The Washington DC Attorney General recently sued Amazon, accusing the online retail giant of stifling competition and unfairly inflating prices. During a press release with reporters, the Attorney General expressed that Amazon has been illegally abusing and maintaining its monopoly power through price control across the online retail market for years.
Since Amazon is among the top giant technology companies which focuses on e-commerce, artificial intelligence, and digital streaming, this begs the question, “Is Amazon becoming a monopoly?” Keep reading to find out…
Is Amazon Becoming a Monopoly?
Although Amazon is growing more and more every day, they do not have a monopoly on their market share and likely won’t for many years. Amazon is very competitive but they still compete, and at times lose, to other major players like Walmart, Target, and BestBuy.
For a more in-depth answer to whether or not Amazon is, or will become, a monopoly, keep reading…
Is Amazon a Monopoly?
Before answering this question, it is best to familiarize ourselves with terms such as monopoly and antitrust law. According to the Federal Trade Commission, a monopoly occurs when a firm restrains competition by establishing monopoly power.
To determine if the firm being investigated has monopoly power, courts usually look at the market share and whether they have excluded other competitors.
If the firm under investigation doesn’t have over 50% of the sales of a particular good or service within a specific region, the courts won’t find monopoly power. Besides, the monopoly power ought to be sustainable. The firm needs to have a lasting monopoly power that isn’t overly affected by the entry of new firms or several other competitive forces.
Generally, US antitrust law focuses on protecting customers from any harm that may come from companies. Here, the core principle is to shield consumers against predatory practices and ensure competition. This strengthens the open-market economy, thus preventing monopolies.
Most antitrust law stems from the Sherman Act of 1890, whose goal was to preserve free competition as a trade rule. Generally, antitrust laws have a fundamental goal of ensuring there are powerful incentives for businesses to keep their prices low quality up, and improve their operations’ efficiency.
Key Characteristics Of A Monopolistic Market
Below are some characteristics of a monopolistic market:
- Single Supplier: A single supplier is responsible for regulating a monopolistic market. For this reason, a product’s market demand is the demand provided by this entity.
- Entry and Exit Barriers: In this market, there are many barriers to entry and exit. They include resource ownership, high initial capital, government licenses, and copyright. If the government believes that the products or services offered by the monopoly are necessary to the public, it may bar the company’s exit from the market. In simpler terms, the government may prevent public utility companies, such as telephone and electricity companies, from exiting the market.
- Profit Maximizer: The primary goal in a monopolistic environment is maximizing profits. A monopoly has the power to increase prices and make higher profits because there is no competition. Any prices that the monopoly sets become the market price.
- Product Uniqueness: A significant determinant of a monopolistic market is the uniqueness of the products. There are no close substitutes for the products or services provided by the monopoly.
- Price Discrimination: A company operating in a monopolistic market has the freedom to change the quantity or price of a product and service. Price discrimination happens when an organization sells a similar product to different customers at different prices. Considering the elastic nature of the market, the organization will sell more product quantities if the prices are low and sell lesser amounts if the price is high.
Why Amazon Is Not A Monopoly?
While most people may argue that Amazon is slowly becoming a monopoly, commerce experts beg to differ. Here are some reasons Amazon isn’t a monopoly:
Amazon doesn’t meet the Federal Trade Commission’s (FTC) definition of a monopoly. It lacks the requisite market share of over 50 percent of a particular good or service in a specific geographical location. This is despite having economic power in a wide range of industries, including web services, entertainment, grocery, and retail.
At present, the e-commerce industry has its most significant market share (close to 50 percent). However, the percentage is not high enough for FTC to classify Amazon as a monopoly. The FTC’s definition of a monopoly depends not on the company size but pricing, stifling competition, and consumer welfare. Unless there are changes in the law, Amazon is at liberty to continue gaining companies and get into different industries.
One characteristic that stands out for most monopolies is higher-than-normal price-fixing when competition is less. To gain monopoly power, firms first need to have the long-term ability to increase prices. Amazon’s low prices are a significant contributor to deflationary forces, which result in a negative inflation rate. In addition, Amazon isn’t restraining any trading activities since it allows sellers to use the Amazon Marketplace platform to find buyers for their products.
Although Amazon may have established dominance, there is still a stream of new entrants into the market with whom they compete with. While Amazon may be a large enterprise, if you analyze its actions through the eyes of the Federal Trade Commission, it doesn’t come close to being a monopoly.
Top Amazon Competitors
Here is a list of the top businesses in competition with Amazon:
- Online stores
- Alibaba Group
Does Amazon Have a Monopsony?
A monopsony is the opposite of a monopoly. In a monopsony, only one buyer is in complete control of the market, as they are the leading purchaser of products and services from sellers.
In the case of Amazon, this could apply to its leverage over prices charged by shipping companies such as UPS and FedEx. It also includes the area where Amazon is the sole employer and manages to bring down employee wages
Want to learn more about Amazon? Check out these articles to learn if you can use Google Pay on Amazon, what to do if your Amazon order says delivered but you haven’t received it, and can you return opened items to Amazon?.
Although Amazon is yet to be labeled a monopoly, as it gains more market share, it could threaten its competitor and start enacting anti-competitive conduct, such as raising prices, lowering product quality to increase profits, and productivity inefficiency.
The Ending Platform Monopolies Act, when passed, will make it illegal for businesses to favor their products over those of competitors. Thus, if the antitrust laws become more aggressive and stricter, Amazon could take up the monopoly title and pay potential fines.