Free Delivery On Trial: Lina Khan And The FTC Go After Amazon

>> Tom Church: This is the Libertarian podcast from the Hoover Institution. Today we're discussing Amazon and its monopoly status. I'm your host, Tom Church, and I'm joined by the libertarian professor Richard Epstein. Richard is the Peter and Kirsten Bedford senior fellow here at the Hoover Institution. He's the Laurence A Tisch professor of law at NYU, and he's also a senior lecturer at the University of Chicago.

Richard, I have to know, are you as excited at the prospect of breaking Amazon up as FTC Commissioner Lina Khan?

>> Richard Epstein: Well, hey, I mean, it's not even sure that she's in favor of breaking the darn thing up.

>> Tom Church: I know, I know.

>> Richard Epstein: So essentially, there's a little bit of, shall we say, dissimulation on this particular case, which is very difficult to read.

One of the things that's striking is the remedial section that she put in on this case said, we want injunctive relief and damages and other equitable relief as the court sees fit. The general rules on this, even for this situation, is if your merger guidelines are aggressive and you're trying to stop a case, the basic presumption is that you've got a reasonably good shot at it.

Because you don't have to disentangle a unitary operation and figure out how you divide it. But if you're taking the other side on this thing, then it turns out you have a very different kind of problem. The breakup at this point is infinitely more complicated because you have to know exactly how you can make the two or more entities each self-sufficient.

And you have to be able to be confident enough that the only way that they will be so they can be self sufficient without having any kind of cooperative arrangements with the other. And so that what you do is you break the companies up and then have long term contracts as a close substitute.

I don't think that that is in the card. I think the other thing that struck me when I actually went back and read it with some degree of care, ultimately what she made was a practice argument. That is, certain practices that are engaged in by the company tend to lead to monopoly.

There is another doctrine which she did not want to fight, the so called Grinnell doctrine. Which says if you acquire this monopoly status by hard work, thrift, or good luck, you're immune from breakup by the United States government. Because there's nothing that you did which essentially calls you into question.

That's very different from what they do sometimes in the EU, indeed most times where they say, we don't care how you got it, what we care about is what you can do with it. And the argument for the American situation is we want people who start from nothing to get somewhere.

And we think that new entry is going to erode the particular power that they have. And the Europeans say, we can't wait. We have to break it up right now. And they will stop, and they try to do this in many cases, but the breakups have never worked.

So the issue is you can enjoy the practices, put some kind of a fine on them or whatever, and she doesn't have a clue as to exactly what it was that she wants to do. So the betting on the part of most of my sophisticated antitrust seers and predictors, regardless of their political orientation, is that she's not gonna get to first base on this one.

The simplest explanation, I could explain it later, is she's taken two views on this case when she was a student and wrote this Yale law school note. What she said is there's an obvious case of predation, which she could not prove. Now she's saying it's the exact opposite.

There's an obvious case of monopolization. What's the difference? With predation, you say you're making the prices so low to drive everybody out. And with monopolization, you're saying you're breaking them so high so as to reap enormous short term practices. It's very hard when you state both positions so emphatically to show that either of them is correct.

The alternative explanation is that Amazon under Jeff Bezos and his successors is very good at what it does.

>> Tom Church: Yeah, let's back up here and give some context, right? So Amazon, a suit has been brought against Amazon from the FTC, joined by a handful of states. It's an antitrust.

>> Richard Epstein: 13 or so.

>> Tom Church: Yeah, 13 or so, maybe something along those lines. It's an antitrust suit alleging, again, not predatory pricing, right? But I think maybe preferential treatment to its products or preventing competitors from, I'd say, getting a leg up. So that's just some quick context. I do wanna ask about the predatory pricing thing cuz what we're talking about is the level of monopoly that exists.

I think many people think market share means monopoly, big means you've got an unfair advantage. So we have to do something about it. That's clearly maybe the EU perspective. But Richard, how many times can we really point to markets, especially consumer markets, right. Amazon is so consumer facing that prices were so low, maybe even predatorially low, that all their competition left and then didn't come back.

And then this company just gets to win and what, have pricing control forever. I mean, does that really even happen?

>> Richard Epstein: Its never happened. As far as anybody can tell. The only cases of predation which seemed to work are those in which you do very low prices for a short period of time, get the benefit of some regulatory act which makes it difficult for people to re enter the market and then to move up.

But at that point, it's the restriction that does all the work, not the particular predation. The earliest case on this was a case called Mogul and McGregor, an English case from 1889 or so, in which it says that there were a bunch of companies that tried to monopolize the profit on the China tea run.

And it turns out this thing broke down before the case was actually fully done. It's very difficult to predate if you're trying to do it as a group because the tendency is for individual members of the groups to cheat. And once one does it and a second does it, the whole thing breaks out.

Ironically, if you want to be effective at predation, the only way it works is if you have a single firm, which of course is Amazon in this case. But then what you have to do is you have to figure out a do you have market dominance? And b have you taken any losses?

So I went back and I looked at the sort of history of profits on Amazon and it starts out it has no revenues in some losses in the first couple of years. Well, it's very difficult to predate when, in fact, you got 1% of the market. So what the common explanation is is what you have to do is to build infrastructure in order to be able to sustain yourself in the long run.

And Microsoft was more farsighted than others. So it's front end investments gave returns back three, four, five years into the cycle, not immediately. And that's exactly what you have to do when you're talking about startups. There's something in the industry known as a burn rate, which is how long can you last burning up your capital before you turn profitability.

And people have to be extremely careful as to what they invest and how. But Microsoft, rather, not Microsoft, it turns out that Amazon was able to turn that corner. Well now it's a mature company and in order for there to be predation, what you have to do is to show a succession of years where it turns out that you're taking these losses and people exit the market.

Well, how do you define the market? Well you can define the market as Amazon, at which point it's not anything that matters or you can say, look, there are a number of companies that are in this niche. Is predation gonna drive out Walmart or Walgreens? Is it going to drive out any of the other companies that make large numbers of goods?

Well, of course, it's not gonna be able to make a dent in that particular market cuz all these characters in there for the long haul. And they're constantly looking at ways that they could lower their cost structures, which will enable them to compete effectively with the folks who are operating there.

So the predation story, you don't have any But in leaving, you don't have Microsoft, rather Amazon making any kind of losses, and so what you're really basically doing is that these guys are very ingenious. And what happens is they've been able to run this, so, that story doesn't even begin to have any degree of plausibility.

Well, then the question is, can you have a monopoly story? These same guys are there, and you have to figure out, well, is this the situation that's gonna happen? You're gonna beat best buy, you're going to beat all these other companies that are in this market that Amazon is facing.

And the answer is, of course, these guys are gonna be around, and they're going to essentially keep the prices relatively low. So if you're trying to figure out, again, what the basic situation is going to be, the usual rule in this industry is unless you get consolidation from three, four large firms to three large firms, the price differential is not going to be that great.

The FTC wants to change that and to, say, seven to six mergers may be illegal or even smaller ones if there's, I quote, tendency under the guideline for you guys to culminate these initial steps with later steps. And the case it cites in its guidelines, a case called Brown Shoe, which has been universally discredited by everybody else until recently, and the theory is, well, we start with two companies, then three, then four.

You look at Brown Shoe, it's two companies getting together and there's no after act that's going on, which is why people regard this as crazy, so I don't think, in fact, that you can say that there is any kind of market denomination. You start looking at the profits of this company, they've been taking a real hit lately with the decline from COVID.

You look at the number of cases in which it turns out that they abandoned different kinds of product line, and it turns out it's relatively clear. You'll look at the level of consolidation that takes place by closing outlets and recovery retail stuff, post COVID, the company is down, and their share price is probably off 20, 25% from what it was at its particular peak.

None of this even remotely resembles what you would expect for a monopoly. So what you then have to do, and we could talk about this, is to say, if you don't have the obvious things for breakup, what is it that they're doing which is supposed to give them an unfair advantage and give them an unfair advantage which only a monopolist could claim.

>> Tom Church: Richard, let's get into what you mentioned before, which is this new claim against Amazon. The traditional one is predatory pricing, now we're flipping it on its head and saying, no, it's not that we're charging consumers low prices. It's that we're preventing, I think, some competitors from being able to do the same thing, from being able to get spots on Amazon's website, even be able to sell their things, which can drive some prices up.

But I guess I wanna ask, what's wrong with a company which has built this dominant position, right? I mean-.

>> Richard Epstein: Well, it's not that dominant.

>> Tom Church: I love to shop from Amazon, well, it's not that dominant, but it is effective, there's 180 million prime subscribers or people who have access to Amazon and order all the time.

>> Richard Epstein: Yeah.

>> Tom Church: And they use it for a reason, what is wrong with a company saying, okay, we're going to prioritize our products, our brands or anything on this marketplace that we have built, that we're really good at, and we can ship things to you quickly. Why do we have to shut that down?

>> Richard Epstein: I've seen no reason why it is that you do have to shut this down, because what happens is market forces are gonna be relevant. You put yourself at the top of the list, it means that you can no longer sell the space at the top of the list to anybody else.

So you have a product there which, say, generates $100,000 in benefits, and there's somebody else who wants that space, who can use it and produce $150,000 worth of benefits. You're much better off selling the space to somebody else and getting the revenues than you are keeping it for yourself, so the thing to always remember is that foreclosure is a very powerful consideration if you could keep people from the market.

But it's an extremely weak consideration in all these cases where the only way you could foreclose somebody is to sacrifice revenue that that party will give you by putting your own particular inferior product in that particular space. This comes up all the time in some of these cases, and the FTC treats presumptive foreclosure as a wrong that has to be justified, and they don't allow any justifications.

The correct analysis is the firm has a very self-correcting device, because the only way they can hurt their competitor by foreclosure is to give data damage to themselves, and that's not what they want. And it is, of course, interesting if you start looking at this case, they do not do the kind of things that you would do if you actually had a case, they would find 50 plaintiffs who essentially said, you know what, these guys are doing is really sneaky, unfair, stop it.

But this does not have anybody in there, and let me give you something which really does amount to foreclosures, a different kind of practice, and you can see what the difference works about. Suppose it turns out that you're a company and what happens to happen is you have to develop a bunch of interfaces so that you can basically have somebody else's website hook up with your system.

And what Microsoft, or rather Microsoft, Amazon, any one of these companies starts to do is they basically make obsolete the old set of connections. These guys are now relatively stranded, and they can charge them a very substantial amount if they wanna re-hook under some other way to the same platform.

So at that particular point, the real question is why are you upgrading, and why are you upgrading at that point? And if the other guy has a satisfactory experience, the question you would have to show to justify this is that very few people who use these old things, it's phased out, it's unreliable, it gives a bad reputation to everybody else.

But the argument comes back, we're doing just fine, and you're doing this to create a mechanical obstacle. Note with this particular scenario, when you hurt the other guy, you don't hurt yourself, and so it presents completely different kinds of question. There's nothing in this particular case that remotely does this, what they do is they have some stuff about a tie, in so called to the shipping by Amazon Prime, perhaps the best service in the world, and then they have the stuff with respect to the buy box.

And neither of those things are anti-competitive once you get to the bottom and understand them.

>> Tom Church: Richard, I wanna get into this Amazon Prime thing because forcing your sellers to use your product, it sounds a little bit like Apple, having an app store and having terms and conditions there.

Back in the day, they had iTunes, and it was the only place to buy music, and now they've got actual competition.

>> Richard Epstein: Yeah.

>> Tom Church: I think the arguments you're gonna hear is it's fine that they can get big and get successful, but at some point it becomes the only place that you can buy things online, and it's almost like drifting into the common carrier argument for regulation.

Is there a clean way to try and measure when are you actually getting to this part where, okay, we can actually step in and regulate this company that doesn't have special legal privileges. But they've gotten big enough, and now we all rely on it, and so we have to regulate it.

>> Richard Epstein: Well, first of all-.

>> Tom Church: Is there a line to cross?

>> Richard Epstein: No, I don't think this is a problem at all, particularly when you understand what's going on. There are other fulfillment services and all their rivals, Meta and so forth, they all have delivery systems of their own, or they can go to independent carriers like Federal Express or UPS.

And indeed, the issue with respect to Amazon is not quite clear, they say on their most recent website, you wanna go somewhere else, you're free to do so. The difficulty, of course, of allowing that is there's a quality control question. Suppose you have goods that you produce and you send it through X carrier and they come two days late.

The issue is going to be, is this going to affect Amazon's reputation for efficient production if it turns out somebody whom they can control manages to gum up the distribution service? And I have no question that's a serious concern. So at this particular point, what you have to do is you have to put some quality control mechanisms on these other people so as to make sure that they're not engaged in defaults.

That increases your cost as well as that. At the same time, if you look at the allegation, everybody says that it turns out Prime is the most efficient producer in the country and it has the lowest rates, of course, for any particular package it does. And so one of the arguments with respect to vertical integration, which is what you have in this case is what it does is it gets rid of the ruptures that take place when you have two discrete people who have to contract with one another.

And people understand perfectly well and that this vertical integration often has huge efficiency. And so what you want to do is say, okay, show me where the inefficiencies come. And it's gonna be extremely difficult to do that if they turn out to be a low cost provider, which has huge levels of computer satisfaction.

One of the things, of course, that we always want to do is to ask yourself, is consumer welfare the surplus that consumers and producers get from their joint thing? Is that gonna be maximized by the practice? You start looking at that stuff and this is just not look like a case in which the general welfare is compromised by what they've done and they haven't shown, again, any systematic complaints.

What they've said in effect is that predation takes place when you make the best product and keep the most satisfied customers, but that's what competition is supposed to do. And so why are they trying to protect other people when those people have it within their power to try to protect themselves?

And Amazon is willing to let up on this stuff with reputable producers and maybe they're right and maybe they're wrong, but this is as far as you could get from an anti-trust violation. What they're doing is they're punishing excellence again and trying to make it appear, though it's a kind of a time which this was not, where there's any kind of price exploitation and they can't show that either.

So this is just whistling Dixie. This is an extraordinarily weak and embarrassingly we complain on this. And the same thing I think is true with respect to the, whatever it is, the buy box that they're talking about.

>> Tom Church: Last one for you, Richard. There's two scenarios I can picture going forward.

One, President Biden runs for re-election, wins again, Lena Khan sticks around and we get a headline that I would expect out of the EU, which would be something like what? Amazon fined $6 billion for anti-competitive practices, and I'd love to know who actually gets that money. And then there's the other future, I think, which is a GOP president comes in, wins and replaces Lina Khan.

This case has got to go on for a couple of years, right? I mean, does it get dropped at that point? What are the penalties in the first scenario, and what's the likelihood in the second?

>> Richard Epstein: Okay, first of all, I mean, I wanna do two things. I wanna answer the question, but I also wanna talk about the other illegal practice, the buy box.

>> Tom Church: Okay.

>> Richard Epstein: And this is extremely important because they said, if you have a product which is selling for less anywhere else, we're gonna put you take away your buy box privileges and your sales will tank. Well, what's their scenario is they say what's gonna happen is what Amazon is forcing you to do is to tell other people to raise their prices on other platforms.

But that's not what's happening. What typically happens is they're giving you information that it's a bad deal here, go elsewhere. And the moment you put the buy box on and its assurance that you get low cost, so this is a way of economizing on search costs and making things level.

So its clearly a pro-competitive practice. And lets put it this way, get rid of the monopoly. Give them a very small market share with either this or with prime. They do exactly the same thing if they had 2% of the market or if they had 100% of the market, so its crazy.

So putting all this stuff aside, what about Biden? Well, I mean, he's been on picket lines. He's very much committed to this situation. And the question is he's gonna try to fight for it. Well, I think what's gonna happen about it is he could try to replace her, at which point it would be dropped.

Any Republican, she's out on her ear if it turns out the term is not binding for five years, which it is, but there'll be republican commissioners right now there are only three democratic commissioners on the FTC, which skews everything very badly. And what's gonna happen, she's gonna lose in court.

I mean, you wanna figure out what the projection is. All of her more adventurous suits have lost. And the one case that was kind of tough, very hard, was a two-sided market case with respect to American Express, which essentially tried to say that we're gonna only sell our goods at our prices in this very complicated market.

There are very technical issues about consumer welfare and it turned out the company won five to four. And there are many people in the academy who think this was clearly a wrong situation. That's a hard case, this is an easy case. You don't have any arguable restrictive effect, because you're not telling anybody what they can and cannot do.

And so under all of these circumstances, the net outcome of this case, they're gonna lose it just the way they lost the Qualcomm case big time. And they should have lost the Qualcomm case, because that was another one of these situations where somebody says, look, if you wanna use our technology, you have to get our license.

If you get our license, you don't have to use our technology. You could use it from somebody else who takes it. And the physician on the other side was, well, we could take your technology, not pay it, and you come sue us. That's not a sensible, viable situation and so that case basically lost it.

Lost in the court of appeal after a dreadful decision by the trial judge now on the Court of aAppeal, and nobody brought it up to the Supreme Court, and it lasted. So if you look at the anti-trust law, the consumer welfare standard essentially commands a huge amount of support from the center left or even further left than that, all the way to the right.

And there are very few people, even people like Tim Wu and so forth, who has worked in the Biden administration, I think, could come out and publicly say that they support this case. One of my colleagues, who's pretty aggressive on anti-trust laws, said this case is illusion and I just couldn't see anything.

I had some doubts about this before I went back and read the complaint. And the other thing that's so distressing about the complaint is sometimes you really need a number, and what you do is you get a redaction. And the redactions mean that you can't answer the key questions, what's market share, what's profitability, and so forth.

So the complaint in its public form doesn't give you the numerical information that you need to do it. So I think this case is heading down the tubes.

>> Tom Church: Last little bit, Richard, heading down the tubes. Fine, I just need to know if they get fined a couple billion dollars, where's that money go?

>> Richard Epstein: It goes into the general treasury, which you can then use for anything that you sort of want.

>> Tom Church: We do need a lot of money, Richard. We're running quite a deficit.

>> Richard Epstein: We know that, but I mean, look, I mean, this is a serious situation that takes place in which what you do is you start imposing fines on people or recapitalizations of their business and the money gets taken out.

I spent too much time working on the various cases having to do with throwing Fannie and Freddie into bankruptcy, and I thought those were completely illegitimate moves. Companies were not insolvent in terms of their ability to pay. But by the time you got done, there was a collusive arrangement between the new head of this operation and the treasury.

They managed to suck out of these companies $200 billion, some figure in that range. And then it turned out in a dreadful Supreme Court opinion, they said this was all fine and what happens? That money was used to sort of balance the budget. And so the real question in these cases is, do we want the United States government to bring rogue type suits, at least what I regard as rogue type suits, in order to ease the budget deficit?

We had similar problems, if you remember, when they decided to find chase because of its insufficient oversight with respect to the matter of estate, that case was as phony as a four dollar bill in terms of what it did, and they got paid many billions of dollars. So I think that the danger of abuse with respect to antitrust, securities regulation, financial regulation, is not just a kind of disgrace.

It's become part of an organized government campaign. And I'm not saying this is only Democrats in many of these cases, it turns out that Republicans are on the same side of the Democrat. And that was certainly true with the Fannie Freddie type situation. So it's very ominous, this is not a case in which what you see is independent.

And I'll just give you one other Epstein Maxim, which I said before they lost the case having to do with the withdrawal of the money from Fannie and Freddie. I said, if you're 100% right on the merits, you are lucky if you have a 50% chance of winning.

That's true, in that case, I don't think it's gonna be true here. I think this case is so pathetically weak that it won't survive. There is nobody who knows antitrust well who respects Lena Khan as an antitrust expert. There's more respect, I think, for Jonathan Kant, who's doing this justice, and he didn't bring this case.

>> Tom Church: That'll do it for this episode of the libertarian podcast with Richard Epstein. As always, you can learn more if you head over to Richard's column, the Libertarian, which we publish on defining ideas@hoover.org. If you found this conversation thought provoking, please share it with your friends and rate the show on Apple Podcasts, Spotify, or wherever you're tuning in.

For Richard Epstein, I'm Tom Church, and we'll talk to you next time.

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