To get a more complete and clearer view of this reality, ask: given that Amazon unquestionably does discourage third-party merchants who use its site from selling their wares on other sites at lower prices, why do these merchants nevertheless continue to offer their wares on Amazon’s site? The very existence of the problem about which California complains means that Amazon’s platform isn’t the only one available for use by these merchants. So the problem is obviously not that Amazon has a literal monopoly in the market for online platforms that merchants can use. Merchants have, and in practice take advantage of, the option to use platforms in addition to Amazon’s.
These other platforms open to merchants aren’t owned by fly-by-night operations. One is owned and operated by Target, another by Walmart.
So the State of California’s complaint against Amazon boils down to this: Amazon has made its platform so attractive to third-party merchants that large numbers of them willingly pay a premium in order to continue to use Amazon’s platform. This premium is paid to Amazon by these merchants when they effectively agree not to cut the prices they charge for wares offered for sale on non-Amazon sites.
What, exactly, does Amazon offer to third-party merchants in exchange for their paying this premium? I don’t know, for I’m not a third-party merchant. But I do know that Amazon offers something of value, for otherwise third-party merchants wouldn’t agree to the terms Amazon asks, or wouldn’t care if Amazon reduces the visibility of their offerings on its platform.
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Whatever is the source of the durability of the differentially superior service now available on Amazon’s platform was created by Amazon. The company was not gifted this competitive edge by luck or by leprechauns. The superiority of Amazon’s platform is the result of entrepreneurial creativity, risk-taking, and hard work. And the differential returns that Amazon now receives as a result of successfully discouraging third-party merchants from selling their wares on competing platforms at lower prices is the entrepreneurial profit that Amazon earns as a consequence of this entrepreneurial achievement.
Attempts to prevent Amazon from reaping this entrepreneurial profit will discourage not only it, but also other firms and entrepreneurs, from experimenting with differentially better ways to create value for customers. And so even if California successfully uses this antitrust action to lower today’s prices of goods sold on-line by third-party merchants, consumers will find tomorrow’s prices and quality worse as on-line retail platforms and platform features fail to improve as fast and as much as they would have improved had this stunt by California’s government not succeeded.
Since it began in the U.S. in 1889, antitrust has often been fueled by the hubris of intellectuals and government officials who do not realize that what the late Nobel-laureate economist Oliver Williamson called “the economic institutions of capitalism” are in reality mind-bogglingly creative, nuanced, and complex. These intellectuals and officials arrogantly suppose that any contractual terms or organizational arrangements that they cannot immediately understand as serving competition must therefore be devious exercises of monopoly power or attempts to secure such power. Such is the case with California’s new antitrust attack on Amazon. Yet only a bit of dispassionate thought about the facts of this case makes plain that interfering with third-party merchants’ contractual arrangements with Amazon will quite possibly make consumers worse off even in the near term, and will certainly make consumers worse off over time.
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