Amazon Under Fire: Is Antitrust Action Likely?

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Wharton's Daniel Raff and William K. Black of University of Missouri-Kansas City discuss whether Amazon could face antirust action.

Recently, Seattle-based online retail giant Amazon has faced a series of accusations by President Trump about its business practices. But despite the targeting, the company would likely survive any attempts to bring antitrust action against it, experts say.  

In his tweets over the past week or so, Trump has accused Amazon of saving on shipping costs through low-priced deals with the U.S. Postal Service and causing the latter to lose money. He has also attacked The Washington Post newspaper, which Amazon founder and CEO Jeff Bezos owns.  

In his first tweet on March 29, he accused Amazon of “putting many thousands of retailers out of business.” Two days later, he cited reports to say that the USPS loses $1.50 on average for each package it delivers for Amazon. Minutes later came another tweet that if the USPS increased its parcel rates, Amazon’s shipping costs would rise by $2.6 billion. Over the next week, he rejected arguments that the USPS makes money from its deal with Amazon; described the USPS as Amazon’s delivery boy; and called The Washington Post Amazon’s chief lobbyist.  

“Mr. Trump sees Mr. Bezos’s hand in newspaper coverage he dislikes and is lashing out at Amazon as a proxy,” The Wall Street Journal reported on Friday, citing White House officials. Ahead of Trump’s Amazon tweets, the news site Axios had reported that Trump is planning “to go after Amazon with antitrust or competition law.” Amazon’s stock price shed 14% over five days after the tweets, falling to $1,360 on April 2, but it has since recovered to $1,440 in Friday early trading.

“The Department of Justice … owes its allegiance not to the White House but to the body of statutory and case law of the United States of America.” Daniel Raff

USPS incurred a net loss of $2.7 billion on $69.6 billion in revenue in fiscal year 2017, but “without Amazon’s business, [that] financial picture … would most likely be bleaker,” according to a New York Times report. Most of  that net loss, or $2.4 billion, was on account of changes in interest rates, a factor that was outside the control of the Postal Service.

Knowledge@Wharton spoke to Wharton professor of operations, information and decisions Gerard Cachon, Wharton management professor Daniel Raff and William K. Black, associate professor of economics and law at the University of Missouri-Kansas City School of Law, about what lies ahead for Amazon. Raff and Black shared their views on the Knowledge@Wharton show on SiriusXM channel 111. (Listen to the full podcast using the player at the top of this page.)

Following are key takeaways from the conversation.

How Vulnerable Is Amazon to Antitrust Action?

“I don’t see any merit to the argument that Amazon is disproportionally benefitting from its use of USPS,” said Cachon. He also noted that Amazon does not have  preferential  access to USPS services.

According to Black, Trump is unlikely to succeed in his efforts to make antitrust charges stick on Amazon, even as he has had “some degree of successful influence on the Department of Justice,” such as in firing and hiring of the director of the Federal Bureau of Investigation.

“The Department of Justice … owes its allegiance not to the White House but to the body of statutory and case law of the United States of America,” said Raff. He noted that DOJ officials “take their independence, and their responsibility, very seriously.”  

The Wall Street Journal reported that for a company to be found violating antitrust laws, it has to be dominant in one market or be hurting consumers —“neither of which experts think currently apply to Amazon.” It also pointed out that although Amazon has 43% of the U.S. e-commerce market, it is still less than 4% of total U.S. retail, citing data from eMarketer.

“Amazon’s best strategy doesn’t involve changing its business model one iota.” –Gerard Cachon

“If [Trump] persists in [targeting Amazon and Bezos], he will really upset the business community, which is one of his natural allies,” said Black. “Ultimately, he’s going to back off, declare victory and go home, and the Amazon stock will do pretty much whatever [it would] have done anyway.”  

Time to Revisit USPS Finances

Cachon agreed that current controversy could help the USPS reinvent itself to be more profitable. “First, the President  should be briefed as to why USPS struggles to be profitable,” he said. He pointed out that in particular, the USPS doesn’t have control over the pricing of its services, what services it can offer and where it can offer them. “Congress hamstrings USPS with many rules and regulations,” he explained.  

Secondly, email and the internet have significantly reduced the amount of letter traffic, Cachon said. “Amazon is neither responsible for the regulations or the use of the internet for paying bills,” he added. “If anything,  Amazon supports USPS by providing it with valuable package delivery.” 

“Nobody twisted the arm of Post Office to make them agree to sign a contract with this particularly large customer,” said Raff. “They seem to have thought it in their financial interest to do so. And if they are at an operating loss in doing this, the natural thing to do isn’t to yell at Amazon, but to ask the Post Office why they thought it was such a good idea to sign the contract.”

In fact, unlike a typical government agency, the USPS “receives NO tax dollars for operating expenses,” as it notes on its own website, and instead relies on the sale of “postage, products and services to fund its operations,” according to a Time magazine report. Much of the losses the USPS incurs are because of a 2006 law that requires it to pre-fund future retirees’ health benefits, the report added.

Amazon’s Options

Thus far, Amazon and Bezos have preferred to be silent on the controversy. “The President has a beef with Amazon because its CEO, Jeff Bezos, owns The Washington Post,” said Cachon. “Amazon’s best strategy doesn’t involve changing its business model one iota,” he advised.  

“If [Trump] persists in [targeting Amazon and Bezos], he will really upset the business community, which is one of his natural allies.” –William K. Black

Instead, Amazon should respond by  providing information to the public about how it contributes “in positive ways to USPS in particular and society as a whole,” said Cachon. “If ExxonMobil can pull off a campaign that suggests they are leading the way with clean energy, then Amazon can surely convince the public that it offers more good than harm.” 

Amazon’s Tax Breaks, Thanks to Trump

Trump’s claim that Amazon doesn’t pay state and local taxes “used to be true, but is [now] overwhelmingly not true,” said Black. In fact, Amazon saves on taxes because of the Trump administration’s tax cuts, he added. Amazon didn’t pay any federal taxes in 2017, and has said in a regulatory filing that the Trump tax cut from 35% to 21% helped it record a tax benefit of $789 million for the year.

Amazon would also benefit from incentives that various states have offered to attract the company’s proposed second headquarters location. “Amazon has created this massive national competition for its next headquarters, and most assuredly it is looking for enormous concessions,” said Black. “But it’s an absolutely normal thing, and to single out Amazon is weird.”  

Raff noted that Amazon is reportedly hiring some 30,000 computer science/programming people a year, and high real estate prices in Seattle means it cannot possibly locate all of them there, which is why it is looking for a second headquarters location.

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