A young academic is challenging the effectiveness of US competition law in controlling the rise of a new generation of corporations, writes Kyran Fitzgerald.
Lina Khan is a young woman with a mission. Earlier this year, the expert in anti-trust (competition)law published a lengthy article in the Yale Law Journal in which she identified serious flaws in US competition law enforcement, flaws which have allowed a new generation of technology companies to amass financial and commercial power of an unparalleled nature.
America has a strong tradition of ‘cartel busting’. In the past, its legislatures, both State and national, have not be been slow to take on monopolistic entities such as Standard Oil , or the big steel companies.
In the past, it was willing to impose heavy fines and even to break up companies perceived to have grown too big for their boots and for the long-term interest of the wider economy.
As a result, the US managed on the whole to escape the sort of excessive concentrations of economic power and control that, for example, were allowed to build up in pre-war Japan and Germany.
Ms Khan, in her researches, has focused on Amazon — the e-commerce and cloud computing company, presided over by Jeff Bezos, one of the most remarkable figures of the digital age.
Amazon has expanded, octopus like, at an amazing rate, shaking up permanently the world of retailing, now in effect, in control of the central infrastructure for the digital economy. It is involved in everything from fashion design to hardware manufacture to the provision of cloud computing services.
It is best known for its all encompassing delivery and logistics network and for providing online auctions. It is also a major lender.
Back in 2010, Amazon employed just under 34,000 people. By 2016, it had 270,000 on the books. The company absorbed huge losses during its early years yet investors continued to jump on board. Mr Bezos was prepared to suck up losses by betting the house on a market leadership strategy.
He has offered cut price services to those signing on to the company’s Amazon Prime loyalty programme which had 63m subscribers in 2016.
Ms Khan levels the charge that Amazon and Jeff Bezos have engaged in predatory pricing in the effort to gain market share. Back in 2008, Quidsi was one of the fastest growing e-commerce firms around targeting the baby care, household goods and beauty care markets.
A key flagship product was Diapers.com. Ms Khan alleges that Amazon ‘pricing bots’ tracked Diapers.com, slashing prices in response to moves by Quidsi. This followed an initial rejection of a buyout offer from Amazon. Quidsi’s growth was halted and the company was taken over.
The regulatory body, the Federal Trade Commission (FTC), reviewed the matter and concluded that competition law had not been breached.
In Ms Khan’s view, we should not be surprised at this. In a recent interview, she argued that laws aimed at safeguarding the US economy against excessive concentrations of power have been “derailed by a new legal philosophy which took hold in the 1970s and 1980s.”
This philosophy was hatched in Chicago by lawyers and economists of the ‘Chicago School’, one of whose leaders was the father of monetarist thinking, Milton Friedman.
The ‘Chicago’ approach was to focus on the short-term pricing effects of mergers. Concentration of power was assumed to be beneficial, in that it promoted efficiencies. Ms Khan believes that the digital transformation underway is producing effects we have never seen before.
In the past, we had producers like Standard Oil which exercised monopoly power over its customers and powerful retailers which exercised a grip as buyer-monopsonists with a tight hold over suppliers.
However, companies like Amazon stand out in that they are both producer/suppliers and retailers while at the same time, providing the platforms or infrastructure in which other producer/suppliers and retailers operate.
As Ms Khan sees it, Amazon has become a ‘gatekeeper and choke point’, with the ability, if not necessarily the inclination, to use this power abusively.
So, are we seeing an impact on the wider economy? Certainly, we are witnessing a shakeout, with many sectors being shaken to their very foundation.
Lina Khan insists that it is not just long-established incumbents who are suffering. A report by Ms Khan and Barry Lynn, published in 2012, pointed to a 53% decline in the number of start-ups in the US between 1977 and 2010, a decline the authors put down to the rise in concentration as powerful market leaders, typically technology led firms, emerge.
Certainly, Silicon Valley is itself increasingly dominated by the big three platform companies, Google, Facebook and Amazon, leading many to wonder whether it is not time to consider breaking them up into competing entities as part of a move designed to foster innovation.
At the same time, many are wearying of the never ending waves of disruption which affect the lives of both consumers and producers.
Buyers of books benefited greatly from price reductions but are now witnessing a contraction in number and variety of books on sale, a phenomenon that was well underway before Amazon entered the scene.
But this hectic change has been accompanied by a troubling drop off in productivity gains across western economies, an indication that innovation of the sort that fostered Silicon Valley’s emergence may now in the process of being repressed, if not stifled.
Ms Khan is calling on the competition lawyers and legislators to wake up and smell the coffee when it comes to controlling the vast entities that have emerged.
However, most people are reluctant to bite the hand that feeds for Mr Bezos and his kind now have vast resources at their disposal and what is given can easily be taken away.
At the moment, Amazon is planning to locate a 50,000 job second headquarters in an as yet unnamed US city. Senators and US Congress members are lined up like participants in a beauty contest waiting for their city or State to be crowned. It is hard to row against that kind of tide.