Why Amazon must be curtailed

The great Roman senator and historian, Cato the Elder, also known as Cato the Wise, took up a practice of ending every Senate speech, on whatever topic, with the same declaration: “Carthage must be destroyed.” He saw the great Roman rival across the Mediterranean as an existential threat to his country and wanted everyone to understand just how pressing it was.

Cato the Elder and his famous dictum came to mind the other day with news of a big development in grocery pricing. And a corollary declaration presented itself for the realm of American commerce: “Amazon must be curtailed.”
The Wall Street Journal headline that got me pondering old Cato said: “Amazon Doesn’t Need to Make Money on Groceries, Putting Pressure on Wal-Mart, Kroger.”
Amazon, of course, is the prideful new owner of Whole Foods Market Inc., and that puts the online retailer in position to compete with other big grocery chains, including Kroger, Wal-Mart and Target. And the Journal article explained precisely how they will do it: by selling wares at prices below what it costs to produce them. Even if it loses money, says the Journal, the company will benefit in the long run by putting competitors, which don’t have the market power to sell at below production costs, out of business. Just the announcement of the sale sent food retail stocks down 20 percent.
The Journal quoted one former Amazon executive as saying, “Amazon’s using the same playbook they always have when competing with booksellers and other retailers. They take out their revenue stream by killing them slowly on price.”
Which is fine if it’s a level playing field. But Amazon avoids, whenever possible, level playing fields. Consider what the company did after it introduced the Kindle e-book in 2007. By setting most e-book prices at below its own costs, Amazon devastated traditional publishers, whose legacy printing costs made it impossible for them to compete against Amazon prices. That helped destroy the brick-and-mortar bookstores and sliced up the traditional book-publishing business.
A Vanity Fair article in June 2014 explained, “Nothing the publishers did — delaying the release of e-books, complaining to Amazon, upping their wholesale prices to the company, or, in the case of Hachette, actually going to the Justice Department to gripe — seemed to work.”
That led Apple to come up with a possible solution — opening up a new digital bookstore for its new iPad and inviting traditional book publishers to sell through it rather than through Amazon. The innovation was in pricing. The publishers wouldn’t sell their books to Apple wholesale but rather through Apple as a sales agent. That meant the publishers themselves could set prices — and get out from under the artificially low prices set by Amazon that were “killing them slowly.” Apple would merely take a cut of 30 percent. Five of the top publishing houses quickly signed up.
Bad plan. The U.S. Justice Department swooped in and accused the publishers and Apple of conspiring to violate federal antitrust laws. The deal fell apart, most of the publishers quickly settled with the government, and Apple was nailed in court after years of filings and appeals. The fine: $450 million.
That was probably an inevitable outcome, but does that mean Amazon should remain blameless in the eyes of the law when it used its market power to slam its publishing partners and competitors on price? Isn’t that akin to John D. Rockefeller’s predatory pricing, in collusion with the railroads, to eliminate competition and dominate his business partners? After the Apple imbroglio Amazon agreed to ink “full agency” sales agreements with the big publishers, allowing them to set prices but giving incentives for keeping prices down. That was a much more civilized business approach, but by that time the big Borders bookseller chain was dead, and Barnes & Noble was struggling.
But what about consumers? Don’t they deserve lower prices? In a 2014 New Republic piece, Franklin Foer points out that early antitrust thinking, during the Progressive era, focused on consumers to an extent but also on the plight of “the small producers and sellers quashed by the monopolists,” as Mr. Foer puts it. A leading antitrust activist of the time, the prominent lawyer and later Supreme Court justice Louis Brandeis, initiated a crusade for what he called “fair trade,” based on a concept called Resale Price Maintenance.” Mr. Foer explains: “The idea was that manufacturers should legally control the retail value of their wares, rather than hand the power of pricing over to large chains and department stores, whose size gave them the unstoppable advantage of offering deep discounts.”
As for the consumer, Brandeis wrote, “Thoughtless or weak, he yields to the temptation of trifling immediate gain, and, selling his birthright for a mess of pottage, becomes himself an instrument of monopoly.” In those days, the small businessman was the main focus of antitrust concern.
But that changed in the 1960s when liberal activists such as Ralph Nader and Mark Green identified consumers as the monopoly victims most deserving of compassion and relief. Mr. Green suggested the “primary focus of antitrust enforcement” should be “efficient production and distribution — not the local farmer, local druggist, or local grocer.”
That’s where we are today, and that gives Amazon a wide berth to raise havoc in multiple markets, soon to include the grocery business. Which poses a thought: Amazon must be curtailed.

Robert W. Merry


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