Amazon: Monopoly or Monopsony?

Photo credit to Pablo Delcan.

In October 2020, the US House Democrats’ antitrust subcommittee published a 449-page report describing their view that big tech companies Apple, Facebook, Google and Amazon possess unfair market power. Discussions of whether big tech companies wield monopoly power have been growing in intensity, exemplified by the recent FTC lawsuit against Facebook.

The issue of Amazon’s market power is a more complex one. On the surface, it may appear foolish to paint Amazon as a monopoly given that it provides consumers access to seemingly endless amounts of products at low prices from a wide array of suppliers/third-party sellers. Behind the scenes however, signs point to Amazon wielding a different type of market power – monopsony power.

A monopsony, as opposed to a monopoly, is a situation where there is only a single buyer for a good or service. Amazon reflects this in two respects: its interactions with its third-party sellers and its behaviour in the labour market.

Beginning with its suppliers, the House subcommittee estimated that Amazon controls around 50% of the e-commerce market. Given Amazon’s massive user base, Amazon is the main and possibly only choice for many smaller companies to sell their wares. This is a telltale sign of monopsony power since no other e-commerce company has a grip on the market like Amazon’s. No other company has a user base like Amazon’s; therefore, Amazon can keep prices for its suppliers’ products very low. The flip side is that by suppressing product prices in this way, Amazon has shrunk the profit margins of some of its third-party sellers to very thin levels.

This issue came to a head in 2014 when Amazon found itself in a dispute with book publisher Hachette. Amazon argued that it should be able to sell e-books at whatever price it wanted and when Hachette disagreed, Amazon halted sales of Hachette’s books – a tactic enabled by Amazon’s secure hold on the market.

it is also true that since some third-party sellers’ profit margins are being kept so low, that they may be unable to innovate or be forced to provide a less than ideal product to keep costs low

To the contrary, a case can be made that Amazon operating this way is exactly what makes it such a great service for consumers. In response to the House subcommittee report, Amazon made the argument that it is not abusing its market power since it gives consumers access to a wide range of products at low prices and gives sellers access to a large consumer base. While this is true it one sense, it is also true that since some third-party sellers’ profit margins are being kept so low, that they may be unable to innovate or be forced to provide a less than ideal product to keep costs low.

Another way that Amazon’s monopsony power reveals itself is through Amazon’s labour market activity. Amazon has around 798,000 employees in the US alone. Amazon has also come under fire from politicians and workers alike over working conditions, resistance to unionization and some workers being unable to pay their bills. In a more competitive market, it may not be possible for a firm to act this way but the reality is that in many, especially smaller communities, Amazon is the main or only employer of warehouse workers.

Surprise came for many, when Amazon decided to raise its minimum wage for US employees to $15 and vowed to use its lobbying power to push for an increase in the federal minimum wage. It would be naïve to assume that this was an act of altruism, since in many ways it was a clever business decision and an example of Amazon using its monopsony position.

Beneath the surface of Amazon’s easy-to-use and convenient online store, lies potentially harmful treatment of its third-party sellers and its workers

First, the pay raise may have been an attempt to stall growing efforts for unionization. Additionally, Amazon is positioned better to absorb increased labour costs than its competitors. Amazon is then able to drive other warehouse-based companies’ profits down, while maintaining its own profits through its massive share of the e-commerce market and its other successful business activities. The fact that Amazon was able to introduce a pay rise like this implies monopsony power in itself, since such an option is likely too costly for smaller firms. While a pay raise may improve workers’ standard of living for now, in the long-run monopsony power is known to lead to downward pressure on wages, and in Amazon’s case poor working conditions also.

Like Facebook, Amazon is an example of a big tech company with massive market power, although in a different sense. Beneath the surface of Amazon’s easy-to-use and convenient online store, lies potentially harmful treatment of its third-party sellers and its workers. This stems from Amazon’s monopsony power, a less heard-of term than monopoly, but an equally important one. With a new, Biden administration office in the US, it may prove more difficult for tech giants like Amazon to keep a hold on their market power and the debate over how best to regulate tech firms like this is bound to continue. Monopsony as well as monopoly power should be kept in mind as these issues continue to play out.

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