Monopsony gives tech giants enormous power—but could be their undoing

By Glenn Fleishman

The dangers of monopolies and trusts have long been clear. A company or an allied group that controls most sales of a good or service can use that power to set prices at an arbitrarily high level. Without competition, markets wither, and consumers and business customers pay more. Innovation suffers, because new entrants are deterred, while wages take a hit as the monopoly is the only game in town (or country) for certain kinds of workers. It’s a drag on the economy.

Monopolies are both unfair and inefficient. In a fair market, consumers would pay the lowest necessary price, allowing some profit margin that’s effectively arbitraged among multiple participants trying to acquire customers.

But what if the lowest price isn’t the best price for the market–because it hides the true cost, results in the goods decreasing in quality, and increases monopoly power to boot?

That’s the power of monopsony, a term coined back in 1932 and now seen everywhere from economics essays to the lips of Supreme Court justices. The flip side of monopoly, a monopsony results when one company is the sole buyer of a given product or service, including contract and employee labor. Like a monopoly, a monopsony can also result in higher prices and stagnating wages.

The paradox of the digital economy is that certain monopsonies have kept prices low. Logically, you would think that companies that have enormous power to flex would reap the highest profit they can. But we’re in an odd market moment, one that seemingly can’t last. Competition may drive prices down, but companies can’t infinitely squeeze vendors or sell below cost forever. At some point, suppliers balk or go under, or monopsonists crack as their business models prove unsustainable–or courts order changes. Is the end nigh?

Competition doesn’t mean competitiveness

Digital economy upstarts–even those 20-plus years old–may face avid competition for what they offer. Amazon isn’t the only company that can sell you any given book–thousands can. In a reader comment on an article at Deadline in 2014 about an Amazon/Hachette pricing dispute, Ward Anderson wrote, “Amazon sells about 50% of the books in North America. And the books it does not sell are readily available elsewhere. That’s not a monopoly.”

Similarly, you can opt to take a Lyft or a taxi instead of an Uber. And hotels, motels, and even Craigslist room rentals compete with AirBnb.

Yet regulators, consumers, and skeptics have feared that tech giants might exercise a de facto monopoly because they drown out other options through attention and convenience. In a monopoly scenario, prices would rise. So far, however, across a wide swath of products and services, they’ve remained low, and many large firms are known to price below cost, or are at least suspected of doing so. This can be illegal under the Sherman Act if this behavior is found to be predatory, as in a 1993 case Walmart lost. Such outcomes are rare, though. The FTC tuts-tuts at the notion of low prices being problematic these days, so long as they are not specifically designed to create a monopoly and raise prices.

The concept of monopsony has gained traction in the labor market, where workers control their own output and theoretically should have some power to set their wages. The long erosion of union power and more recent rise in non-compete agreements–even for minimum-wage employees–has kept workers from demanding the wages that the market would otherwise allow in an era of high employment.

Monopsonies can reduce diversity and innovation among suppliers as much as a monopoly does, because suppliers can’t afford not to sell to a dominant buyer, and yet the ever-lower prices a supplier-squeezing giant demands may hobble its suppliers. The need to hit price points dictated by a behemoth of a customer also affects quality, as a 2013 Foreign Policy essay noted: “[T]he almost inevitable result of such a practice is to force those suppliers to degrade the products they make, even if this results in lower prices.”

Walmart has been castigated for decades for relying on monopsonistic power to force its vendors to meet its terms, which in turn allowed it to set extremely low consumer prices. A case from the 1990s that Walmart settled involving automatic gate openers exemplified its behavior.

For now, with Amazon, Uber, Apple, and several others, monopsony seems to be working, and U.S. regulators act as if they have no tools to fight it, if the agencies even recognize it as a problem. (Some other countries prohibit below-cost pricing and have other laws that counterbalance some of the effect of monopsonies.)

Over the long haul, though, something has to give. In the digital economy tied to physical stuff, the monoposonists might lose the tug of war.

Infinite shelves fed by captive suppliers

A critical element in Walmart’s use of monopsony is that it produced vast profits for its founding family, executives, and shareholders, even if its dominance of retail was terrible for many of its suppliers, as recounted in this 2003 Fast Company story.

It’s Amazon–Walmart’s key challenger–that flipped the monopsony script. During Amazon’s early history, the Seattle startup accumulated massive losses as it competed on pricing, often selling far below cost, in order to achieve the size that would ostensibly allow it to extract volume discounts from vendors. The idea was that its online efficiencies would eventually let it earn a larger profit than Walmart and other brick-and-mortar chains.

That hasn’t played out in its earnings reports–more specifically in its measures of free cash flow, a tool that analysts and economists like to examine to understand how much a company truly has available to invest in its future. Free cash flow reflects what can be spent on research and development, to pay down accrued debt, expand production, and engage ahead of routine business.

In the Journal of Antitrust Enforcement, Shaoul Sussman recently wrote that Amazon largely has fundamentally negative free cash flow, even in quarters when it shows profits. That likely translates into Amazon selling below cost in a way that has no long-term positive outcome, because eventually the bills come due. In the meantime, the company has to flex monopsony muscles and extract whatever it can from suppliers.

That could result in predatory pricing, but Sussman argues that regulators need new tools to understand what’s going on, because there’s not enough required private or public disclosure to determine whether pricing is fair under the terms of the Sherman Act. In the future, he writes, Amazon might welcome this oversight “since it will ensure that their competitors do not compete against them in an illegal manner.” His paper provides a guideline for regulators to pursue an antitrust investigation against Amazon.

Amazon is a tricky case, however, because the company shows a profit under standard accounting rules and appears successful by many measures. Because the company’s pricing is low and consumers can buy from many other sources (although often at a higher price), it’s not clear that the market is broken.

A clearer example of monopsony at work is Uber within the U.S. (Uber has faced far bumpier roads in most other countries.) The ride-hailing company’s strategy combines impossibly low prices relative to traditional taxi service—surge pricing aside–and a ready supply of typically untrained people willing to serve as drivers. Taxi driving requires licensing, insurance, and other costs that are a bar to entry, and taxi commissions offer a controlled monopoly, which in turn creates an intentional monopsony in each city or region’s service area.

As Uber, Lyft, and others kicked taxis to the curb, as it were, potential cab drivers were deterred from entering that business because it paid less, while ride-sharing companies increasingly became the dominant employers of drivers. More specifically, while it had competition, Uber’s successful grab for attention among app users meant it could largely set the terms at which it purchased contracted labor. It started by paying generously, and the battle between drivers and Uber since reflect Uber’s seeming attempt to one day achieve profitability.

Lyft’s counteroffers and slightly different path–and those of other smaller ride-sharing companies in the U.S.–have given drivers alternatives to Uber, and some drive for both Uber and Lyft at the same time. But it’s difficult to drivers to know on the fly what they’re netting after the expenses they incur. Articles abound asking the question “Can Uber ever make money?” because all measures point to the prices it can charge being constrained through competition.

Cities and drivers are in the midst of a successful pushback that began before Lyft and Uber’s initial public offerings. New York City regulated what it considered a failed market flooded with an oversupply of drivers contending for the unsupportable fees it alleges ride-sharing companies offer drivers. Its taxi and limousine commission set a minimum hourly wage that has to be paid as a floor regardless of fares collected.

Seattle has attempted to allow ride-sharing drivers–who have been deemed contractors by various courts and employment bodies—to organize a union, but lawsuits have blocked its implementation. Meanwhile, drivers organized a global strike on May 8. And the stock market hasn’t been kind to either stock since their respective IPOs, suggesting that investors aren’t so sure about the long-term prospects for their business models.

Monopsony everywhere

Other examples abound in which a company’s domination by app or service allow it to exert monopsony control despite other potential buyers in a market or similar markets:

Apple only allows users to install apps on its iPhones and iPads from approved developers whose apps pass review. The company charges 30% off the top for purchases and sales of digital goods. Developers can set a list price, but can’t negotiate over Apple’s share. (Rumor has it that some bigger companies, like Netflix, have sweeter deals.) Apple’s tendency to promote cheaper (or free) apps sets a market expectation for price. The Supreme Court just allowed an antitrust lawsuit against Apple to proceed by users who say its quasi-monopoly on its App Store led to higher prices, though whether prices are actually higher hasn’t been proven. But Apple could face actions on the monopsony front, as Justice Brett Kavanaugh wrote in joining the four liberal justices in a 5-4 decision: “A retailer who is both a monopolist and a monopsonist may be liable to different classes of plaintiffs.”

Facebook is a monoposonist for user-generated content. It’s an interesting argument made by Antonio García Martínez that Facebook is the only “buyer” for information users provide, and has set the market price at zero, because it can sell ads and other services without incurring the cost of content creation. (Twitter is a competitor of sorts, but hasn’t as effectively exploited all the dimensions of the information its users voluntarily provide.) Martinez’s view explains Facebook’s failure to enter certain markets–such as creating its own news division–as it pursues that monopsony.

Airbnb dominates private, short-term rentals, particularly ones for business travel and in cities. Because it’s made a market and its name is synonymous with the type of travel, it can control the fees it charges and how it shapes pricing through competition among properties and incentives, even if it allows its hosts to set prices. Cities in the U.S. and worldwide have increasingly regulated and cracked down on Airbnb, however. In San Francisco, the company lost almost 50% of its listings (from 10,000 to about 5,500) in January 2018 after a city deadline for all hosts to register.

Google’s search engine advertising remains the vast market leader despite other search engines, allowing it to set pricing and terms for advertisers. (Google used to be a significant buyer of ad space on smaller publishers’ sites that it resold to its advertisers, exercising monopsony there, but that power has waned as the revenue evaporated.)

Bring in the lawyers

In 2010, when Amazon was in the middle of a dispute over pricing with book publisher Macmillan, its Kindle team–not Jeff Bezos–sent a letter to its customers in a company discussion board:

We want you to know that ultimately, however, we will have to capitulate and accept Macmillan’s terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books. Amazon customers will at that point decide for themselves whether they believe it’s reasonable to pay $14.99 for a bestselling e-book.

Failure to account for monopsony makes for odd outcomes. Two years after that Macmillan fight, Apple lost a case brought by the Department of Justice alleging it had conspired with the five leading publishers to raise ebook prices for new books, colluding against Amazon–which was selling those ebooks below cost, much to the publishers’ chagrin. (Publishers were eager to avoid cannibalizing high-margin hardcover sales, and therefore set wholesale ebook prices high for new hardcover releases.)

While publishers settled and Apple didn’t win an appeal or get the Supreme Court interested, Amazon’s below-cost price allowed it to continue to consolidate its strong hold over the ebook market. That allowed it to exercise monopsony pressure on publishers.

That led in 2014 to the bizarre fight between Hachette and Amazon, in which Amazon argued it should be able to set any price it wanted for ebooks. When Hachette disagreed, Amazon halted sales of the publisher’s print books and ebooks. Amazon even appealed to authors, trying to get them on its side; some supported the e-commerce firm.

In the end, Hachette stood firm and Amazon gave in, after financial cost to both firms. While Hachette’s books had remained for sale elsewhere, people who did their reading via Kindle—by far the biggest e-book platform—couldn’t purchase them. You see, Amazon had a monopsony on Hachette books sold through its Kindle store.

That hidden power to shape consumer sentiment by controlling supplier access has only expanded since. And tech giants seem only more willing to wield it. But how long can they retain their leverage? This year should be revealing.

 

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