and growing at unprecedented paces.  The alternative is the paternalistic behavior of telling citizens and consumers how to spend their hard-earned money.


Endnotes:

[1] See Joel Achenbach, Three months into the pandemic, here’s how likely the coronavirus is to infect people, Wash. Post (Mar. 28, 2020), https://www.washingtonpost.com/health/three-months-into-the-pandemic-here-is-what-we-know-about-the-coronavirus/2020/03/28/6646f502-6eab-11ea-b148-e4ce3fbd85b5_story.html.

[2] Cf. Annie Palmer, Amazon to hire 100,000 more workers and give raises to current staff to deal with coronavirus demands, CNBC (Mar. 16, 2020), https://www.cnbc.com/2020/03/16/amazon-to-hire-100000-warehouse-and-delivery-workers.html.

[3] Remarks by President Trump, Vice President Pence, and Members of the Coronavirus Task Force in Press Briefing, The White House (Mar. 28, 2020), https://www.whitehouse.gov/briefings-statements/remarks-president-trump-vice-president-pence-members-coronavirus-task-force-press-briefing-13/.

[4] E.g. Tesla’s Elon Musk is donating hundreds of ventilators to New York, CBS News (Mar. 28, 2020, 5:07 AM), https://www.10tv.com/article/teslas-elon-musk-donating-hundreds-ventilators-new-york-2020-mar; Darrell Etherington, Amazon, Apple and Microsoft CEOs detail their companies’ efforts to combat coronavirus pandemic, TechCrunch (Mar. 22, 2020, 11:41 AM), https://techcrunch.com/2020/03/22/amazon-apple-and-microsoft-ceos-detail-their-companies-efforts-to-combat-coronavirus-pandemic/.

[5] See Orion Rummler, America’s coronavirus bailouts, Axios (Mar. 20, 2020), https://www.axios.com/coronavirus-bailouts-usa-61ffab7e-9f30-42d7-9fb7-3b0f587980b6.html.

[6] Cf. Kevin Stankiewicz, Cramer: Amazon shares could shatter last month’s all-time highs after coronavirus crisis abates, CNBC (Mar. 25, 2020, 11:02 AM), https://www.cnbc.com/2020/03/25/jim-cramer-amazon-could-be-3000-per-share-in-post-coronavirus-world.html.

[7] See, e.g., Lina Khan, Amazon’s Antitrust Paradox, 126 Yale L.J. 710 (2017); Roger Parloff, Behind the Big Tech antitrust backlash: A turning point for America, Yahoo Fin. (Dec. 11, 2019), https://finance.yahoo.com/news/amazon-facebook-google-antitrust-backlash-152518336.html; Ben Piven, Is Amazon a true monopoly or does the Bezos behemoth not qualify?, Al Jazeera (July 15, 2019), https://www.aljazeera.com/ajimpact/amazon-true-monopoly-bezos-behemoth-qualify-190712212903436.html.

[8] Marc Veilleux, Note, “Alexa, Can You Buy Whole Foods?” An Analysis of the Intersection of Antitrust Enforcement and Big Data in the Amazon-Whole Foods Merger, 37 Cardozo Arts & Ent. L.J. 481, 482 (2019) (citations omitted).

[9] Nancy Scola, Federal antitrust regulators clear Amazon’s Whole Foods purchase, Politico (Aug. 23, 2017, 5:14 PM), https://www.politico.com/story/2017/08/23/amazon-whole-foods-merger-241957.

[10] The author believes that any corrective measure to the market not performed by the market itself squarely fits into the definition of patronization.  If a consumer would rather pay a lower price and give a specific business a greater market share, why should the government step in?

[11] Alexis Madrigal, When Amazon Went From Big to Unbelievably Big, The Atlantic (Feb. 7, 2019), https://www.theatlantic.com/technology/archive/2019/02/when-amazon-went-from-big-to-unbelievably-big/582097/.

[12] “Rightfully” is used in the context insofar as the measures Amazon has taken are supplying market demand in a time when the manufacturing industry could not rise to the occasion.  The slim profit margins Amazon is taking pay off in circumstances such as the specific pandemic: they just do not benefit the market in the long run.  In the author’s opinion, lower prices and higher efficiency do not always benefit the general public when they are subject to a potentially tyrannical private party no different from a tyrannical government.

[13] Cf. Annie Palmer, Amazon to hire 100,000 more workers and give raises to current staff to deal with coronavirus demands, CNBC (Mar. 16, 2020, 4:16 PM), https://www.cnbc.com/2020/03/16/amazon-to-hire-100000-warehouse-and-delivery-workers.html.

[14] See, e.g., Veilleux, supra note 8, at 499-502.

[15] See id. at 488-89.

[16] See id.

[17] Cass Sunstein, A New View of Antitrust Law That Favors Workers, Bloomberg Opinion (May 14, 2018, 11:47 AM), https://www.bloomberg.com/opinion/articles/2018-05-14/antitrust-law-gets-a-chicago-school-makeover.

[18] See Russell Brandom, The Monopoly-Busting Case Against Google, Amazon, Uber, and Facebook, The Verge (Sept. 5, 2018, 8:14 AM), https://www.theverge.com/2018/9/5/17805162/monopoly-antitrust-regulation-google-amazon-uber-facebook.

[19] Lydia DePillis & Ivory Sherman, Amazon’s Extraordinary 25-Year Evolution, CNN Bus. (Oct. 4, 2018), https://www.cnn.com/interactive/2018/10/business/amazon-history-timeline/index.html; Tim Mullaney, This is what’s behind Walmart’s staying power that could outmaneuver Amazon, CNBC (Aug. 15, 2019, 9:43 AM), https://www.cnbc.com/2019/08/15/walmarts-secret-weapon-in-its-quest-to-outmaneuver-amazon.html.

[20] Definition of Retail, Merriam-Webster, https://www.merriam-webster.com/dictionary/retail (last visited Mar. 30, 2020).

[21] Lydia DePillis & Ivory Sherman, Amazon’s Extraordinary 25-Year Evolution, CNN Bus. (Oct. 4, 2018), https://www.cnn.com/interactive/2018/10/business/amazon-history-timeline/index.html; Tim Mullaney, This is what’s behind Walmart’s staying power that could outmaneuver Amazon, CNBC (Aug. 15, 2019, 9:43 AM), https://www.cnbc.com/2019/08/15/walmarts-secret-weapon-in-its-quest-to-outmaneuver-amazon.html.

[22] E.g. Charles Fishman, The Wal-Mart You Don’t Know, Fast Company (Dec. 1, 2003), https://www.fastcompany.com/47593/wal-mart-you-dont-know.

[23] Id.

[24] Definition of Fixed and Variable Costs, Economics Online, https://www.economicsonline.co.uk/Business_economics/Costs.html (last visited Mar. 30, 2020).

[25] Kimberly Amadeo, Vertical Integration: Pros, Cons, and Examples, The Balance (Mar. 2, 2020), https://www.thebalance.com/what-is-vertical-integration-3305807.

[26] See Rani Molla, Amazon’s tiny profits, explained: It’s all about investing in the future, Vox (Oct. 24, 2019), https://www.vox.com/recode/2019/8/21/20826405/amazons-profits-revenue-free-cash-flow-explained-charts.

[27] Brian Naylor, Could The Old AT&T Break-Up Offer Lessons For Big Tech Today?, NPR (June 26, 2019), https://www.npr.org/2019/06/26/736344175/could-the-old-at-t-break-up-offer-lessons-for-big-tech-today.

[28] Id.

[29] Id.

[30] This is leaving aside the fact that AT&T was also vertically integrated. Jon Gertner, The Idea Factory: Bell Labs and the Great Age of American Innovation 297-98 (2012).

[31] Tim Worstall, Amazon, Apple, and the Perils of Vertical Integration, Forbes (Apr. 23, 2012), https://www.forbes.com/sites/timworstall/2012/04/23/amazon-apple-and-the-perils-of-vertical-integration/#51da27f6ca79.

[32] Definition of Horizontal Integration, Business Dictionary, http://www.businessdictionary.com/definition/horizontal-integration.html, (last visited Mar. 30, 2020).

[33] See Worstall, supra note 31.

[34] Id.

[35] Veilleux, supra note 8, at 498-502.

[36] Jon Swartz, With unemployment soaring, there’s a run on those 100,000 Amazon jobs, Market Watch (Mar. 27, 2020, 1:05 PM), https://www.marketwatch.com/story/with-unemployment-soaring-theres-a-run-on-those-100000-amazon-jobs-2020-03-27; Elizabeth Segran & Coco McPherson, Fear inside Amazon warehouses as workers face sick colleagues and mandatory overtime, Fast Company (Mar. 25, 2020),  https://www.fastcompany.com/90479593/fear-inside-amazon-warehouses-as-workers-face-sick-colleagues-and-mandatory-overtime.

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Fordham Journal of Corporate & Financial Law