Economics Series Part 1: Why Taxing Amazon Would Be Bad For All Of Us

When the average American logs onto to make a purchase, rarely do they think about the company’s supposed economic influence or control over the economy. Does Amazon carry an unfair advantage over its competition? And although it creates lower prices for shoppers, should its business model be regulated to curtail its economic influence? One voice which is causing a stir in this topic on antitrust is Lina Khan. Her work on the issue was recently discussed in an article in The New York Times (NYT) titled: Amazon’s Antitrust Antagonist Has a Breakthrough Idea. Ms. Khan, as she is referred to throughout the NYT article, is a graduate of Yale Law School. There, she first became interested in the antitrust debate.

Two Schools of Thought

Historically, there are two schools of thought on antitrust laws. On one hand, some believe that the government should focus antitrust laws. They believe that this is in the best interest of the consumer (i.e. lower prices and better efficiency). On the other hand, there are those like Ms. Khan, who suggest that focusing only on lower prices for consumers is a “short-sighted view” of antitrust regulation. They believe that government should instead limit a corporation’s economic power. I’ll highlight Ms. Khan’s argument for the latter view, and contrast that with my own opinion. Before we can delve into the debate, let’s learn about Amazon.

What is Amazon?

Amazon is an online commerce company. Jeff Bezos founded it in 1994. Amazon sells products literally from A to Z (as the arrow in its logo suggests). Amazon employs more than 500,000 employees. It is a big company with over 170 billion dollars in revenue in 2017. They also offer some of the lowest prices in each of the product categories in which it competes. Many retailers do business on Amazon as well. Amazon uses its platform and influence to sell their own merchandise. Moreover, Amazon produces movies, TV shows, and consumer products such as the Kindle, Fire TV, and Echo. The company has evolved from an idea which began in someone’s head to such a powerhouse. I believe that Amazon should be celebrated for the great American success story that it is.

What are some of Ms. Khan’s objections?

The NYT article lists a number of Ms. Khan’s reasons why Amazon’s influence should be stymied. The main crux of her argument is that Amazon “undermines fair competition”. It owns the platform that many of its competitors also depend on to do business, namely its online presence. Ms. Khan also argues that Amazon enjoys an unfair advantage from “its shipping and warehouse infrastructure”. She goes on to argue that Amazon, therefore, is limiting innovation, product quality, and variety.

An Economic View

When viewed from a philosophical viewpoint, these arguments may sound logical, but they don’t hold water from an economic viewpoint. We will look at production function, which is a measure of the economy’s value of total potential output or Growth Domestic Product (GDP). This is based on three important inputs: quality of labor in the workforce, capital, and technological innovation. The equation looks like this:

Production function = (labor) + (capital) + (technology) 

The government has an interest in ensuring that these three inputs are always in good standing. This is why there is so much focus, for example, on keeping the unemployment rate low.

Three Reasons Antitrust Regulations Would Not be a Good Idea

First: Antitrust regulations would lead to massive job loss at Amazon. This would negatively impact the economy’s GDP. See formula above. The NYT article makes reference to A&P. A&P was a strong supermarket chain that was targeted 60 years ago by antitrust laws because of its size and strong competitive advantage. This attack placed a lot of undue restraints on A&P. I don’t think it’s a coincidence that, not too long ago, A&P went bankrupt. Amazon might not go bankrupt if it were targeted as well.

However, many of the half million people would lose their jobs if Amazon got handcuffed by the antitrust police. As Amazon grows, the Principle of Increasing Costs necessitates that it grows its workforce as well. The opposite holds if Amazon shrinks. The company started with one employee 24 years ago. Today it has over half a million people on its payroll. Restricting Amazon’s growth would consequently place many of those people out of work.

Second: Antitrust regulations would reduce Amazon’s capital investments, further impacting the GDP. Not much needs to be said on this issue because the logic is simple. If Amazon doesn’t have an incentive to grow, it won’t invest more capital that will increase growth. The loss of capital investment leads to reduced efficiency. Ultimately, this will decrease their total output by the economy. Government interventions, though well-intentioned, cannot thwart the regular workings of economics.

Third: Perhaps most dangerously, antitrust regulations will limit technological innovations at Amazon. This, again impacts the GDP. Ms. Khan argues that Amazon limits product quality, variety, and innovation. These three have been at the center of its mission for more than 20 years. 20 years ago, one could only take a couple of books on a flight to save room in the suitcase.

Today, I can carry hundreds of books in my back pocket, thanks to the Kindle—that’s product quality! Today, someone can order a computer on Amazon and have it delivered to them the very same day—that’s innovation! And if I’m in an eclectic mood, I can get a book, groceries, a shirt, and download a movie simultaneously. This is just with a click of a button—that’s product variety! Given these facts, Ms. Khan’s claim is unfounded.

Antitrust Implications

Those who support Ms. Khan’s call for tighter antitrust regulations against Amazon, often point to its competitors. They believe that its competitors are victims of its behemoth-like presence. It is true that some companies have been made obsolete by Amazon. However, that is not a reason to punish it. Companies go in and out of business all the time. It is part of the risk of doing business in a free market environment. At the end of the day, the consumers decide which company deserves their hard earned dollars. Any company must be innovative to retain a large share of the consumer’s buying decision.

Ms. Khan’s arguments are misleading because they do not find their foundation in economic theory. We have to understand the economic implications of further antitrust regulations on Amazon. By doing so, we will see that further antitrust encroachment is not the way to go. Instead, I believe that other companies should study Amazon for the best practices that it offers. By doing so, the competition, which today might complain of Amazon’s “unfair influence”, might be able to find ways to set themselves apart from their rival.

Take a look at other posts in this series: 
Economics Series Part 2: Companies Brace for Impact Ahead of U.K’s Brexit
Economics Series Part 3: President Trump and The Federal Reserve are Going Head-to-Head. Here’s Why.
Why Am I Writing about Economics in a Leadership Blog?

-Led by the Book