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What Is the Appropriate Market for Analyzing Amazon’s Alleged Power?

The current debate over whether Amazon holds the power of a monopolist or a monopsonist is likely to be narrowed to one question in a court room: What is the relevant product market that Amazon is allegedly dominating? Since our last post on the Amazon and Hachette dispute, there has been increased discussion in the general press, culminating with 2008 Nobel Prize winner for economics Paul Krugman telling readers of the New York Times that Amazon is a monopsonist.

Others writing in the general press disagree, arguing that Amazon has many competitors. As Annie Lowrey wrote in New York Magazine, choosing the books business as the relevant market is “cherry-picking.” She contends the relevant market might be e-commerce sales, where Amazon reportedly has 15 percent of the total market. And among traditional retailers, Lowrey states Amazon has “but a tiny slice” of the market, and Matthew Yglesias notes at Vox that Amazon “faces fierce competition.”

As Amazon’s defenders are quick to point out, Amazon is involved in buying and selling many products: so why define the market so narrowly as to inflate Amazon’s appearance of dominance? And why penalize a company that appears to have been an efficient competitor?

We write from a legal perspective only on this increasingly public debate. Amazon’s defenders are correct that the Sherman Act does not penalize companies based on “mere size” or even the existence of “monopoly power.” In one sense, a monopoly can be considered an ideal outcome for consumers if it is the result of superior products, business acumen, better customer service, or economic efficiency. Indeed, this year’s Nobel Prize winner for economics, Jean Tirole, when asked about the Amazon/Hachette dispute, turned the question to consumer benefits and noted “When you have a small newspaper that’s free and just charges for advertising, it’s not preying on anyone.”

Most of the articles cited above note that Amazon’s alleged power appears to arise from its success among consumers. Consumers appreciate the low prices, the quick delivery, and the overall business model of Amazon. Thus Amazon’s power—even if it has power in the antitrust sense—appears to reflect an ideal outcome of competition.

But the next question in a legal analysis is how Amazon has been using the alleged power arguably gained through its superior skill. The New York Times reported on October 20 that Simon & Schuster (“S&S”) recently reached a multi-year deal with Amazon for electronic and physical books and that S&S obtained Amazon’s assurances that the books of S&S authors would be available continuously throughout the 2014 holiday book buying season. What would publishers without those assurances—like Hachette—allege if they were to challenge Amazon on antitrust grounds?

Hachette would allege the relevant product market in terms of the alleged anticompetitive conduct by Amazon causing its purported injuries. That conduct does not occur in the e-commerce market or the traditional retail market of Ms. Lowrey and Mr. Yglesias, but it does occur in the marketplace for books. Hachette may therefore be able to pursue an antitrust theory premised on a market definition of books or e-books rather than the e-commerce market more generally.

One factor for defining a relevant antitrust market is the identity of a defendant’s competitors that consumers might switch to if a defendant’s sales prices rise or the distributors that book publishers may switch to if a defendant’s purchase offers fall. If consumers were trying to buy Hachette books they would look to other book retailers; they would not look to Amazon’s competitors for other types of products. The same would be true for book publishers looking for distributors.

Although Amazon would have many counterarguments about the uses of its alleged market power, the debate in a court room about market power and market definition is likely to be very different than the arguments being made in the popular press.