Amazon's Monopoly


Last updated: August 2016

 

 

Amazon and the monopoly regulators

 

With Amazon’s growth apparently unstoppable, are there any regulators out there trying to prevent its systematic tax avoidance from further distorting UK markets? Rob Harrison investigates.

 

Amazon cartoon

 

In 2016, Amazon breathlessly announced to its shareholders that it had become “the fastest company ever to reach $100 billion in annual sales”.[1] This makes it now the 44th biggest company in the world, just below some 100-year-old oil companies, 80-year-old car companies, and a raft of Chinese state-owned firms.[2]

This might not be quite so worrying had Amazon not, at its May 2016 AGM, summarily opposed shareholder resolutions to:

  • issue a sustainability report looking at its greenhouse gas emissions,
  • begin reporting on the human rights impacts of its operations,
  • report on its political donations.[3]

 

Amazon’s systematic tax avoidance also appears unstoppable. Despite a promise to stop booking UK sales through its Luxembourg parent company from April 2015, early indications are that tax paid to UK authorities by Amazon actually fell in 2015 to £9.7 million, from £11.9 million in 2014.[4]

Amazon now accounts for 80% of all online book sales and 90% of e-book sales.[6] In 2014, 56% of all books were sold online, and the trend for internet book sales is around 10% growth per year.[7] Over 40% of booksellers said they had sold books on Amazon Marketplace.[9] Surely there is an issue with monopoly power here?

 

Regulating monopolies in the UK
 

Most market economies have some kind of government regulator to prevent companies from abusing monopoly power. In the UK, following the abolition of the Office of Fair Trading in 2013, we now have the Competition and Markets Authority (CMA).

The CMA says that its “mission is to make markets work well in the interests of consumers, businesses and the economy. Markets work well when businesses compete vigorously and fairly to win customers’ business. In well-functioning markets consumers have confidence that market processes deliver excellent outcomes for them in terms of price, quality, variety, innovation and service.”

It goes on to say that “we therefore focus our efforts and resources on deterring and influencing behaviour that poses the greatest threat to consumer welfare, and intervene in order to protect consumer welfare.”[5]

The CMA took enforcement action a couple of years ago against Amazon’s pricing rules for suppliers on the Amazon Marketplace, and Amazon unilaterally withdrew these provisions shortly after the CMA commenced its formal investigation. The CMA is now contributing to investigations of these types of provision at EU level as well.

At Ethical Consumer we have long argued that Amazon’s tax avoidance allows it to undercut tax-paying businesses in the UK, thereby creating competitive pressures for other retail companies to avoid tax too. This creates a race to the bottom which may leave shareholders delighted, but it leaves the poorest and weakest in society worse off. Many monopoly regulators are looking for high prices to indicate that an abuse of power is taking place, and this is clearly not the case with Amazon. However, we would argue that Amazon’s tax avoidance is seriously impacting ‘consumer welfare’ in a much broader sense.

 

 

The Booksellers’ Association

 

The Booksellers’ Association (BA) is a trade association for booksellers in the UK, representing over 95% of all bookshops. When Amazon entered the market in 1995 the BA had 1,894 outlets in membership. Now it has 905.6 It argues that Amazon’s growth means that “high streets and communities no longer have booksellers who provide author events, go into schools, churches or libraries, or run book clubs and reading groups”.

In December 2015 Tim Godfray, chief executive of the BA, explained its recent approach to the CMA: 

“We sent a formal submission to the Competition and Markets Authority outlining our concerns. It was a substantial document of about 300 pages. We were particularly concerned about allegations received from publishers and booksellers that Amazon was seemingly engaged in predatory pricing: 93% of booksellers believed that Amazon had been selling books below cost and 51% of publishers thought the same. We supplied a lot of title information examples to the CMA and we hoped that the competition authority in London would investigate, but instead they ended up passing the file over to DG Competition in Brussels. We are still talking to Brussels and we do not have a quick resolution.”[6]

 

The House of Lords weighs in
 

Reassuringly, many others are concerned about the market power of Amazon and, in 2015, a Select Committee in the House of Lords began a detailed investigation into complaints not just about Amazon but also about the behaviour of other fast-growing digital platforms like Uber, Google and Facebook.

As it pointed out in its final report:

“Online platforms present regulators and enforcement agencies with multiple challenges ... In addition to a perceived gap in enforcement, popular concerns about their use of personal data, disruption of traditional industries and corporate tax contributions have put pressure on policy makers to act.”[8]

It was instructive to hear from taxi drivers and hoteliers about how they felt the same sense of injustice as booksellers. Uber and Airbnb, for example, were accused of setting up competing models of supply which conveniently avoided many of the tax and regulatory issues in each sector. And the speed of their growth meant that regulators were left looking flat-footed and slow.

Disappointingly, despite it identifying tax avoidance as a key public concern, the Committee excluded any comment on tax from its final report:

“To avoid over-extending the inquiry we excluded questions of copyright, illegal content and corporate tax payments from the outset.” 

It did however confirm in its findings: “The markets in which online platforms operate are characterised by accelerated network effects. These may fuel exponential growth, increase switching costs, increase entry barriers for potential competitors and lead to monopolistic outcomes. Firms that succeed in harnessing these network effects may become the main platform in a sector, gateways through which markets and information are accessed. This can reduce choice for users and mean that they become an almost unavoidable trading partner for businesses. Such platforms are likely to possess a significant degree of market power.”

 

What about Europe?
 

The House of Lords Committee pointed out that the perception that large online platforms were above the law was putting pressure on policymakers to act at Member State level, resulting in increased regulatory fragmentation. It explained that “unless these concerns are addressed in a concerted way at a European level this fragmentation will continue to increase, undermining the possibility of creating a single market in digital goods and services.”

Now that the UK has decided to set off down a road away from Europe, it further complicates existing and future actions against Amazon – presumably working to the advantage of the fastest growing company in history.

 

Competition regulation and ethics
 

JK Galbraith and other economists on the left have not always held high opinions of competition regulators, regarding them as the creations of governments already too close to business but wanting to be seen to be doing something. So while expectations of the CMA may not be too high, it is worth asking two questions:

 

1. Is tax honesty a ‘product quality’?

Some people have viewed the ethical performance of manufacturers as an issue of ‘product quality’ (as opposed to price). If I want to pay extra for Fairtrade clothing for example, then I am buying a product with different or higher qualities.

As a consumer wanting to buy books online from a company paying a fair rate of tax in the UK, I feel that Amazon’s dominance of the online market and its aggressive pricing are forcing tax-paying competitors out or preventing new ones from entering. The House of Lords’ own report identified that around 50% of UK consumers have expressed an interest in buying in this way.[10]

Is it not therefore true that, because of Amazon’s monopoly position in the online books market, consumers are losing confidence that “market processes deliver excellent outcomes for them in terms of price, quality, variety, innovation and service?”

 

2. Is tax avoidance having negative impacts on consumer welfare?

If the CMA is to “focus its efforts and resources on deterring and influencing behaviour that poses the greatest threat to consumer welfare” is it able to investigate Amazon’s impact on tax avoidance in the online book market, on the grounds that consumer or citizen welfare is clearly not benefitting when falling tax revenues are leading to a shrinking welfare state?

 

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References: 

1 Amazon.com Annual Report 2015 

2 www.forbes.com Global 500 viewed August 2nd 2016 

3 Amazon.com 2016 Proxy Statement 

4 Amazon UK Services Ltd Annual Return 2015 

5 Prioritisation Principles for the CMA April 2014 

6 House of Lord Select Committee on European Union - 2015 Oral evidence 

7 UK book Sales Source of Purchase 2004-2014. BA Reports Library 2015 

8 HOUSE OF LORDS Select Committee on European Union 10th Report of Session 2015–16 Online Platforms and the Digital Single Market April 20th 2016 para 389 

9 Oral Evidence at 6 above from the BA about its members survey 

10 Oral Evidence at 6 above p 280