[#1] Anti-Trust and platforms
Key ideas from 'Amazon's antitrust paradox', Indian VC landscape and more
Amazon’s Anti-trust paradox
I recently read ‘Amazon’s Anti-trust Paradox’, a paper published by Lina Khan in Yale Law Journal. (https://bit.ly/2IMYyOj) It deals with how current anti-trust regulations are inadequate in dealing with modern platform businesses, with specific reference to Amazon and comes up with a few suggestions on how to regulate such companies.
Have listed some key ideas below (All paraphrased):
Abstract:
The current framework in antitrust pegs competition to consumer welfare as defined by short term price effects. Lower prices for consumers is what authorities want, and Amazon provides that in spades. But the current framework under-appreciates the risk that predatory pricing and integration across business lines poses to overall competition.
These concerns are heightened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits…Under these conditions, predatory pricing becomes highly rational - even as existing doctrine treats it as irrational and therefore implausible. Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors.
In order to capture these anticompetitive concerns, we should replace the consumer welfare framework with an approach oriented around preserving a competitive process and market structure. Applying this idea involves, for example, assessing whether a company's structure creates anticompetitive conflicts of interest; whether it can cross-leverage market advantages across distinct lines of business; and whether the economics of online platform markets incentivizes predatory conduct and capital markets permit it.
Part 1: The Chicago School Revolution: The shift away from competitive process and market structure
The Chicago School (of thought) claims that "predatory pricing, vertical integration, and tying arrangements never or almost never reduce consumer welfare."
The Chicago School critique of predatory pricing doctrine rests on the idea that below-cost pricing is irrational and hence rarely occurs. For one, the critics argue, there was no guarantee that reducing prices below cost would either drive a competitor out or otherwise induce the rival to stop competing. Second, even if a competitor were to drop out, the predator would need to sustain monopoly pricing for long enough to recoup the initial losses and successfully thwart entry by potential competitors, who would be lured by the monopoly pricing. The uncertainty of its success, coupled with its guarantee of costs, made predatory pricing an unappealing - and therefore highly unlikely - strategy. The Chicago School critique came to shape Supreme Court doctrine on predatory pricing.
"Evidence of below-cost pricing is not alone sufficient to permit an inference of probable recoupment and injury to competition.” Instead, the plaintiff "must demonstrate that there is a likelihood that the predatory scheme alleged would cause a rise in prices above a competitive level that would be sufficient to compensate for the amounts expended on the predation, including the time value of the money invested in it" - a requirement now known as the "recoupment test"
In placing recoupment at the centre of predatory pricing analysis, the Court presumed that direct profit maximization is the singular goal of predatory pricing. Furthermore, by establishing that harm occurs only when predatory pricing results in higher prices, the Court collapsed the rich set of concerns that had animated earlier critics of predation, including an aversion to large firms that exploit their size and a desire to preserve local control.
Part II: Why Competitive Process and Structure Matter
Focusing primarily on price and output undermines effective antitrust enforcement by delaying intervention until market power is being actively exercised, and largely ignoring whether and how it is being acquired. In other words, pegging anticompetitive harm to high prices and/or lower output -while disregarding the market structure and competitive process that give rise to this market power - restricts intervention to the moment when a company has already acquired sufficient dominance to distort competition.
Focusing antitrust exclusively on consumer welfare is a mistake. For one, it betrays legislative intent, which makes clear that Congress passed antitrust laws to safeguard against excessive concentrations of economic power. This vision promotes a variety of aims, including the preservation of open markets, the protection of producers and consumers from monopoly abuse, and the dispersion of political and economic control. Secondly, focusing on consumer welfare disregards the host of other ways that excessive concentration can harm us-enabling firms to squeeze suppliers and producers, endangering system stability (for instance, by allowing companies to become too big to fail), or undermining media diversity, to to name a few.
A better way to understand competition is by focusing on competitive process and market structure… In practice, adopting this approach would involve assessing a range of factors that give insight into the neutrality of the competitive process and the openness of the market. These factors include: (1) entry barriers, (2) conflicts of interest, (3) the emergence of gatekeepers or bottlenecks, (4) the use of and control over data, and (5) the dynamics of bargaining power. An approach that took these factors seriously would involve an assessment of how a market is structured and whether a single firm had acquired sufficient power to distort competitive outcomes.
Part III: Amazon’s business strategy
Amazon has established dominance as an online platform thanks to two elements of its business strategy: a willingness to sustain losses and invest aggressively at the expense of profits, and integration across multiple business lines.
These facets of its strategy are independently significant and closely interlinked. This strategy - pursuing market share at the expense of short-term returns - defies the Chicago School's assumption of rational, profit-seeking market actors. More significantly, Amazon's choice to pursue heavy losses while also integrating across sectors suggests that in order to fully understand the company and the structural power it is amassing, we must view it as an integrated entity. Seeking to gauge the firm's market role by isolating a particular line of business and assessing prices in that segment fails to capture both (1) the true shape of the company's dominance and (2) the ways in which it is able to leverage advantages gained in one sector to boost its business in another.
The fact that Amazon has been willing to forego profits for growth undercuts a central premise of contemporary predatory pricing doctrine, which assumes that predation is irrational precisely because firms prioritize profits over growth.In this way, Amazon's strategy has enabled it to use predatory pricing tactics without triggering the scrutiny of predatory pricing laws.
Involvement in multiple, related business lines means that, in many instances, Amazon's rivals are also its customers.
At a basic level this arrangement creates conflicts of interest, given that Amazon is positioned to favor its own products over those of its competitors. Critically, not only has Amazon integrated across select lines of business, but it has also emerged as central infrastructure for the internet economy.
Part IV: Two models for addressing platform power
If it is true that the economics of platform markets may encourage anti-competitive market structures, there are at least two approaches we can take. Key is deciding whether we want to govern online platform markets through competition, or want to accept that they are inherently monopolistic or oligopolistic and regulate them instead. If we take the former approach, we should reform antitrust law to prevent this dominance from emerging or to limit its scope. If we take the latter approach, we should adopt regulations to take advantage of these economies of scale while neutering the firm's ability to exploit its dominance
A. Governing Online Platform Markets Through Competition
(i) Predatory pricing
Introducing a presumption of predation would involve identifying when a price is below cost, a subject of much debate. The Supreme Court has not addressed the issue, but most appellate courts have said that average variable cost is the right metric. Whether a platform is dominant enough to trigger the presumption could be assessed through its market share: those holding greater than, say, 40% of the market in any given line of service (e.g., cloud computing, ride sharing) might be designated "dominant." Rather than measuring this market share nationally, enforcers would look to levels of local control; a ride-sharing platform that held only 35% of the national market but 75% of the Nashville market would still be considered dominant for the purpose of price cutting in Nashville.
(ii) Vertical integration
One way to address the concern about a firm's capacity to cross-leverage data is to expressly include it in merger review. Under the current approach, only mergers over a particular monetary threshold require agency review yet the monetary value of a deal may not be a good proxy for the scope and scale of data at stake. Thus, it could make sense for the agencies to automatically review any deal that involves exchange of certain forms (or a certain quantity) of data. Data that gave a player deep and direct insight into a competitor's business operations, for example, might trigger review.
A stricter approach would place prophylactic limits on vertical integration by platforms that have reached a certain level of dominance. In the case of Amazon, for example, this prophylactic approach would prohibit the company from running both a dominant retail platform and a dominant platform for third-party sellers. These two businesses would have to be separated into different entities, in part to prevent Amazon from using insights from its role as a third-party host to benefit its retail business, as it reportedly does now.
B. Governing Dominant Platforms as Monopolies Through Regulation
The other option is to accept dominant online platforms as natural monopolies or oligopolies, seeking to regulate their power instead. There are two models for this approach, traditionally undertaken in the form of public utility regulations and common carrier duties.
Given that Amazon increasingly serves as essential infrastructure across the internet economy, applying elements of public utility regulations to its business is worth considering. The most common public utility policies are (1) requiring nondiscrimination in price and service, (2) setting limits on rate-setting, and (3) imposing capitalization and investment requirements. Of these three traditional policies, non-discrimination would make the most sense, while rate-setting and investment requirements would be trickier to implement and, perhaps, would less obviously address an outstanding deficiency.
Interesting stuff I read recently:
Bain-IVCA report on Indian venture capital
I summarized the key insighs here
Borrowed joy: Decoding the digital credit boom of India (Economic Times)
… generational shift in attitudes has intersected with a massive digital disruption in the business of lending, causing an expansion in capacity and a drop in costs, allowing companies to bring more and more people into the ambit of formal credit.
Within this large trend, there are five discernible shifts. First, lending is moving online — a person in need of a loan today is far likelier to fill up a form on a website than walk into a bank branch. Second, a raft of fintech firms have sprung up, offering all kinds of convenience in accessing credit. Third, young consumers identify with their brand ethos, with a much more accessible feel and aura of transparency, rather than the imposing facades of traditional banks. Fourth, even as demand for secured loans housing loan, loan against property, and so on — are on a decline, unsecured credit, such as credit cards and personal loans with high rates of interest, is booming. And, fifth, demand for credit is increasingly coming from non-metro cities and towns.
Building for India’s MSMEs (Harsha Kumar - Partner at Lightspeed)
With 60M MSMEs, India is the largest base of MSMEs in the world, after China. Over 1 Trillion dollars of trade flows through these relatively unorganized channels and there is barely any software or technology that even touches these transactions and for valid reasons – traditionally, distribution to these small businesses has been operationally intensive and has required an army of agents.
India’s MSMEs need Micro-software…Distribution is getting easier. There is a huge word of mouth potential and acquisition costs are dropping steadily…That SMBs will not use software is untrue…Credit as an offering will not ensure monetisation off the bat. One should expect speed bumps along the way…
Book recommendation:
Narratives & Numbers (by Aswath Damodaran)
I summarized the key ideas here
Thank you for reading :)