The market structure in which firms operate has important implications for prices, products, suppliers and profits. In competitive markets, we expect to see low prices, many firms competing with new innovations and firm behavior that is in, or at least not against the public interest. As a firm becomes dominant in a market, its behavior is likely to change and consumers and suppliers can be adversely affected. Is this the case with Amazon?
Much attention has been given to the dispute centering around Amazon and its actions in the market for e-books, where it holds close to two thirds of the market share. Critics of Amazon suggest that this is just one example of Amazon using its monopoly power to exploit consumers and suppliers, including the publishers and their authors. Although Amazon is not breaking any laws, there are suggestions that its behavior is ‘brutal’ and is taking advantage of consumers, suppliers and its workforce.
But rather than criticizing the actions of a monopolist like Amazon, should we instead be praising the company and its ability to compete other firms out of the market? One of the main reasons why consumers use Amazon to buy goods is that prices are cheap. So, in this respect, perhaps Amazon is not acting against consumers’ interests, as under a monopoly we typically expect low output and high prices, relative to a model of perfect competition. The question of the methods used to keep prices so low is another matter. Two conflicting views on Amazon can be seen from Annie Lowrey and Franklin Foer, who respectively said:
“Amazon relentlessly drives down prices for goods and services and delivers them fast and cheap. It ploughs its profits into price cuts and innovation rather than putting them in the hands of its investors. That benefits millions of families – full stop.”
“In effect, we’ve been thrust back 100 years to a time when the law was not up to the task of protecting the threats to democracy posed by monopoly; a time when the new nature of the corporation demanded a significant revision of government.”
So, with Amazon we have an interesting case of a monopolist, where many aspects of its behaviour fit exactly into the mould of the traditional monopolist. But, some of the outcomes we observe indicate a more competitive market. Paul Krugman has been relatively blunt in his opinion that Amazon’s dominance is bad for America. His comments are timely, given the recognition for Jean Tirole’s work in considering the problems faced when trying to regulate any firm that has significant market power. He has been awarded the Nobel Prize in Economics. I’ll leave you to decide where you place this company on the traditional spectrum of market structures, as you read the following articles.
Amazon: Monopoly or capitalist success story? BBC News, Kierran Petersen (14/10/14)
Why the Justice Department won’t go after Amazon, even though Paul Krugman thinks it’s hurting America Business Insider, Erin Fuchs (20/10/14)
Is Amazon a monopoly? The Week, Sergio Hernandez (19/11/14)
Big, bad Amazon The Economist (20/10/14)
Questions
- What are the typical characteristics of a monopoly? To what extent does Amazon fit into this market structure?
- Why does Paul Krugman suggest that Amazon is hurting America?
- How does Amazon’s behaviour with regard to (a) its suppliers and (b) its workers affect its profitability? Would it be able to behave in this way if it were a smaller company?
- Why is Amazon able to charge its customers such low prices? Why does it do this, given its market power?
- Is there an argument for more regulation of firms with such dominance in a market, as is the case with Amazon?
- The debate over e-books is ingoing. What is the argument for publishers to be able to set a minimum price? What is the argument against this?
- Should customers boycott Amazon in a protest over the alleged working conditions of Amazon factory employees?
Apple was last week found guilty in the US for its role in the fixing of e-book prices. A subsequent hearing will now be held to determine the damages that Apple will be forced to pay. However, Apple vehemently denies the allegations and looks set to appeal the decision.
To understand what the US Department of Justice (the European Commission has also brought a case) is objecting to, we need to look back to how pricing in this rapidly growing market has evolved over time.
Until the end of 2009 e-books were sold under a wholesale pricing model. Here, publishers charge retailers a wholesale price per book and retailers are then free to charge final consumers whatever price they choose. This all changed in the US (there were also similar developments in Europe) during an eventful period of a few days in January 2010 when Apple unveiled its iPad for April release.
The publisher Macmillian proposed that Amazon switch to an agency pricing model under which the publisher sets the retail price. This is typically referred to by economists as Resale Price Maintenance (RPM). Interestingly, RPM has a long history in the book industry. In the UK for example, throughout most of the last century publishers set prices under the Net Book Agreement, until this broke down in the mid 1990s. In addition, in some countries, for example Germany, books continue to be sold under RPM.
Macmillan also threatened Amazon that if it preferred to keep wholesale pricing it would delay the supply of e-book releases to them. Amazon initially responded by refusing to stock Macmillan titles. However, soon after Amazon ceded to Macmillan’s proposal. Despite this, Amazon made clear its dissatisfaction to its customers:
We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles. We want you to know that ultimately, however, we will have to capitulate and accept Macmillan’s terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books.
It turned out that 5 of the 6 major publishers (including Macmillan) had already agreed the same agency terms to sell e-books for Apple devices. Like Macmillan, the other publishers all then also imposed agency pricing on Amazon. Furthermore, crucial to the contracts agreed with Apple was a so called ‘most-favoured customer’ clause which guaranteed that e-books would not be sold elsewhere at prices below those charged to Apple customers. Effectively, therefore, this clause made it necessary for the publishers to impose agency terms on Amazon. The Department of Justice objected to this and believed consumers would be harmed due to higher prices. All of the publishers involved eventually decided to settle the case, leaving Apple alone to fight the case in court.
In the decision Judge Cote concluded that:
the publisher defendants conspired with each other to eliminate retail price competition in order to raise e-book prices, and that Apple played a central role in facilitating and executing that conspiracy. Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did in the Spring of 2010.
It is interesting to consider the reasons why the publishers would be keen to take control of the prices Amazon charges for e-books. Evidence suggests that Amazon was frequently retailing e-books at substantial discounts and even below wholesale costs. One explanation for this is that Amazon was keen to increase demand for Kindle devices. The publishers, on the other hand, might well be concerned about the implications of Amazon dominating the e-book market. Potentially, this would give Amazon significant bargaining power over them.
Of course, such dominance might also have knock-on effects on consumer prices in the long-run. Whether the publishers will be permitted to use agency pricing to mitigate such concerns in the future remains unclear and depends on whether the competition authorities object to agency pricing per se or just the coordinated way in which it was achieved.
As the articles below demonstrate, opinion is strongly divided for and against the judgement against Apple.
EU raids ebook publishers in price fixing investigation The Guardian, Benedicte Page and Leigh Phillips (4/3/11)
Apple Faces Damages Trial Over E-Book Antitrust Violation Bloomberg Businessweek, Bob Van Voris, Adam Satariano and David McLaughlin (10/7/13)
Apple played ‘central role’ in ebook price-fixing conspiracy, says federal judge The Guardian, Amanda Holpuch (11/7/13)
US: Apple found guilty, but what happens next? Competition Policy International (11/7/13)
Why It’s Insane That No One Cares About Apple’s Price-Fixing Conspiracy (AAPL) Seattle pi, Jim Edwards (13/7/13)
Apple Learns The Hazards Of Innovation With E-Book Antitrust Ruling Forbes, Daniel Fisher (10/7/13)
Questions
- What are the important features of the e-book market?
- What are the key differences between the traditional and e-book markets?
- To what extent do Amazon and Apple have different incentives in the e-book market?
- Do you think Resale Price Maintenance is more likely to harm competition in the market for traditional or e-books?
- What do you think might be the short and long-run implications of this decision?
If you ask most people whether they like paying tax, the answer would surely be a resounding ‘no’. If asked would you like to pay less tax, most would probably say ‘yes’. Evidence of this can be seen in the behaviour of individuals and of companies, as they aim to reduce their tax bill, through both legal and illegal methods.
Our tax revenues are used for many different things, ranging from the provision of merit goods to the redistribution of income, so for most people they don’t object to paying their way. However, maintaining profitability and increasing disposable income is a key objective for companies and individuals, especially in weak economic times. Some high profile names have received media coverage due to accusations of both tax avoidance and tax evasion. Starbucks, Amazon, Googe and Apple are just some of the big names that have been accused of paying millions of pounds/dollars less in taxation than they should, due to clever (and often legal) methods of avoiding tax.
The problem of tax avoidance has become a bigger issue in recent years with the growth of globalisation. Multinationals have developed to dominate the business world and business/corporation tax rates across the global remain very different. Thus, it is actually relatively easy for companies to reduce their tax burden by locating their headquarters in low tax countries or ensuring that business contracts etc. are signed in these countries. By doing this, any profits are subject to the lower tax rate and are thus such companies are accused of depriving the government of tax revenue. Apple is currently answering questions posed by a US Senate Committee, having been accused of structuring its business to create ‘the holy grail of tax avoidance’.
Many may consider the above and decide that these companies have done little wrong. After all, many schemes aimed at tax avoidance are legal and are often just a clever way of using the system. However, in a business environment dominated by the likes of Google, Apple and Amazon, the impact of tax avoidance may not just be on the government’s coffers. Indeed John McCain, one of the Committee members asked:
…Couldn’t one draw the conclusion that you and Apple have an unfair advantage over domestic based corporations and companies, in other words, smaller companies in this country that don’t have the same ability that you do to locate in Ireland or other countries overseas?
The concern is that with such ability to avoid huge amounts of taxation, large companies will inevitably compete smaller ones out of the market. Local businesses, without the ability to re-locate to other parts of the world, pay their full tax bills, but multinationals legally (in most cases) manage to avoid paying their own share. With a harsh economic climate continuing globally, these large companies that aim to further increase their profitability through such means as tax avoidance will naturally bear the wrath of smaller businesses and individuals that are struggling to get by. It’s likely that this topic will remain in the media for some time. The following articles consider some of the companies accused of participating in tax avoidance schemes and the consequences of doing so.
Is Apple’s tax avoidance rational? BBC News, Robert Peston (21/5/13)
Apple’s Tim Cook defends tax strategy in Senate BBC News (21/5/13)
Senator accuses Apple of ‘highly questionable’ billion-dollar tax avoidance scheme The Guardian, Dominic Rushe (21/5/13)
Apple’s Tim Cook faces tax avoidance questions Sky News (21/5/13)
EU leaders look to end Apple-style tax avoidance schemes Reuters, Luke Baker and Mark John (21/5/13)
Apple Chief Tim Cook defends tax practices and denies avoidance Financial Times, James Politi (21/5/13)
Apple CEO Tim Cook tells Senate: tiny tax bill isn’t our fault, it’s yours Independent, Nikhil Kumar (21/5/13)
Miliband promises action on Google tax avoidance The Telegraph (19/5/13)
Google is cheating British tax payers out of millions…what they are doing is just immoral’: Web giant accused of running ‘scandalous’ tax avoidance scheme by whistleblower Mail Online, Becky Evans (19/5/13)
Multinational CEOs tell David Cameron to rein in tax avoidance rhetoric The Guardian, Simon Bowers, Lawrie Holmes and Rajeev Syal (20/5/13)
Fury at corporate tax avoidance leads to call for a global response The Guardian, Tracy McVeigh (18/5/13)
Questions
- What is the difference between tax evasion and tax avoidance? Is it rational to engage in such schemes?
- What are tax revenues used for?
- Why are multinationals more able to engage in tax avoidance schemes?
- Is the problem of tax avoidance a negative consequence of globalisation?
- How might the actions of large multinationals who are avoiding paying large amounts of tax affect the competitiveness of the global market place?
- Is there justification for a global policy response to combat the issue of tax avoidance?
- What are the costs and benefits to a country of having a low rate of corporation tax?
- How would a more ‘reasonable’ tax on foreign earnings allow the ‘free movement of capital back to the US’?
Comet, Peacocks, Woolworths, JJB, Jessops and now HMV – they all have one thing in common. The recession has hit them so hard that they entered administration. HMV is the latest high street retailer to bring in the administrators, despite insisting that it does have a future on the UK’s high streets. With debts of £176m and huge competition from online retailers, the future of HMV is very uncertain.
Over the past decades, companies such as Amazon, ebay, LoveFilm, Netflix and apple have emerged providing very stiff competition to the last remaining high street seller of music and DVDs. People have been turning more and more to the internet to do their shopping, with cheaper prices and greater choice. The speed of delivery, which in the past may have been a disadvantage of buying from somewhere like Amazon, is now barely an obstacle and these substitute companies have created a difficult environment for high street retailers to compete in. Despite going into administration, it’s not necessarily the end of the much-loved HMV. Its Chief Executive said:
We remain convinced we can find a successful business outcomes. We want to make sure it remains on the high street … We know our customers fell the same way.
While the recession has undoubtedly affected sales at HMV, is this the main reason for its demise or are other factors more relevant? As discussed, online retailers have taken over the DVD and music industry and with downloading increasing in popularity and CD/DVDs on sale in numerous locations, including supermarket chains, HMV has felt the competitive pressure and its place on the high street has come into question. As Neil Saunders, the Managing Director of Conlumino said:
By our own figures, we forecast that by the end of 2015 some 90.4 per cent of music and film sales will be online. The bottom line is that there is no real future for physical retail in the music sector.
Further to this, prices have been forced downwards and HMV, having to pay high fixed costs to retain their place on the high streets, have been unable to compete and remain profitable. Another contributing factor could be an outdated management structure, which has not responded to the changing times. Whatever the cause, thousands of jobs have been put at risk. Even if buyers are found, some store closures by the administrators, Deloitte, seem inevitable. Customer gift vouchers have already become worthless and further losses to both workers and customers seem likely. It is thought that there will be many interested buyers and huge support from suppliers, but the former is likely to remain a relatively secretive area for some time.
This latest high street disaster will undoubtedly raise many questions. One theory about recovery from a recession looks at the need for many businesses to go under until the fittest are left and there is sufficient scope for new businesses to emerge.
Could it be that the collapse of companies such as Woolworths, HMV, Comet, Jessops and Blockbuster is an essential requirement for economic recovery? Or was the recession irrelevant for HMV? Was its collapse an inevitable consequence of the changing face of Britain’s high streets and if so, what does the future hold for the high street retailers? The following articles consider the demise of HMV.
HMV: a visual history BBC News (15/1/13)
Chief executive says ‘HMV still has a place on the high street’, as customers are told their gift vouchers are worthless Independent, James Thompson (15/1/13)
Potential buyers circle stricken HMV Financial Times, Andrea Felsted (15/1/13)
HMV and independents to urged to work together to save in-store music market BBC News, Clive Lindsay (15/1/13)
HMV record chain was besest by digital downloads and cheap DVDs The Guardian (15/1/13)
The death of traditional retailers like HMV started when we caught on to one-click and the joy of owning DVDs wore thin Independent, Grace Dent (15/1/13)
HMV shoppers: ‘I’m disappointed, but it’s understandable why they went bust The Guardian, James Brilliant (15/1/13)
HMV: Record labels could take HMV back to its 1920 roots The Telegraph, Graham Ruddick (15/1/13)
HMV’s future seen as handful of stores and website Reuters, Neil Maidment and James Davey (15/1/13)
HMV leaves social gap in high street BBC News, Robert Plummer (15/1/13)
Is there good news in HMV’s collapse? BBC News, Robert Peston (15/1/13)
Is it game over for UK retail? The Guardian, Larry Elliott (18/1/13)
High Street retailers: Who has been hit hardest? BBC News (16/1/13)
Questions
- What are the main reasons behind the collapse of HMV?
- Use a diagram to illustrate the impact the companies such as Amazon and Tesco have had on costs and prices in the entertainment industry.
- Has the value we place on owning DVDs truly changed or have other factors led to larger purchases of online entertainment?
- Why is online retail providing such steep competition to high street retailers?
- Explain why it can be argued that economic recovery will only take place after a certain number of businesses have gone into administration.
- To what extent do you think HMV’s collapse is due to its failure to adapt to changing social circumstances?
- Briefly outline the wider economic implications of the collapse of a company such as HMV. Think about managers, employees, suppliers, customers and other competitors, as well as other high street retailers.
- In which market structure would you place the entertainment industry? Explain your answer. Has this contributed to the demise of HMV?
The market structure in which firms operate has important implications for prices, products, suppliers and profits. In competitive markets, we expect to see low prices, many firms competing with new innovations and firm behavior that is in, or at least not against the public interest. As a firm becomes dominant in a market, its behavior is likely to change and consumers and suppliers can be adversely affected. Is this the case with Amazon?