It’s easy to ignore the Federal Trade Commission’s (“FTC”) case against Amazon (AMZN)…
After all, these types of lawsuits can drag on for years.
Plus, as investors, we have plenty of other things to focus on today. We need to watch interest rates, inflation, fears of a recession – and now, an evolving war in the Middle East.
Besides, some Wall Street experts already see this situation as a win-win for investors…
If Amazon wins, things will stay the same. And if the FTC wins, Amazon will likely get broken up. In that case, the parts could turn out to be worth more than the whole.
But the thing is… the FTC isn’t really trying to break up Amazon.
As I’ll explain today, this case is more about the government’s crusade against Big Tech…
These days, Big Tech is politically isolated. Both parties hate it – each for their own reasons.
And in short, the FTC wants Amazon to change some of its business practices. By that, I mean what the company (and Big Tech as a whole) did to get where it is today – and what it still does to stay there.
That’s why anyone who cares about Big Tech should take the FTC’s lawsuit seriously…
The FTC’s formal complaint redacted a lot of text to preserve confidentiality. But we can still see enough to figure out what it’s based on…
In short, the complaint centers around a January 2017 article that FTC Chair Lina Khan wrote in her final year at Yale Law School.
Now, it’s a thick article. It’s about 24,000 words long. But here are the basics…
Khan’s law-school paper started with the core idea that monopolies are illegal. She’s talking about companies that dominate a market – like Amazon and the online retail space.
The hard part is figuring out whether a monopoly truly exists…
Traditionally, the law looked at process – how companies get to where they’re at. And too much market concentration was frowned upon.
When a company controls too much of a market, it can easily block new entrants to the space. And it has huge bargaining power over its customers, suppliers, and even workers.
This idea is known as “economic structuralism.”
But throughout the 1970s and 1980s, economic structuralism lost favor. The legal community started focusing less on process. And instead, it looked to economic outcomes…
In other words, we can accept dominant firms as long as things work out well for customers. And a market-disrupting monopoly only exists if customers are paying more than they should.
Khan doesn’t buy that line of thinking. She wants to go back to focusing on the process.
More specifically, in her Yale Law School article, Khan cited examples from legislative history to show that the goal of antitrust isn’t “consumer welfare.” Instead, it’s about “diversity and access to markets.”
Going further, Khan bashed the current line of thinking as not promoting consumer welfare as well as its proponents claim…
She said low price isn’t the only thing that matters. As consumers, she argued that we also want “product quality, variety, and innovation.”
That’s where the FTC’s case gets complicated…
You see, Amazon responded almost immediately to the complaint. And General Counsel David Zapolsky suggested that Amazon features low prices and other non-price benefits.
Now, let’s assume that Amazon manages to prove it really does benefit consumers. Khan will want the court to then figure out…
- Is Amazon doing good because the market structure prevents it from doing bad?
- Or is Amazon just showing a pretty face – even though the market process would let it choose to misbehave (like a kid who messes up as soon as the parent turns away)?
The current line of thinking accepts No. 2. But Khan and the FTC want No. 1 to once again help us decide whether a company is a monopoly or not.
An FTC victory could prevent Amazon’s search results from burying sellers who sell their goods for cheaper elsewhere. And sellers who forgo Amazon’s costly shipping services might not lose their Prime eligibility.
In the end, the FTC’s lawsuit isn’t an immediate crisis for shareholders.
But as the case carries on, we’ll need to keep our eyes on the Power Gauge’s Experts and Technicals categories for Amazon. They’ll show us how the market is reacting to everything.
Good investing,
Marc Gerstein
