Let’s say that I do indeed come up with a better mousetrap resulting in market dominance. Or perhaps I’ve begged, borrowed, and stolen kernels and fragments of existing software to produce a computer operating system that, for accidental reasons, becomes the default OS of choice. If I become so large that I can dictate the price you pay for a mousetrap or an operating system because I have no competitors, the federal government steps in. Monopolies are considered illegal in the U.S., even if some escape prosecution.

Now we’ll explore a different situation. I have in mind Amazon. It began with books. Remember? But that was so long ago. Today, Amazon sells almost anything. And it does so with such remarkable convenience to the consumer, that “going out shopping” has disappeared from the lexicon. Now we click, and click some more.

Amazon, if you hadn’t been paying attention, doesn’t make all that much money as the world’s largest retailer. Heck, it even sells many products at a loss (source for graph below):

Amazon net income 2009 to 2013

Yet, despite very modest net income, investors have actually bet large on the company. Why? I think it has everything to do with eventual, if not already present, monopsony.

The dictionary defines ‘monopsony’ as “a market with only one buyer.” While Amazon sells a whole lot of stuff, enough to make it the dominant player in book selling, for instance—by virtue of that dominance it is now in a position to dictate the terms and conditions with book publishers, since it has become the largest buyer of books.

Obama’s Justice Department, it seems, couldn’t grasp this phenomenon. Previous administrations went after Microsoft and, nearly a century ago, broke up the oil monopoly and giant holding companies. Obama, instead of paying close attention to Jeff Bezos, decided that Apple was the larger threat, when it championed an agency model patterned after iTunes and its App Store.

An attorney who wrote a brief friendly to Apple’s defense penned an op-ed for the New York Times. He argues:

…When a company has dominant market power and sells goods for below marginal cost, it is engaging in predatory pricing, a violation of federal antitrust laws.

What was to be done? Fortunately, in early 2010, a natural market solution presented itself: the introduction of the iPad and Apple’s entry into the e-book market. At Apple’s suggestion, the major book publishers were persuaded to change their e-book business model to reflect how Apple had been selling its popular apps for the iPhone. Under the app model, the publisher sets the price, not Apple or Amazon — with the e-retailer keeping a 30 percent commission. Here, price competition does not go away; it just moves from the e-retailer to the app developers, book publishers and authors.

All was well until the Justice Department, supported by a white paper supplied to it by Amazon, filed an ill-advised lawsuit against Apple and five of the major book publishers for antitrust violations. The publishers were charged with “price fixing” — but not for fixing prices: Not a single e-book price was fixed by the conspiracy contrived by the government. All the publishers did, as I argued in a friend-of-the-court brief at the time, was to move to the lawful app store model, which eliminated Amazon’s self-serving distortion of the e-book market [my emphasis].

Bob Kohn, the lawyer who authored the above excerpt, believes that Amazon created a monopsony in book selling, and that the publishers fought back using Apple and its purchasing model. But a judge sided with the Justice Department against Apple and the publishers, accusing them of conspiring to fix prices.

So, who benefits from the decision? Why Amazon, of course.

Consumers may now be enjoying convenience and low prices, but as the company grows and grows it threatens to establish multiple-sector monopsonies in which it emerges as the principal or even the lone buyer of wholesale merchandise. As such it will have the power to extract all sorts of concessions from producers.

Jeff Bezos says that he’s all about the consumer.  But Kohn begs to differ:

AMAZON has caused no small controversy of late by refusing to accept presale orders on books to be released by the publisher Hachette and by understocking Hachette’s titles. These punitive maneuvers, which follow a dispute between Amazon and Hachette about e-book contracts, have led to significant delays in shipments of Hachette’s books to Amazon’s customers.

Both consumers of Hachette books and the authors who wrote them are mad as hell. Kohn has an idea to break Amazon’s stranglehold:

So far, Hachette, to its credit, has been unbending. But Amazon still has its nuclear option. It would appear that unless Amazon backs down — through public pressure or government intervention — publishers will have no choice but to employ their own nuclear option: pull all their books from Amazon and throw their weight behind a law-abiding alternative. Perhaps the best solution would be an online marketplace controlled by the publishers — with the 30 percent commission being split 50-50 with the authors in addition to the author’s royalty.

I don’t think his idea will get anywhere because, as Amazon’s own history demonstrates, it takes an awful lot of time and money to first establish an online marketplace then nurture it through thick and thin. Nor will this administration likely intervene against Amazon, having already jumped into bed with the company, and utterly failed to grasp the implications of monopsony.

After Bezos conquers private retail, I wouldn’t be surprised if he went after the public sector, selling all sorts of goods and services now provided by governments. At some point we might even have an Amazon justice department.

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