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Who should antitrust protect? The case of Diapers.com

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Preparing for an informal session with some UK antitrust regulators last week, I had the opportunity to finally read Lina Khan’s widely-cited contribution to hipster antitrust, “Amazon’s Antitrust Paradox.” It’s quite a piece.

via REUTERS

Before discussing the article’s shortcomings — which are many and profound — let’s highlight some areas of general agreement. First, economies of scale and scope in network industries sometimes result in very big companies with high market shares (somehow defined). Second, such companies sometimes have both the incentive and ability to engage in exclusionary conduct that harms both competition and consumers, and they sometimes do.  Third, while antitrust enforcement is often effective in identifying and deterring such conduct — Microsoft comes to mind — it is far from perfect. We need to continue improving our understanding of competition in digital markets and refining antitrust doctrine and practice.

The antitrust hipsters take a much darker view. In their eyes, antitrust as currently practiced — a fusion of the Chicago School revolution of the 1950s-1980s and the post-Chicago counter-revolution of the 1990s-2000s — is woefully inadequate to address the problems caused by today’s “internet giants.” Such firms, they say, engage in a multitude of anticompetitive practices, like slanting search results to disadvantage competitors, monopolizing “big data” to gain an “unfair” advantage over competitors, and buying out potential competitors in “killer acquisitions,” all of which current antitrust laws have failed to prevent. For some hipsters, the solution is to ditch the economics-based consumer welfare standard at the core of the current consensus in favor of a “non-discrimination” rule; others say nothing short of “breaking them up” will do.

This is obviously a complex debate, but at its heart is a simple question: Who exactly should antitrust be trying to protect? Under the Chicago/post-Chicago synthesis, the answer is consumers: Mergers and business practices that make consumers worse off should be stopped or deterred, otherwise enforcers should stand aside. The hipsters take a different view: They seek to protect businesses, specifically smaller firms that might someday pose a competitive threat to current incumbents, even in the absence of evidence consumers would benefit.

To understand why this is a bad idea, consider the saga of Diapers.com, which plays a central role in Khan’s critique of Amazon. Diapers.com was started in 2005 by two New Jersey entrepreneurs, and within a few years had emerged as a successful online marketer of diapers and other baby products, even branching out into soaps (Soap.com) and beauty products (Beautybar.com). In 2009, Amazon expressed interest in buying the company, which had been renamed Quidsi. When its offer was rebuffed, Amazon proceeded to cut prices — predatory pricing, in Khan’s view. Quidsi proceeded to put itself up for sale and — despite receiving a higher offer from Walmart — ultimately accepted a bid from Amazon. (Khan says the owners accepted the lower Amazon offer “largely out of fear,” though she does not say what they were afraid of.) The deal was approved by the Federal Trade Commission (FTC). Khan says that was a mistake.

Indeed, Khan views the Diapers.com story as a classic combination of predatory pricing combined with a killer acquisition, casting Jeff Bezos as a modern-day John D. Rockefeller.  But from the perspective of consumers, it is hard to see a downside here, for two main reasons. First, Amazon’s conduct did not result in a diaper retailing monopoly. Far from it.  According to Khan, Amazon had about 43 percent of online sales in 2016, compared with Walmart at 23 percent and Target with 18 percent  — and since many people still buy diapers at the grocery store, real shares are far lower. (The diaper manufacturing market is far more concentrated: Kimberly Clark and Procter and Gamble together account for 80 percent of output.) Second, there is no evidence that Quidsi represented a meaningful threat to Amazon’s online dominance. The notion that Amazon bought Quidsi to shut down a disruptive competitor is farfetched at best — or so the Obama FTC apparently concluded.

In the end, Quidsi proved to be a bad investment for Amazon: After spending $545 million to buy the firm and operating it as a standalone business for more than six years, it announced in April 2017 it was shutting down all of Quidsi’s operations, Diapers.com included. In the meantime, Quidsi’s founders poured the proceeds of the Amazon sale into a new online retailer — Jet.com — which was purchased by Walmart in 2016 for $3.3 billion. Jet co-founder Marc Lore now runs Walmart’s e-commerce operations, and has said publicly that his goal is to surpass Amazon as the top online retailer. One recent report described the rivalry between the firms as “embittered” and noted that it “is reshaping how we’ll buy everything in the future.”

Far from demonstrating the shortcomings of current antitrust doctrine, the Diapers.com saga shows why focusing on protecting consumers rather than competitors remains the right approach. Consumers benefited twice: first because they were allowed to reap the benefit of Diapers.com’s entry, including lower prices from Amazon; second because Quidsi’s founders were rewarded for their entrepreneurship by the Amazon buy-out, which ultimately enabled them to create the platform that is now driving real competition in the online retailing space:  Jet, aka Walmart. And yes, they do sell diapers.

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