A New Breed of Price Predator?

A New Breed of Price Predator?

Are Amazon’s pricing strategies similar to trade dumping practices?

In international trade, the practice of dumping – exporting product at a predatory price to capture market share – is usually associated with aggressive countries intent on moving into a national market at any cost.

Are we now seeing a commercial enterprise with country-sized market muscle get into the dumping business?

I’m referring to the on-line behemoth, Amazon.com.

In the politicized trade arena, governments often accuse each other of dumping. Earlier this year the Trump administration took up the antidumping cause against China on behalf of US steelmakers.

Such grievances can owe as much to political expediency as to unfair trade practices. But there is no doubt that dumping is a genuine threat that has been perpetrated successfully by aggressor countries.

For example, it is widely acknowledged that a dumping strategy executed by Japanese companies in concert with the country’s government effectively destroyed the domestic TV manufacturing industry in the US. Between the late 1960s and 1980s, well known American companies such as Philco, RCA and Westinghouse either exited the business or were gobbled up by foreign enterprises.

Amazon is, quite rightly, one of the most admired companies in the world. Its capacity for innovation and competitive ingenuity is remarkable. This is one of a rare breed of companies that single-handedly defines a market.

But that market power, coupled with the enterprise’s vast resources, can also be used to undercut competitors in a manner reminiscent of nations that have used predatory pricing policies to smother commercial opposition.

Amazon is valued at close to half a trillion dollars, which is roughly equivalent to the GDPs of Poland and Sweden according to a world ranking published by the World Bank in 2016. Some commentators suggest that Amazon.com is on course to become the world’s first trillion-dollar company, which would put its value on par with the GDPs of Indonesia and Mexico.

The company has wielded its financial and commercial clout to redefine retailing, and has vanquished many competitors. This process continues, as more retailers succumb to the online giant’s competitive power, and ever-expanding portfolio of business interests.

Yet as a recent analysis published by Forbes points out, the company has posted just a handful of profitable quarters in its two-decade history. Its vision and market presence have afforded Amazon the capital it needs to push into a wide array of markets. The enterprise has expanded its shipping empire to include trucking, air and ocean transportation interests. Its brand has become synonymous with free, two-day deliveries. But its shipping services lost an estimated $7.2 billion in 2016, compared to a loss of about $5 billion the previous year. A sharp increase in the number of items that are eligible for free two-day shipping is the main reason given for these escalating losses.

Amazon has every right to fix its prices in line with the company’s strategic goals. However, setting prices that appear to be markedly below commercially prudent rates, and which drive out competitors, has the whiff of a dumping practice.

Ultimately, such practices can hurt consumers by depriving markets of healthy competition and raising prices. We have seen this in the airline industry. When rivals introduce services on a route, monopolistic incumbents drop their prices and engage in anti-competitive activities. The new entrant is eventually forced to withdraw, and the incumbents immediately increase their prices to pre-competition levels.

The rubber may hit the road in Amazon’s international expansion, where the company lost $1.2 billion in 2016. Given the European Union’s penchant for restricting and levying fines on innovative American companies, Amazon’s future success in Europe may subject it to the wrath of the EU Competition Czars.

Another possibility is that Amazon’s advance will be checked by increasing and new competition. Walmart is one company with the resources to compete with the online giant, and the Chinese giants Alibaba and JD.com have international ambitions. In addition, many smaller players, including traditional retailers, are learning to compete. Still, the Amazon “network effect” is extremely potent.

Either way, we should pay attention to Amazon’s rise. Can the company be accused of dumping practices? If so, are we witnessing the emergence of a new type of market player: commercial enterprises with huge valuations and influence that can attack markets in much the same way that governments do?

This article was written by Yossi Sheffi, Elisha Gray II Professor of Engineering Systems at MIT, and Director of the MIT Center for Transportation & Logistics.

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