John Locke Update / Research Brief

President Attacks Consumers with Amazon Tweet

posted on in Economic Growth & Development, Fiscal Insight, Spending & Taxes
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“Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt – many jobs being lost!” – President Donald Trump

Setting aside the fact that Amazon is itself a “tax paying retailer,” in a free market no company has any power to “harm” cities and states or cause “many jobs” to be “lost.” Only paying customers have that power. President Trump’s view of the impact of Amazon on retail markets, like his views on imports and foreign trade, demonstrates a profound lack of understanding about how markets work and what is the driving force behind the acquisition of market share. He ignores the centrality of sovereign consumer choice in markets and the ultimate purpose of production in a free market.

If the presence of Amazon offering products to consumers in the marketplace is causing the loss of customers and business for brick and mortar retailers like Macy’s or Best Buy or now, with the purchase of Whole Foods, possibly numerous grocery store chains, it is the result of one thing – consumers accepting those offers. And they are doing so because they feel that what Amazon is offering them makes them better off than the offers presented to them by Amazon’s competitors.

The power to satisfy customers to a greater degree than its competitors is the only power that Amazon can exercise in the market. But ultimately, it’s the customers’ choice. If consumers prefer to pay higher prices or shop for their products in less convenient ways to keep their local retail store in business and the people in their communities working for those stores employed in those occupations, they are free to do so. There is nothing Amazon can do to stop them.

In a free market, without cronyism and protectionist laws, the only way Amazon, or any other business, can gain market share is to offer consumers a product or a deal that they prefer more than their alternatives. In fact, that’s what market share is: the percentage of customers that choose a particular business relative to other businesses that they have available to them.

In tweeting what he did, the president is, in fact, complaining that Amazon is too good at serving its customers and that those customers, in choosing to make their purchases through Amazon rather than the local Best Buy or Macy’s department store, somehow needs to be punished. Any penalties that might be placed on Amazon to force them to behave differently, possibly through antitrust action, as some have suggested, are in reality an attack on the free choices made by Amazon’s customers.

But one might ask, what about the possibility that Amazon gains so much market share that it becomes a monopoly and, in true monopolistic fashion, raises its prices and starts treating those same consumers poorly. This is the classic myth of predatory pricing. It is a myth because, while people generally believe that it can and does happen, there is not a single case in business or antitrust history (including the Rockefeller Trust) where this has actually occurred.

There is a reason for this. In an open market where there are no legal barriers to market entry, one business’s mistreatment of customers is another business’s profit opportunity. If Amazon gained a very large market share in any one product, or in all the products it sells, without erecting legal barriers to entry, the only way it can maintain that market share is by continuing to do what it had been doing to gain it in the first place.

We, consumers, are fickle. If someone we are doing business with begins to treat us poorly, we immediately start looking for other opportunities. The world is full of profit hungry entrepreneurs who are constantly on the lookout for ways to “steal” other businesses’ customers, i.e. to convince them to change their allegiances and purchasing habits.  If Amazon begins to behave toward their customers in ways that were inconsistent with what got them their market share in the first place, for example, packages started arriving late, their prices shot up, their web site stopped working properly, no matter how big that market share was, they would lose it pretty quickly, if not to a company that is already in the market, to entrepreneurs waiting for the opportunity to get it and prove their worth with consumers.

The point here is that it is customers that are in charge and there’s not much Amazon, or any other company can do about that, other than make sure those consumers are happy.  So, when the President complains about the effects of Amazon on local brick and mortar businesses and, consequently, employment in those business, he is showing his displeasure with the choices made by American consumers. Of course, to say that explicitly would be bad politics. It is much easier to attack one of the largest businesses in the world than it is to attack those who are really calling the shots, “little guy” customers.

Roy Cordato is Senior Economist and Resident Scholar at the John Locke Foundation. From January 2001 to March 2017, he held the position of Vice President for Research at the Locke Foundation. He is also an adjunct faculty member in… ...

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