That’s the Market’s Way of Signaling that the Move is Competitive

by Don Boudreaux on January 31, 2019

in Agriculture, Competition, Myths and Fallacies

Here’s a letter to Charles Payne of the Fox Business network:

Mr. Payne:

I enjoyed your discussion today with my Mercatus Center colleague Veronique de Rugy about the threat that a growing Amazon allegedly poses to the American economy. And I’m pleased that you seemingly agree with Veronique that Amazon, as long as it receives from government no protection from competition, poses no such threat.

But I want to note a fact – one that Veronique surely would have noted if she’d had more time – about the way you opened the segment. You’re correct that when Amazon entered the retail grocery business the share prices of rival supermarkets fell. Ditto for the share prices of rival pharmaceutical retailers when Amazon announced its entry into that industry. Yet contrary to popular belief, these share-price moves reveal that Amazon intensifies rather than diminishes competition.

If, for example, Amazon’s acquisition of Whole Foods was destined to inject monopoly power into grocery retailing, the share prices of Whole Foods’s rivals would have, not fallen, but risen because Whole Foods’s rivals would have had an easier time hiking their prices under the umbrella of the higher prices charged by Whole Foods. And so the fact that the share prices of Whole Foods’s rivals fell when its acquisition by Amazon was announced is solid evidence that the market expects Amazon’s operation of Whole Foods to improve that supermarket’s service to consumers – improvement that, of course, obliges other supermarkets to step up their game at serving consumers.

That’s how real-world competition works. But it will stop working if antitrust authorities threaten to break-up or otherwise hamstring companies on the grounds that these companies’ growth and success make life more difficult for their rivals. As Veronique said, the appropriate measure of any firm’s performance is how well it serves consumers and not how easy it makes life for its rivals.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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