Prime Predator: Amazon and the Rationale of Below Average Variable Cost Pricing Strategies Among Negative-Cash Flow Firms
And the discussion is at In These Times, April 23:
Is Amazon Violating U.S. Antitrust Laws? This Law Student Thinks He Has Evidence.
Amazon’s reports of low–or zero–profits have long raised suspicions that it’s selling below cost to build a global monopoly.
Amazon famously barely turned a profit in its first twenty years, and even today nearly all of its operating income comes from cloud-computing service Amazon Web Services. To hear CEO Jeff Bezos tell it, Amazon focuses relentlessly on customer needs, serving as a kind of charity run for the benefit of its users.....MUCH MORE
Many critics have offered a more sinister theory: Amazon has spent the past couple decades building up market share by underpricing competitors, and someday, when there are no alternatives left, it will become fabulously profitable. Amazon is laying in wait, in other words, to become a monopoly.
The technical term for this is predatory pricing, and it’s actually illegal under U.S. antitrust laws. You can’t drop prices with the intent to monopolize. But predatory pricing is extremely difficult to prove in court. Plaintiffs bringing suit would have to demonstrate that Amazon set prices below the cost of production, which is difficult without access to the internal books. In addition, plaintiffs would have to establish that Amazon’s practices had a high likelihood of successfully creating a lucrative monopoly.
If Sussman is right, Amazon’s suppliers could use his theories to sue theThe high bar is thanks to Robert Bork, the godfather of modern antitrust theory, who declared predatory pricing schemes irrational in his influential book The Antitrust Paradox. The Supreme Court adopted Bork’s theory in a 1986 case, claiming that it would be “implausible” for Japanese electronics makers to conspire to hold prices low for television sets exported to the U.S. This would “require the conspirators to sustain substantial losses in order to recover uncertain gains,” the Court ruled. Since then, predatory pricing cases have been few and far between.
company and gather evidence in discovery that could reveal illegal maneuvering.
But Shaoul Sussman, a law student at Fordham University, thinks he’s come up with a roadmap to prove that Amazon profitably engages in predatory pricing, overcoming Bork’s skepticism. In a paper for the Journal of Antitrust Enforcement published in February that has generated discussion in academic circles, Sussman points to evidence that Amazon has already flipped the switch, moving from dominating the market by undercutting rivals to reaping the profits from that dominance. And Amazon’s doing it, Sussman claims, without raising prices for customers. This strategy is even more attractive because corporate accounting rules make the conduct virtually undetectable.
If Sussman is right, Amazon’s suppliers could use his theories to sue the company and gather evidence in discovery that could reveal illegal maneuvering. The paper could also spur the Federal Trade Commission to make a simple rule change that would lay bare Amazon’s practices. And, it could blow up a scheme that Uber, Lime, and numerous other startups have been accused of undertaking.
Here’s how it works.
HIDING EXPENSES
Amazon routinely highlights its cash flow instead of earnings, signaling to investors that it’s on a road to profitability. The cash flow number zoomed to over $30 billion in 2018. Positive cash flow is often used as evidence against predatory pricing; if Amazon has negative cash flow, it could be subsidizing an anti-competitive scheme to edge out rivals.
However, Sussman asserts in his paper, “Amazon utilizes existing loopholes in Generally Accepted Accounting Principles (GAAP) disclosure regulations to exclude a significant portion of its expenses.”
Amazon accomplishes this in part through using capital leases to purchase equipment and some of its 288 million square feet of office space. Instead of paying cash, Amazon borrows and finances these purchases over time. The leases don’t show up as expenses in Amazon’s free cash flow calculations, even though the equipment is listed as an asset. A 2017 Motley Fool report showed that, when you add in capital leases, Amazon’s 2017 cash flow was indeed over $1 billion in the red, although more recent numbers have bounced back.
The point, Sussman tells In These Times, is that Amazon “can move numbers on balance sheets from one side to the other to obscure the numbers on cash flows.” Amazon has chronically resisted attempts to reveal the inner workings of its financial structure. Sussman believes that if Amazon gave the full picture, it would show negative cash flow.
No current accounting rules force full disclosure of itemized costs. Considered highly confidential, they’re typically redacted from public legal documents, even when a company is sued. More definitive cash flow numbers could help prove whether Amazon sells items below cost.
But proving that Amazon sells below cost is only half the battle.
HOW AMAZON RECOUPS ITS LOSSES
By now, Amazon has established its dominance, supplying 45 percent of all e-commerce purchases and boasting the second-largest paid digital membership program behind Netflix, with 100 million Amazon Prime users. We already know that Amazon’s low prices, which it achieved both by avoiding sales tax for years and severely undercutting rivals, played a major role in gaining customers.....
