[summers.daniel]

Hi, folks! I’m a newby here and do NOT have an economic background, so forgive what might be a dumb question.

Friends of mine have talked about Amazon “taking over” as a monopoly. I have tried to argue the point based on Tom’s example of Dow chemical and beryllium (succinctly – his competitor kept driving the price of beryllium lower and lower in an attempt to put Dow out of business. Dow took advantage of the low prices by BUYING their own supply of beryllium from the competitor trying to put them out of business. The story is brilliant and hilarious).

Amazon seems to be a bit different since they have so many ways to absorb any losses from any particular competitor. An example that I have heard was Amazon vs Diapers.com where Amazon famously told diapers.com, “we will lose money on diapers in order to undercut you”. As the argument goes, Amazon is more than willing to lose money on diapers because it can make up for that loss in any number of different income streams they have that are not diapers. Dow chemical and his competitor didn’t have this kind of diversification, so there was no way to “absorb” the losses, as it were.

Any thoughts on this?

[jmherbener]

The argument your friends advance is called “predatory pricing” in the economics literature. A firm selling a similar product with a similar cost structure as a rival undercuts a rival by charging a price below its costs. This strategy forces losses on both firms, but the predator has deep pockets and can outlast his rival. The payoff for the losses the predator suffers in displacing his rival come if and only if he is able to recoup his losses (and more) by earning excessive profits in the absence of the competition of his rival. Obviously, for this strategy to work, it must be nearly impossible for a rival to arise in the wake of the excessive profits earned by the predator. The classic article showing how difficult this is to achieve is by John McGee. Here is a short article on the topic:

https://mises.org/library/100-years-myths-about-standard-oil

Predatory pricing cannot be done by a retail firm. If Amazon drove Diapers.com out of business by undercutting both of their costs (in particular, paying the wholesale price to buy diapers from say Pampers), then as soon as Amazon raised its retail price after pushing Diapers.com out it would also be profitable for another competitor to step in or even for Pampers to sell online.

Tom DiLorenzo has written extensively about antitrust, monopoly, and competition:

https://mises.org/library/anti-trust-anti-truth

Here is Dom Armentano’s book, Antitrust the Case for Repeal:

https://mises.org/system/tdf/Antitrust%20The%20Case%20for%20Repeal_1_0.pdf?file=1&type=document

[summers.daniel]

Mr. Herbener –

Thank you so much for your quick reply. Apologies for taking so long to write back. I guess I assumed that I would receive a notification if someone replied (or perhaps I did, and it was lost in a sea of emails).

This is most helpful! I guess the critical piece is not whether or not firm A can put firm B out of business (because that is certainly a possibility), but whether or not firm A can withstand their losses given the fact that firms D,E,F,G, and H will certainly take advantage of the fact that firm A must raise their prices to such an extent to recoup their losses for their predatory pricing? Is that right?

So – the public may lose firm B as an option, but in that exchange, they have enjoyed very cheap diapers during the “predatory period”, and further enjoy an inrush of new competitors to the diaper market who will keep diaper prices low.

Hope I’m on the right track…

I never thought I would have the super-stars responding to me! How great!

[jmherbener]

You are, most assuredly, on the right track.

Here’s another short piece on the economics of predatory pricing:

http://cei.org/PDFs/predatorypricing.pdf

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