Biden's Executive Order on Competition
Recently the Wall Street Journal stated that President Biden’s July 9 executive order on competition is a “sweeping proposal to spur competition.” That raises an important question: how can a government spur competition? Economics has a lot to say about that question. The major way, which goes back to Adam Smith, is to get rid of barriers that government itself uses to block or limit competition. While the Biden executive order does mention one government barrier to competition, occupational licensing, it is vague about what should be done on that issue and passes on getting rid of most of the extensive government barriers to competition. Unfortunately, much of the order’s focus is on the danger of market concentration. It might surprise Biden and many in his administration to know that economists extensively debated the issue of market concentration in the 1960s and 1970s and that the bottom line is that market concentration is not a good measure of the presence or absence of competition.
Seen from this perspective, the Biden administration’s latest proposals are a grab bag: some, fortunately, might increase competition, some would decrease competition, and some would dictate outcomes rather than letting the competitive process emerge.
These are the opening paragraphs of my latest article for the Hoover Institution’s Defining Ideas. It’s “How Can the Government Spur Competition?” Defining Ideas, July 15, 2021.
Another excerpt, under the subhead “The Anti-Amazon Wrath of Khan:”
One person present at Biden’s signing of the executive order was Lina Khan, Biden’s new appointee as chair of the Federal Trade Commission. Not surprisingly, the FTC is featured prominently in the order and, whatever her role in writing it, Khan will have a role in implementing it. Khan made her reputation in January 2017 when, as a law student, she wrote “Amazon’s Antitrust Paradox,” a long article in the Yale Law Journal. In that article, Khan showed herself to be Learned Hand’s twenty-first-century embodiment. In page after page Khan discussed Amazon’s efforts that have brought prices down to consumers and had not, Khan admitted, resulted in fat profit margins for Amazon. She claimed in her article that Amazon’s P/E ratio was 900. It was much lower at the time of publication but, of course, there are lags between when the article is finished and when it is published. The closest I could find to 900 in the previous two years was 720 in September 2015.Let’s go with that.
Khan’s reasoning is a little different from Hand’s. She argues, quite reasonably, that the stock traded at such a large multiple of current earnings because investors expected much higher earnings in the future. And, she feared, Amazon would get those earnings by setting much higher prices. In short, Khan feared that Amazon was engaging in predatory pricing—pricing low to knock out competitors and then setting prices high after they’re gone. But as of July 12, 2021, Amazon’s P/E ratio had come much closer to earth at 70.72. That’s still high, but not ridiculous. If Khan’s fears are valid, then we should see Amazon pricing not just higher than before, but higher than its competitors were pricing before Amazon competed them out of the game. We don’t.
The closest Khan comes to making her case is her example of Amazon setting up Amazon Mom, discounting prices to compete with Quidsi on items like diapers, buying Quidsi, and then reducing the discounts. She approvingly quotes journalist Laura Owen’s statement that “The Amazon Mom program has become much less generous than it was when it was introduced in 2010.” But that doesn’t make her case: reduced discounts are still discounts and “less generous” is still somewhat generous. In short, prices at the end of the process were still lower than before Amazon entered.
Competition 1, Predatory Pricing 0.
Read the whole thing.