Editorial cartoon on Amazon and Hachette books

Amazon's Bully Economics

The mammoth Internet company shows why real rules are so vital to market competition.

Editorial cartoon on Amazon and Hachette books
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This week, Amazon continued its long-running, high-stakes public spat with Hachette Book Group, in an attempt to force the publisher to accept stiff terms that sweeten Amazon’s bottom line. Amazon has been squeezing Hachette, refusing to take advance orders on its most popular books, imposing lengthy shipping delays and reducing discounts. Now, Amazon is imposing similar tactics on Warner Home Video, producer of "The Lego Movie," likely this summer’s hottest video release.

This is not the way capitalism is supposed to work. Companies that want to stay in business don’t usually hike prices, delay shipments and refuse to accept customer orders. It is a testament to Amazon’s market dominance that it can get away with tactics that hurt its bottom line in the near term, simply to inflict damage on its trading partners. Some partnership! But, as brutal as it is, what Amazon is doing now is nothing more than what most companies do when they acquire such tremendous market power.

These all-too-common tactics are fundamentally dangerous to our economy because they undermine capitalism’s ability to spur innovation and efficiency. What we’re losing sight of is this: It is not capitalism per se that makes our economy so innovative and productive, it is competition. When there is strong competition, companies innovate, products improve and costs come down. But when there is little or no competition, innovation slows, costs go up, service deteriorates, and dominant companies get to impose large-scale externalities (otherwise known as unpaid-for consequences) on the public and on other companies.

[GALLERY: Cartoons on the Economy]

We have seen this time and time again over the decades: Standard Oil in the late 19th century. Railroads. AT&T. IBM mainframes. Microsoft’s operating system. Cable TV and broadband.

It is a sad irony of capitalism that what benefits us most is vigorous, unfettered competition, and yet what that competition leads to, in most cases, is concentration of power that inhibits further competition and damages the economy. We love the journey, but we hate the destination.

Some conservatives argue that there isn’t really a problem here because all monopolies are ultimately swept away by innovation, just as railroad monopolies were swept away by trucking, and IBM’s mainframe monopoly was swept away by personal computing. Ironically, some of the same publishers who now complain loudly about Amazon’s market power welcomed the upstart at first because those publishers were tired of being pressured by the giant book retailers. (Anyone remember Barnes and Noble?)

[READ: An E-Book Battle Royale]

But the correction of technology moves slowly. The next technology revolution may displace Amazon, but before that happens, years or decades from now, its near-monopoly can do a lot of damage. Fewer choices, slower service and eventually, higher prices.

Can anything be done?

Not unless we get serious about standing up to the ability of companies to accumulate and then abuse market power. Anti-trust law worked once but no longer. Since Reagan, the will to enforce it is lacking, and companies have mastered ever more subtle ways to exert market power without breaking the law. Far more dollars, lawyers and IQ points are devoted to subverting the market than to keeping it competitive.

[READ: Let Innovators Innovate]

Perhaps the best we can do is nibble away at the margins of the problem, and make it just a little harder for companies to accumulate the advantages of bigness and use these advantages in a way that hurts competition. For example:

  • Shorten the periods of patent protection and limit renewals.
  • Close offshore tax loopholes so big companies don’t pick up unearned economies of scale simply from the tax code.
  • Prevent companies from funneling money to elect politicians who will then sit in judgment on regulations affecting those companies. (A similar rule already restricts banks involved in municipal finance, and the Supreme Court has not denied its constitutionality.)

It will never be easy to strike the balance between encouraging competition and permitting so much market power to accumulate that competition itself is destroyed. But just as the rules of collegiate and professional sports are designed to ensure the game remains competitive season after season, we can engineer the rules of commerce to help keep business competition vigorous year after year. If we really want to reap the full benefit of a market economy, we need a structure and a system that makes fair play the only game in town.