With the recent merger of Amazon and Whole Foods, some folks are concerned with Amazon’s rising monopoly power. I wouldn’t be so worried, though.
ICYMI: Wedding Bells for Amazon and Whole Foods
Amazon plunged into the grocery business when Whole Foods submitted to Amazon for $14 billion. Economically, the merger makes sense. The Prime Pantry and the physical store Amazon Go work in progress makes it clear that Amazon is trying to find a foothold in the supermarket industry.
At the same time, the organic food niche in which Whole Foods once dominated has now expanded to grocery giants like Walmart, Kroger and Costco. In other words, Whole Foods isn’t as niche as it once was. As a result, Whole Foods announced its sixth consecutive quarter of falling same-store sales in February. The dismal outlook for the high-end food store is also evident by its stock price, which dropped from $65 in 2013 to $30 in February of 2017.
Coincidentally, Amazon is trying to capture some of Walmart’s consumer base. Amazon recently released a press release stating that they would offer a heavily discounted Amazon Prime membership to people receiving government assistance. Now, Amazon Prime isn’t just for those highfalutin’ millennial kids.
From the looks of it, it won’t be long before Amazon’s founder and CEO Jeff Bezos will start sporting the iconic Monopoly monocle.
The reality of monopolies
Given the recent Twitter action and news articles, this merger has put monopoly power back at the center of the political world. But considering how the concept of monopoly is taught in our standard economics classes, it’s easy to see why Amazon is getting tons of heat. Here’s a textbook refresher:
A monopoly is characterized as a single seller, selling a unique product or service in the market. In a monopoly market, the seller faces no competition and therefore can raise prices of the good or service. As a result, the monopoly doesn’t have any incentive to produce better quality products and will limit the consumer’s options, aka the world goes to shit.
Here’s a new angle that most econ professors don’t teach you: Every business is a monopoly.
In the real world, every seller is selling a unique product or service. For example, even if a bunch of stores sold the same exact widget, there is something unique and different about the transaction. The store may be prettier or more convenient. The cashiers may be more welcoming or, maybe, they are more environmentally and socially conscious. There are a whole bunch of aspects that make every business a unique experience, which, by definition, makes them all monopolies.
The concern with monopolies, though, rises when consumers start getting the short end of the stick. This usually happens when governments grant businesses special privileges. Matthew Mitchell at the Mercatus Center lists a few in the book, The Pathology of Privilege.
- Direct subsidies, bailouts, protection from foreign competition and straight up giving businesses monopoly status
- Loan guarantees backed by taxpayers
- Tax subsidies
- Government contracting
- Patents and copyrights
- Government regulations
These tools, which aim to help businesses stay afloat or help the consumer, end up forcibly creating monopolies because they limit the amount of competition these businesses will face.
On the other hand, businesses that get bigger and bigger because of new innovations and bringing more value to consumers should be applauded. Since 1996, Amazon has continuously innovated all while increasing customer satisfaction. They have single-handedly transformed how the world shops for stuff, not because they forced us, but because we like it.
They have reduced the cost of shopping by having stuff delivered to our doorsteps. They allow pretty much anyone to sell stuff on their platform, offering consumers more options. All while personalizing the shopping experience.
Every business is striving to become the monopoly
We should all assume that every business in the world dreams of being a monopoly, except for the rare few that just want to “be their own boss.” If they can find a way to make more money, they will do it.
If there is a way to make more money by using a government granted privilege, they will most likely take it. Unfortunately, this is where consumers are most likely to be negatively affected.
But if they find a way to make more money by simply being better than the rest, then there is nothing bad about that. Additionally, they put the fire under the butts of their competitors to also find ways to bring more value to consumers.
Amazon seems to be doing just that and it’s awesome.
Previously posted at GenFKD.