Amazon, Antitrust and the Chicago School
In a recent lawsuit, the Attorney General of Washington D.C. alleges that Amazon has violated federal antitrust laws by using price fixing to maintain monopoly power. The lawsuit states that Amazon uses contract provisions that punish third-party vendors if they either “set a price on a product or service that is lower than recent prices offered on or off Amazon”. While this can prevent price-gouging by third parties, the provision of the contract also allows for Amazon to punish third-party sellers if they offer a product for a cheaper price on another online retail website. Consequences for breaking this contract include relegating one’s product listing to a lower position among Amazon’s displayed products. The Attorney General argues that this price policy allows Amazon to maintain its monopoly by preventing rivals from lowering prices to cut into Amazon’s sizable market share.
In light of these antitrust developments, it is worthwhile to look at the modern framework of antitrust law that is enforced by courts, the Department of Justice (DOJ), and the Federal Trade Commission (FTC). Antitrust law in the United States began with the Sherman Antitrust Act in 1890, during a time in which large corporations dominated industries such as oil and steel. In response to the increased concentration of economic power and wealth, the Sherman Act banned any restraint on trade. This was later interpreted by the Supreme Court in Standard Oil v. United States to create the “rule of reason” doctrine to only prevent "unreasonable" restraints on trade.
The "rule of reason" doctrine attempts to determine the legality of given business arrangements by examining the positive and negative effects of a given agreement prior to determining whether it has violated the law. According to Continental T.V. Inc. v. GTE Sylvania, Inc., judges are called on to weigh “all of the circumstances of a case in deciding whether a restrictive practice should be prohibited”. This includes taking into account anything from the market share held by the company to its ability to use its monopoly power to create economies of scale. An issue with this doctrine is that the underlying economic rationale used to determine the legality of a given arrangement may differ according to each judge’s preferences and economic beliefs. Furthermore, the doctrine is vague regarding what standard should be enforced, thus making compliance with antitrust law difficult.
Following the passage of the Clayton Act of 1914, price discrimination that harmed competition became illegal. In the aftermath of its passage, the Supreme Court interpreted the Act to deem all price fixing as illegal per se. This was later overruled in Appalachian Coals v. United States by using the rule of reason to allow certain restraints on trade, such as permitting monopoly power. This was one such case in which attempted monopolisation of the coal industry was allowed in order to prevent unemployment and to protect a vulnerable industry during the Great Depression. The rule of reason was thus a tool to be used by the Supreme Court to determine economic policy in particular instances rather than maintaining a specific rule towards enforcing competition.
During the era when the rule of reason was the common judicial standard for courts enforcing the Sherman and Clayton Acts, criticism arose from lawyers and economists who were associated with the University of Chicago (this group’s ideology later became known as the Chicago School). Aaron Director, an economist at the University of Chicago Law School, began to influence the direction of antitrust law by criticising the current standards by which courts judged predatory pricing and vertical mergers. However, Director’s greatest influence on the Chicago School was his ability to generate skepticism about antitrust policy in his students who later went on to change American antitrust policy.
Robert Bork’s "The Antitrust Paradox" was even more influential in changing the mainstream antitrust jurisprudence of the time. Bork argued that the purpose of US antitrust legislation rooted in the Sherman Act was to protect consumer welfare rather than prevent businesses from gaining and maintaining a high market concentration. The Antitrust Paradox involved an application of economic analysis to antitrust law by stating that antitrust law should not target monopolies or oligopolies that increased efficiency since greater economic efficiency would necessarily create greater welfare for the consumer. The Supreme Court subsequently adopted Bork’s consumer welfare standard in Reiter v. Sonotone Corp., propelling the Chicago School into antitrust orthodoxy.
The Chicago School’s analysis of antitrust did not begin and end with The Antitrust Paradox but continued with the work of Frank Easterbrook, Richard Posner, and many other scholars. Easterbrook, in his famous article "The Limits of Antitrust", argued that the aim of antitrust law was to “perfect the operation of competitive markets”. Easterbrook’s argument is that this goal is misguided given that there is extensive cooperation inside and outside of firms which reduces competition within the market. Such cooperation can increase economic productivity, from which it is argued that consumers stand to benefit. The conclusion of this premise is that it is wrong for the law to determine which economic arrangements are legal and illegal. Courts that condemn beneficial practices risk losing the benefits to consumers. But when courts fail by permitting poor practice, the loss to society decreases in the long run as monopolies lose their power due to new entrants.
Easterbrook shifts his argument into providing a means by which courts should structure their opinions on antitrust cases. Firstly, courts should note that most forms of economic cooperation are beneficial so courts should not deter beneficial cooperation given the high costs of doing so. Secondly, the market is more likely to correct a monopoly more easily than it can correct judicial errors since there is “no automatic way to expunge mistaken decisions”. Thirdly, and following on from the second rule, the costs of an efficient or competitive firm being deemed illegal are higher than those of accidentally permitting a monopoly.
Additional inquiries made by courts are recommended by Easterbrook: whether the market power of a given firm can be undercut by rivals, whether markets can automatically drive out monopolies without legal intervention, whether almost all firms in a market use similar restraints on trade, and whether output and market share fall should a business use anticompetitive practices. Much like Robert Bork, Easterbrook tends towards the view that market efficiency is more likely than not to correct monopolistic practices without the use of the legal system.
While the Chicago School has been heavily criticised since the publication of The Antitrust Paradox, it is important to recognise its primary achievement in the realm of antitrust policy: having a clear economic standard by which lawyers and judges can determine cases without having to fall back on the far more subjective rule of reason standard.
If the courts apply the philosophy of the Chicago School to the Amazon case, the court must focus on the economics surrounding Amazon’s market share among US online retailers (if not the general retail market), whether Amazon's market share and output has fallen following the implementation of the third-party contract terms, and whether consumer welfare is inevitably harmed by the provisions.
The current lawsuit may well lead to the condemnation of Amazon based on its current dominance among online retailers as well as the likelihood that consumer welfare is in fact harmed by the alleged price inflation that follows from Amazon’s pricing policies. Alternatively, a Chicagoean analysis could render Amazon’s practices permissible so long as their economies of scale and position in the market create efficiencies that are passed on to consumers. Regardless of the outcome, the case will determine whether populist fears about corporations triumph, or whether the Chicago School’s hegemony remains.