Why Amazon monopoly accusations deserve a closer look by Roger Lowenstein @FortuneMagazine July 23, 2015, 12:25 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons It must be a sign of success—Amazon is being accused of monopoly behavior by its industry partners, in this case groups representing authors, agents and booksellers. As with other one-time high-tech leaders (IBM, Microsoft, Google) Amazon’s dominant market share suddenly seems too much. In letters to the Justice Department, the authors’ and retailers’ groups claim that Amazon is squeezing publishers, punishing writers, driving bookstores out of business—and violating antitrust laws. They want Justice to investigate. Is there anything to their arguments? Charges against Amazon AMZN (now celebrating the 20th anniversary of its start-up as a dot-com phenomenon, and due to announce even more soaring sales growth today in their quarterly earnings report) will not surprise anyone with even a passing interest in the book industry. Bookstores are failing and book prices and authors’ royalties have been squeezed by Amazon’s relentless efforts to drive prices lower. But wait a second: Isn’t that what business is supposed to do—compete to lower prices? Not necessarily, according to the Authors Guild, the American Booksellers Association, and several other groups. In multiple letters, the complainants contend that Amazon is “generating fear among many authors,” and that it has used its marketplace clout to “harm the interests of America’s readers, impoverish the book industry as a whole, and impede the free flow of ideas in our society.” We’ll let the last bit pass; the fear that media concentration would shackle free expression was rife when the nightly news was controlled by the three television networks (remember them?) and it has been hurled at every big information distributor since. Digital communications, of which Amazon is a subset, may be accused of many things, but impeding the flow of ideas isn’t one of them. As for sowing fear among authors, this is palpably true. I earn my living primarily from selling books, and I much preferred the landscape as it existed earlier in my career, when bookstores were (or seemed to be) healthier and more numerous. Although the casual impression that bookstores are disappearing en masse is incorrect – there are 2,227 bookstores in the U.S., more than at the end of the 2009 recession, and their share of the printed book market has held steady, according to the American Booksellers Association – the total is down from the 1990s. And Amazon, which sells more than a third of new physical books and an estimated two-thirds of e-books, dominates the market. The Authors Guild, whose officers include such luminaries as Judy Blume and Richard Russo, thinks this is bad for readers. Concentration in retailing encourages the sales of fewer and bigger titles. Squeezing profits from the book trade is making it more difficult for traditional publishers to supply the superior editing, marketing, and guidance that authors rightly crave. I share the Guild’s biases, or rather I share its cultural preferences. I would prefer to see more independent and edgy bookstore-cafes unsullied by the influence of Silicon Valley and run, as it were, by one-time English majors nurturing a readerly clientele of university professors, literary-minded artisans, orchid growers and philosophically minded baristas. Also, I would prefer that not so many people shopped at Walmart; come to think of it, I would prefer that the Internet shut down for two hours every evening during which interlude people’s only diversion would be listening to Mozart and reading books. Popular tastes, we’ll admit, are gauche. James Patterson will sell more volumes than James Baldwin. That said, publication of traditional books is close to an all-time high, and an awful lot of good ones find their way to readers. We can argue about Amazon’s merits, but antitrust is not intended to protect some people’s cultural preferences, much less the lifestyles and professional habits of publishers and writers. Culture may be created in the loft, but it is underwritten in the marketplace. Antitrust answers to the welfare of consumers in that marketplace. You can get a good idea of antitrust’s purpose by looking at the airline industry, where regulators have mistakenly permitted a succession of ill-advised mergers. A generation of lax antitrust enforcement has resulted in higher fares and fewer choices for consumers as well as elimination of meals, not to mention a growing list of fees imposed for checked luggage, ticket changes and, as it were, each additional inch of legroom. This is classic monopolistic (or oligopolistic) behavior, and consumers have suffered. Should the law protect mom and pop? For a period after World War II, aside from protecting consumers, American antitrust also embraced an alternative mission: protecting small retailers, such as grocers under competitive assault from supermarket chains. Protecting moms-and-pops had a partly political—even a cultural – rationale. People liked having smaller stores around. (Who wouldn’t?) At its height in the 1960s, the hostility to bigness was so pronounced that even a proposed merger of supermarkets each with single-digit market shares was blocked. However, since the 1970s, the dual mission has been renounced—by most scholars and by the courts. Essentially, the agendas were seen to be in conflict. If you want antitrust law to foster competition to deliver lower prices, and Walmart does so, you can’t also expect antitrust to inhibit Walmart in favor of smaller and pricier competitors. (The forum for that could be a local city council, through zoning laws.) Antitrust has reverted to its economic mission of protecting consumers. Scrutiny of Amazon should be all about one question: Is it harming readers, or rather, is it harming book buyers, as buyers see it? Amazon’s antagonists make multiple economic claims. One is that, in effect, Amazon is charging too little. There is a familiar antitrust story of would-be monopolists charging below cost, driving competitors out of business and then gouging customers. But actual examples of this behavior, notes Michael Carrier, an antitrust expert at Rutgers School of Law, are extremely rare. Standard Oil, one of the most notorious monopolists in history, may have used low prices to drive rivals out of business, but the brunt of the evidence suggests that it then solidified its hold on markets by keeping prices low. In any case, Carrier notes, courts require that a plaintiff demonstrate both stages of the predatory cycle–price-cutting, followed by price-gouging. It’s not enough to say, “Amazon is charging so little that rivals are folding and therefore someday Amazon may charge more.” The trouble with e-book domination The more intriguing case against Amazon concerns its behavior not as a seller but as a buyer, specifically in the e-book market. Amazon has driven very hard bargains with e-book publishers, mainly with the aim of depressing prices. During a long-running battle with Hachette, Amazon made it difficult for consumers to buy Hachette books. E-books of other publishers (including, for a while, mine) have also been blocked from Amazon’s site. The books were available on other venues, of course. Amazon’s position, in effect, is that just as a big retailer (say, a supermarket) is entitled to bargain hard with suppliers, so is Amazon. And just as the supermarket doesn’t have to carry goods it considers over-priced (or unappealing for any reason), Amazon is free to offer, or not, products as it chooses. However, Amazon’s estimated two-thirds share of the e-book market approaches the level at which regulators worry about market control. In this case, the potential abuse would come from monopsony–that is, being the dominant buyer. “One point is crucial to show abuse of monopsony power,” says Carrier, “which is, are they doing something that [from a normal economic standpoint] doesn’t make sense?” Delisting books does, indeed, raise that red flag—because delisting causes Amazon to forego (at least in the short-term) profit. “If it sacrifices profits that’s a pretty good indicator there are concerns,” Carrier says. That said, it is still a long way from an airtight case. Amazon, naturally, would counter with its reasons for delisting books. If a publisher wanted, say, to charge $100 for a run-of-the-mill novel, Amazon, presumably, would be within its rights to refuse to list it on sensible economic grounds. So then the case boils down to a very difficult, in-the-weeds inquiry as to whether Amazon is behaving as a sensible (albeit, aggressive) competitor or a manipulative monopsonist. Courts are naturally hesitant to try to make such decisions. Larry White, a professor at NYU, doubts that the Department of Justice will pay serious attention even on the monopsony claim. “Two-thirds share by itself is not an antitrust problem,” he says; It becomes one “only if it became the basis for Amazon increasing the price of e-books.” And Amazon hasn’t done that. In general, Amazon’s low prices represent capitalism at its competitive and often destructive best. The cultural claims are no claims at all. But delisting smacks, as Carrier puts it, of questionable and perhaps anticompetitive behavior. And one could argue that delisting, itself, harmed consumers, because it narrowed their choices on the dominant e-book platform. On the limited charge of abusing its e-book monopsony, the Justice Department would do well to give Amazon a second look.