The Effects of Consolidation on the Economy

Amazon recently bought Whole Foods, following a pro-forma approval by the Federal Trade Commission. Amazon touted its plans to cut prices on popular items on the very day the merger closed, and it advertised those discounts as resulting from the merger. It was as though the company had concocted a plan to ensure any ex-post analysis of the effect of the merger would conclude it was pro-competitive, under the standard employed by current antitrust policy.

Indeed, Amazon has that standard baked into its DNA, so to speak: reduce prices to consumers, and all sins are forgiven.

The problem is that current antitrust policy has manifestly failed to keep the economy competitive. Corporate profits have tripled since 1980, from 5% of the economy to 15%. Corporate investment, on the other hand, is anomalously low, leading to what economists have come to call “secular stagnation.” These two phenomena create a puzzle in a capitalist economy, because when profits are high, corporations are supposed to invest in order to take advantage of those opportunities. Or if existing corporations do not, new entrants see an opening to steal market share from complacent incumbents.

That isn’t happening, and it’s a big problem. Even Goldman Sachs said so: “If… high profit margins manage to endure for the next few years (particularly when global demand growth is below trend), there are broader questions to be asked about the efficacy of capitalism.”

We’re all living with the consequences: income and wealth inequality higher than they’ve been in a hundred years, wage stagnation, declining entrepreneurship and business dynamism, and slow economic growth. And it’s no accident how we got here: Once-stringent antitrust policy weakened, under an ideologically-motivated assault that replaced a mission to counter market power—wherever in the economy it was to be found—with a far narrower one that finds excuses to let powerful corporations do what they want, under mistaken theories about how whatever that happens to be benefits consumers.

Today, I want to use the Amazon-Whole Foods merger to illustrate the shortcomings of the existing antitrust policy.

First of all, consumers supposedly benefit from low prices. But mere weeks later, Amazon announced that Whole Foods vendors would no longer be allowed to sell or market their goods in the supermarkets. Instead, it would be up to Amazon to decide how product lines are priced and positioned, and to which ones customers would be directed. This is a strategy that Amazon has perfected on its online platform, with its “buy box” and mysterious algorithm ranking search results and selecting prices. Instead of having access to, and competing for, customers, small businesses and other suppliers are at Amazon’s mercy when it comes to marketing their products.

And Amazon is not a neutral party, because it is itself vertically integrated. Amazon has countless retail product lines—and some of them are even secret! The restrictions imposed on the Whole Foods stores, vis-à-vis supplier access, will presumably not be imposed on Amazon itself: It will have unfettered access to consumers, and it will stock the Whole Foods supermarkets in such a way that its products get prime real estate. The dangers of vertical integration have been consistently underestimated by the current antitrust regime, to the point that they nearly always approve vertical mergers, sometimes with ineffective conditions, but often, as with Amazon-Whole Foods, without any conditions at all. This invites the sort of exclusionary behavior toward unaffiliated suppliers that Amazon announced it would put in place at Whole Foods and has repeatedly done to book publishers, apparel manufacturers, and many others. The inability of small businesses to access customers is a core reason for the decline in small business activity over the last several decades.

Whole Foods also already had in place non-compete clauses restricting the ability of its employees to leave for a job with one of its suppliers—thus restricting them from making use of what they learn on the job. Whole Foods supermarkets are busy places where high-value customers congregate and are used to spending a great deal of money. Those noncompete clauses prevent employees from using the knowledge and relationships they’ve gained from working in that kind of environment to further their careers. And in combination with the restricted access to Whole Foods stores that Amazon recently announced, the noncompete policy will make job offers increasingly hard to come by for Whole Foods employees—which in turn prevents them from negotiating wage increases in their current positions.

Noncompete clauses have garnered increased attention recently as potentially in violation of antitrust laws, and that attention is warranted—there really is no good reason for them, other than to transfer power from workers to their bosses. But they are also symptomatic of a larger decline in worker power, and that too is an antitrust problem.

Finally, the other big piece of Amazon news in the last months has been their request for proposals from cities seeking to host the company’s second headquarters. In return for the privilege, Amazon wants tax exemptions and public spending on infrastructure and amenities to service that headquarters and its workforce. Given that local economic development policy has devolved to this kind of race to the bottom, it is very likely Amazon will get what it wants. But at what cost? We know that such “incentive” schemes and the burdens they place on municipal government were at the heart of the problem of over-policing in Ferguson, Missouri and elsewhere. In need of revenue to service tax-exempted corporate citizens and their upscale workforce, towns and cities place the burden of government on a much less mobile and empowered population, with humiliating and sometimes violent results.

Squeezed supply chains, disempowered workers, over-policing: These are all issues that have been at the forefront of public concern and debate in recent years. And all of them can be traced to the consolidation of corporate power—which is in turn the direct result of an ideological revolution in antitrust enforcement. It’s time for a wholesale rethink, and so I look forward to today’s discussion.