India has been accused of resorting to protectionism because it enacted regulations that impose limits on e-commerce platforms. The criticisms are unfair; India is doing what the U.S. should have done: preserve capitalism and free markets. Unchecked, the tech industry will keep breaking every rule.
In 2014, Facebook board member and PayPal co-founder Peter Thiel openly exposed one of Silicon Valley’s darkest secrets: that it likes to build monopolies. Competition is for losers, he wrote, because it limits profits; a monopoly can set its own prices and “deviously eliminate rivals.” He proclaimed that capitalism and competition were opposites, on the basis that “capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away”.
The tech moguls love monopolies because they enable them to amass unprecedented money and power — at the expense of everyone else. “Profits come out of customers’ wallets, and monopolies deserve their bad reputation”, Thiel admitted. His argument was that in a fast-changing technology world, “creative monopolies” such as Google make the world better by bringing in innovations.
The reality, though, is that monopolies are a cancer on capitalism. They limit competition and lead to abuses of power. In truly free markets, competition causes a constant churn and makes it difficult to be complacent in service, quality, or innovation; it creates checks and balances.
The tech industry is literally getting away with the murder of capitalism, and the forces that have enabled it to do so have outpaced U.S. policy makers, who understand neither the technologies nor the underlying dynamics. Note how Facebook, in the short 15 years of its existence, has been able to dominate social media globally and to fan the flames of hatred and divide societies by spreading misinformation. It used the tricks of psychological addiction to keep us coming back for more so that it could continue increasing its massive profits. It has either stomped competition or acquired it. Such are the powers that monopolies gain.
Amazon has been less sinister but is using its monopoly powers to dominate new industries and expand globally. It started by taking a dominant position in bookstores, publishing, and distribution before infiltrating cleaning supplies, electronics, and home goods. Now it is beginning to dominate all forms of retail as well as cloud services, electronic gadgetry, and small-business lending. It is making massive investments in new markets such as India’s.
Platforms are another powerful weapon in Silicon Valley’s arsenal, which it misuses. To understand how these work, think of the difference between a roadside store and a shopping center. A mall owner creates a shared infrastructure on which it takes care of the day-to-day maintenance and upkeep of the facilities so that renters can focus on selling goods. The mall has many advantages in size and scale, and every store benefits by the marketing and promotion done by others. The owner charges rent and benefits from the network effects. Facebook, Amazon Marketplace, and Apple’s App store are all platforms. These have given them a strategic advantage and made them amongst the most valuable companies in the world.
It is usually a win–win, unless the platform owner wipes out all competition and becomes the only way for stores to reach their markets. Once that occurs, it can increase rents and disadvantage anyone who competes with it. This is what Amazon is doing to producers that are successful on its platform, and stopping it the intent of the revamped Indian rules. “The idea”, says antitrust lawyer Lina Khan, “is [that] you can either run the marketplace or sell your goods on the marketplace, but not both.”
This is why I believe that India is doing a wise thing in limiting monopolistic practices. Its new e-commerce laws inhibit the ability of Amazon to do what it has in the U.S.: leverage its merchant platform to learn what products sell the best and produce an Amazon-branded version of them. According to Bloomberg, it uses its superior data-analysis capabilities to give itself an information edge and then stacks the deck further by demoting competitors in search listings, effectively using its privileged position as marketplace to cheat both its commercial clients and its clients’ customers.
Amazon has also been using its success in one industry to dominate another. It has been willing to forgo profits and use its advantages in shipping and warehouse infrastructure to kill off competition, a practice generally known as predatory pricing. As Khan wrote in The Yale Law Journal, Amazon’s practices resemble those of the all-powerful railroad barons, the independent businesses that ride Amazon’s rails to reach market’s becoming increasingly dependent on their biggest competitor.
This is how Amazon now captures nearly half of all U.S. e-commerce. It outwitted regulators by understanding anti-trust laws and focusing on low prices and consumer growth. It “marched toward monopoly by singing the tune of contemporary antitrust”, Khan explained.
Europe took the lead in reining in the tech industry’s anti-competitive behaviors; now countries such as India are weighing in. It is time for U.S. policy makers to restore American capitalism by applying the same lessons.
Vivek Wadhwa is a Distinguished Fellow at Carnegie Mellon University and Harvard Law School. You can follow him on Twitter: @wadhwa.