Tuesday, October 28, 2014

Amazon 'abusing' its online dominance

Oct 21, 2014


AMAZON, the giant online retailer, has too much power and uses that power in ways that hurt America.

If you haven't been following the recent Amazon news: Back in May, a dispute between Amazon and Hachette, a major publishing house, broke out into open commercial warfare.

Amazon had been demanding a larger cut of the price of Hachette books it sells; when Hachette baulked, Amazon began disrupting the publisher's sales. Hachette books weren't banned outright from Amazon's site, but Amazon began delaying their delivery, raising their prices and/or steering customers to other publishers.

You might be tempted to say that this is just business: no different from Standard Oil, back in the days before it was broken up, refusing to ship oil via railroads that refused to grant it special discounts. But that is, of course, the point - the robber baron era ended when America, as a nation, decided that some business tactics were out of line. The question is whether we want to go back on that decision.

Does Amazon really have robber baron-type market power? When it comes to books, definitely. Amazon overwhelmingly dominates online book sales, with a market share comparable with Standard Oil's share of the refined oil market when it was broken up in 1911. Even if you look at total book sales, Amazon is, by far, the largest player.

So far, Amazon has not tried to exploit consumers. In fact, it has systematically kept prices low, to reinforce its dominance. What it has done, instead, is use its market power to put a squeeze on publishers, in effect driving down the prices it pays for books - hence the fight with Hachette.

In economics jargon, Amazon is not, at least so far, acting like a monopolist, a dominant seller with the power to raise prices. Instead, it is acting as a monopsonist, a dominant buyer with the power to push prices down.

And on that front, its power is really immense - in fact, even greater than the market-share numbers indicate. Book sales depend crucially on buzz and word of mouth. What Amazon possesses is the power to kill the buzz.

So can we trust Amazon not to abuse that power? The Hachette dispute has settled that question - no, we can't.

It's not just about the money, although that's important: By putting the squeeze on publishers, Amazon is ultimately hurting authors and readers. But there's also the question of undue influence.

Specifically, the penalty Amazon is imposing on Hachette books is bad in itself, but there's also a curious selectivity in the way that penalty has been applied.

Last month, The New York Times' Bits blog documented the case of two Hachette books receiving very different treatment. One is Daniel Schulman's Sons Of Wichita, a profile of the Koch brothers; the other is The Way Forward, by Paul Ryan, who was Mitt Romney's running mate and is chairman of the House Budget Committee. Both are listed as eligible for Amazon Prime, and for Ryan's book, Amazon offers the usual free two-day delivery. What about Sons Of Wichita? As of Sunday, it "usually ships in 2 to 3 weeks".

Which brings us back to the key question. Don't tell me that Amazon is giving consumers what they want, or that it has earned its position. What matters is whether it has too much power, and is abusing that power. Well, it does and it is.


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