Amazon Monopoly Is Better than Free Market

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Amazon’s monopoly in online retail got some attention recently. For years, Amazon restrains other online retailers with predatory pricing and covers its own losses with debt. The debt is cheap because the company enjoys a low-risk monopoly and can fix its profit margin anytime. But there’s no need to do so until lenders see this huge advantage.

That’s a bad thing about Amazon. A good thing about Amazon is that the company invests in new technologies and better service. Customers don’t have to stay 20 minutes on the line or worry about out-of-stock goods. Scale and scope of Amazon operations made this possible.

Online retail in Russia shows how the world without this kind of a monopolist looks like. Thousands of firms sell about the same stuff. Independent price search engines (of the kind Google tried to be) ensure competitive prices, hence, profit margins remain low. Low profit margins kill any chances for these small retailers to invest in service and inventories. Sellers economize on everything. In the end, customers buy stuff across dozens of shops with equally poor service and red tape, like entering all your personal information again and again.

An Amazon-type retailer isn’t emerging in Russia because the entry cost is already high and VC firms dislike investing in highly competitive markets. In turn, online retailers have no sources of capital to reach Amazon’s benefits of scale. “What about Walmart?” you may ask. It had emerged out of a competitive industry and became the largest company in the country.

It seems that Walmart appeared at the right moment. When Sam Walton opened his first shop, the United States invested heavily in new highways and railroads. Import of goods and interstate trade intensified. You need efficient logistics to keep prices down in this game. Walmart had it and became a monopolist in its segment. It entered international markets too late, as with Germany, and failed there.

Such technological revolutions rarely happen. But when they do—as with Walmart, Amazon, or Russian retailers—they shape the market for years. The sequence is important. You do want an Amazon-type monopolist to explore efficient practices in the beginning. Thousands of small firms don’t innovate like this, so low quality reigns the free market for years, which is a real loss. But after you have the monopolist that sets high standards, governments need to understand how to regulate it to revive competition.

2 thoughts on “Amazon Monopoly Is Better than Free Market

  1. […] Larry Page and Sergey Brin’s key contribution to their startup was PageRank algorithm. PageRank is patented, but the underlying algorithms are easy to find in graph theory. The more links point to your website, the higher position your website gets in search results. When I google “PageRank,” I have Wikipedia’s article on the top. When I link to this article here, it becomes more likely that Wikipedia’s article will remain at the top. As a side effect, linking to the first page of Google results creates a serious competitive advantage for top websites. For Wikipedia, it may be a plus as more people concentrate on improving its pages. But strong positions in search results also secure Amazon.com’s monopoly in e-commerce. […]

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