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For those who have supported monopolistic practices in antitrust discussions since the Carter era up to 2020, Amazon poses a significant riddle: its monopoly influence was never anticipated, and if it were to arise, it should have disintegrated almost immediately.

Advocates of monopolies often reflect Ely Devons’s well-known saying: “If economists wanted to study horses, they wouldn’t observe them directly. Instead, they would contemplate, ‘What would I do if I were a horse?’”

Rather than starting with real-world dynamics, they formulate intricate models based on abstract ideas like “rational actors.” These theoretical frameworks can be so aesthetically pleasing that it's easy to overlook their detachment from practical realities.

These economic models suggested that Amazon could not realistically achieve monopoly status. Even if it dominated specific market sectors, it was believed that the company would lack true monopoly power.

For instance, if Amazon attempted to monopolize a market by engaging in below-cost sales (termed “predatory pricing”), competitors could simply wait until Amazon ceased its losses and reinstated regular pricing, thereby resuming competition. Moreover, should Amazon aim to sustain its loss-leader strategy indefinitely by "cross-subsidizing" losses with higher profits from another area, competitors could undercut Amazon’s prices on those high-margin items, enticing customers away and disrupting Amazon's price war.

These models forecasted this outcome, but reality proved different. Amazon leveraged its capital market access to initiate aggressive predatory pricing tactics. When diapers.com resisted selling to Amazon, the company committed $100 million to selling diapers at a loss until diapers.com went bankrupt, allowing Amazon to acquire it for a fraction of its former value.

Investors quickly learned the lesson: competing with Amazon is not viable. The company can sustain its predatory practices longer than competitors can stay financially afloat.

However, not everyone held the same conviction as the antitrust establishment that Amazon couldn’t establish a lasting monopoly with significant market influence. In 2017, Lina Khan, then a law student, authored “Amazon’s Antitrust Paradox,” a pivotal paper arguing that Amazon had the necessary tools to gain monopoly power.

Currently, Khan chairs the FTC and has initiated a case against Amazon, incorporating ideas from her earlier work. A result of this case is an unprecedented examination of Amazon’s internal workings. However, as Stacy Mitchell from the Institute for Local Self-Reliance points out in The Atlantic, crucial information has been heavily redacted in the court documents.

The most significant omitted detail is how much profit Amazon generates from each of its business segments. According to Amazon's narrative, its retail operations barely break even, relying on profits from its AWS cloud services to sustain its entire business model. This narrative is critical because if accurate, it indicates that Amazon isn't driving up retail prices, which forms the foundation of the FTC's case against the company.

What is certain about Amazon’s retail business is this: merchants cannot thrive without it. Most U.S. households have Prime memberships, and 90% of these members begin their online shopping on Amazon; once they find what they want, they buy it and leave the site. Consequently, merchants who do not sell on Amazon often struggle to sell their products. This dynamic is referred to as “monopsony power” and is easier to sustain than monopoly power. For most manufacturers, a sudden 10% drop in sales can be disastrous, so even a retailer with a 10% market share can extract substantial concessions from its suppliers. Amazon's market share in numerous categories far exceeds 10%.

What type of monopsony power does Amazon possess? For starters, it imposes a substantial fee on its sellers. When totaling all the various fees Amazon charges its platform sellers, they amount to 45–51%.

Businesses operating competitively simply cannot sustain a 45% margin! Merchants face a dilemma: sell on Amazon and lose money on each transaction or avoid selling on Amazon and forfeit all sales.

The only solution is to inflate prices on Amazon. Since Prime members predominantly do not compare prices, if Amazon demands a 45% cut, a merchant can raise their prices on Amazon by about a third and nearly break even.

However, Amazon is aware of this strategy. They enforce a “most favored nation” clause that punishes suppliers who offer lower prices in competing stores or even on their own websites. The repercussions range from relegating products to the bottom of search results to outright removing sellers from the platform. In dealings with publishers, Amazon retains the right to reduce the prices set by publishers to match the lowest price available online, consequently paying publishers less per sale.

This means that suppliers who engage with Amazon (essentially anyone wishing to remain in business) must significantly increase their prices on Amazon, resulting in price hikes across all their sales channels (which explains why Prime members often do not seek better deals elsewhere).

Amazon disputes these claims. They assert that the 45–51% margin they take from business customers barely covers their costs. The company maintains that its profits derive from AWS services, portraying its retail operations as a public service subsidized by the higher AWS margins.

This assertion is quite bold. Last year, Amazon generated $130 billion in seller fees. In comparison, this revenue from fees surpassed the total earnings of Bank of America across its entire operation. Amazon’s fees amount to more than all of Meta’s revenues combined.

Amazon argues that none of this income counts as profit — it's merely covering operational costs. They claim that their non-AWS segments collectively achieve only a one percent profit margin.

This claim is indeed astonishing. As a public entity, Amazon is required to provide detailed quarterly and annual financial reports outlining its profit and loss. One would expect that these documents would reveal some insights.

However, one would be mistaken. Amazon's financial disclosures do not delineate profits and losses by individual segment. SEC regulations mandate that companies must disclose this information by segment.

This rule was established in 1966 due to concerns that companies could misuse cross-subsidies to engage in predatory pricing and other anti-competitive practices. Yet, over the years, the SEC has largely ceased enforcing this rule. Companies now enjoy “near total managerial discretion” to combine business units and aggregate their profits and losses into broad, undifferentiated financial statements.

As Mitchell notes, it's not only Amazon that sidesteps this rule. The profitability of YouTube for Google remains unclear, as does the financial performance of Apple's App Store (Apple has claimed such data does not exist). Even Warren Buffett, with his extensive interests across numerous companies, only provides detailed profit and loss information for seven segments of Berkshire Hathaway.

Recall that one category of data from the FTC's antitrust case against Amazon has been entirely redacted. A reasonable assumption would be that this pertains to the profit and loss for its retail operations and other business lines.

These redactions may be the judge’s responsibility, but the real issue lies with the SEC. As a publicly traded company, Amazon is obligated to provide certain disclosures in exchange for access to capital markets, as outlined in the SEC’s guidelines. The SEC permits Amazon — and other massive corporations — to maintain a level of secrecy that should disqualify them from public trading. As Mitchell argues, SEC Chairman Gary Gensler should implement “new rules that more clearly define what constitutes a segment and limit the discretion granted to executives.”

Amazon exemplifies the dangers of unchecked monopoly power. As Yanis Varoufakis articulates in Technofeudalism, Amazon has evolved into a post-capitalist entity. It does not generate profits (income from selling goods); instead, it derives rents (fees charged to those seeking to profit).

Profits are the hallmark of a capitalist system, while rents characterize feudalism. Although Amazon appears to function as a marketplace with countless merchants offering products, a closer look reveals that all these vendors are entirely controlled by Amazon. The company dictates what can be sold, the pricing, and the visibility to customers, pocketing $0.45–$0.51 from every dollar spent. Amazon's “marketplace” resembles a cohesive store rather than a diverse flea market, akin to the interconnected shops on Disneyland’s Main Street, USA.

Furthermore, Amazon's tight grip over its sellers allows it to wield influence over its buyers. The company's search algorithms often suppress the best deals while promoting more expensive, lower-quality items from sellers willing to pay for higher visibility (which aren't truly ads but rather prioritized positions in search results).

This phenomenon illustrates “Amazon’s pricing paradox.” While the platform can assert that it offers affordable, quality goods, it generates $38 billion annually by relegating those good deals deep in search results. The average top search result on Amazon costs 29% more than the best available deal. To find the best price, consumers often have to navigate to the seventeenth item on the search result page.

For four decades, pro-monopoly economists have insisted that Amazon could never achieve monopoly power over both buyers and sellers. Today, however, Amazon exerts that influence so effectively that its junk-fee revenues alone surpass the total earnings of Bank of America. The narrative that these fees merely cover operational costs requires an almost unbelievable level of trust from the public. Unfortunately, there exists a group of seasoned, highly regarded economists who possess this level of trust and more.

Ultimately, a straightforward resolution to this debate exists: Amazon could comply with SEC regulations and disclose its profit and loss data for its e-commerce operations. I assure you, they are not concealing this information because they anticipate the public will be pleasantly surprised by the results.

For an essay-formatted version of this article, feel free to read or share it on my ad-free, tracker-free blog: https://pluralistic.net/2024/03/01/managerial-discretion/#junk-fees

Image: Doc Searls (modified) https://www.flickr.com/photos/docsearls/4863121221/ CC BY 2.0 https://creativecommons.org/licenses/by/2.0/