by Samili Marathe
Amazon’s recent acquisition of Whole Foods has made people question whether Amazon is a monopoly. Venturing into a $700 billion grocery-store business, Amazon has expanded its retailing business into a whole new territory. It already vends items like shoes, clothes, electronics, cleaning supplies and video streaming services. Jeff Bezos’s, its founder, net worth is almost a whopping sum of $100 billion. All of this clearly makes Amazon appear as an intimidator, a hegemonic firm dominating the retail market. However, conceptualizing Amazon as a monopoly is simply absurd because it ignores the basic premise of monopolies and consumer behavior.
Amazon could be characterized as a natural monopoly, meaning that it originated with a high startup cost, but eventually incurred low marginal costs as its volume of output increased. Unlike a traditional monopoly, a natural monopoly does not necessarily mean that only one firm is providing the good or service to the market. It simply suggests that the provision of the same good by multiple firms may be inefficient. However, Amazon is not a natural monopoly, evident with an increasing number of companies like Jet, recently purchased by Walmart, Walmart itself and Target, expanding their services and creating a competitive environment to an Amazon-like method of online shopping. The numbers also indicate this. The total U.S. retail revenue in 2016, excluding auto, auto parts and food services, amounted to $3.7 trillion, out of which Amazon’s constituted only $135 billion. Even by adding Whole Foods’ $16 billion sales to Amazons’, the total contribution to the annual U.S. retail revenue is insignificant, compared to Walmart which brought in almost $500 billion.
Critics declaring Amazon to be a monopoly ignore the role of consumer purchasing behavior. Monopolists can charge prices higher than the market price, knowing that there is an absence of competition, which is unlike Amazon’s practice. This means that consumers have a choice of whether to purchase an item for a certain price from Amazon, or from its competitor. I recently bought the new iPhone 8 and wanted to purchase a case for it. After comparing prices for the same case on Amazon and Best Buy, I decided to buy it from Best Buy. Not only was the price of the case itself cheaper, but Best Buy also offered free shipping, which Amazon did not without Prime, for the same number of delivery days. Not every buyer will go to a competitor and compare prices, like myself, and would be willing to pay extra either for the shipping or the benefits that Prime offers. This is the exact point that demonstrates how Amazon is not a monopoly. Each consumer has a maximum willingness to pay, and some will opt to pay a higher price for better benefits, a choice-making behavior missing when monopolists are in power.
Although Amazon is not a monopoly currently, its consistent rapid financial growth suggests that it may surpass Walmart in size within the next 10 years or sooner. In this case, what can be done to reduce its potential hegemony in future markets? The first option could be splitting the firm up into two or more smaller firms. However, this would result in an increased average total cost of production or supply born by the two smaller firms. The outcome would be an inefficient economic production or supply and would not encourage competition. Another solution could be the government implementing a price cap that the firm can charge for a specific time period. This has the benefit of improving the allocation efficiency of goods. Yet, this would not be successful for a firm like Amazon, which sells thousands of different goods from external producers. It may also mean that the firm could lower the quality of service to retain maximum profits.
Overall, Amazon may be a financially powerful company, but this does not make it a monopoly. It constantly faces fierce competition from rival firms, like Walmart, and makes a relatively small contribution towards the total U.S. retail revenue, even with the Whole Foods acquisition. Individuals who suggest otherwise should rethink fast.