Firms are not passive recipients of regulation. When new rules or taxes are put in place, firms adjust their activities to accommodate the new setting, maximizing profits across a multitude of margins. Some of these altered behaviors can reflect the intent of the regulation, while others will not. Obamacare wanted employers to pay for employee’s healthcare, but many employers avoided the mandate by reducing hours below the threshold thirty hours per week. Affected workers faced lower incomes and had to search for second jobs. A 1990s effort to regulate cable television prices left prices largely untouched while cable companies curtailed quality and reduced industry investment.
This is the “Law of Unintended Consequences.”
Unintended consequences are universal. Inevitable. And, often painful. No regulatory intervention can fully escape them. The unforeseen (though often predictable) responses to a regulatory intervention may cause the regulation to do more harm than good.
A contemporary example of the law of unintended consequences involves proposed reforms to the nation’s antitrust laws, particularly when it comes to constraining large tech platforms such as Amazon.
Amazon is one of the nation’s most successful retailers, routinely topping the list of most popular retailers. Surveys suggest that 39% of Americans trust Amazon “to do what is right,” ranking nearly as high as the U.S. military (44%). In contrast, only 7% of Americans trust the U.S. Government to do the same, giving the government only a slight edge over Wall Street (5%). About 65% of Americans visit Amazon’s website each month, and there are nearly 100 million Amazon Prime subscribers in the U.S. alone. Amazon is the most popular online shopping site in the nation, employing in the U.S. nearly one million persons.
Despite this consumer satisfaction, many in Washington would nonetheless like to see fundamental changes to our antitrust laws in an effort to “save” us from Amazon. To this end, Senator Amy Klobuchar and Senator Chuck Grassley recently introduced a bill entitled the American Innovation and Choice Online Act to target the behavior of a handful of “covered platforms” with “non-discrimination” provisions.
Under the proposed bill, a “covered platform” is defined as “a critical trading partner for the sale or provision of any product or service offered on or directly related to the online platform.” In other words, a “covered platform” is an online service that allows users to connect directly to third party sellers. Amazon would fit within this definition because not only does it operate as an online retailer with direct sales to consumers, but Amazon also permits thousands of third-party sellers to sell their wares directly to consumers on its website. In fact, about 60% of Amazon’s sales are by these third parties.
As a “covered platform,” the proposed legislation would impose conditions on all sorts of relationships between Amazon and third-party sellers under the guise of non-discrimination (or equal treatment) including how Amazon presents its search results and how it handles back-office interactions with millions of third-party sellers. The difference, however, is that under the proposed legislation, even if Amazon has a legitimate business reason for the perceived unequal treatment, the proposed legislation considers a covered platform guilty until proven innocent. According to the bill, it is the defendant, not the complainant, who must establish by a “preponderance of” and “clear and convincing” evidence that the claims levied against it are incorrect or insubstantial. With millions of third-party sellers, it seems certain that at least a few (or a few hundred) will complain about something. Some already have as complaints in business relationships are nearly universal.
Second, this presumed guilt comes with a penalty of up to 15% of total revenue for the time of the alleged infraction. At about $1 billion in sales per day, the risks to Amazon are enormous, especially considering the company’s operating margin is only 6%.
Third, enforcement of the statute would be done mostly by the Federal Trade Commission (FTC). While the FTC has traditionally enjoyed a reputation for dispassionate analysis, things have changed dramatically under the Biden Administration. In fact, the sitting Chair, Lina Khan, has an explicit beef with Amazon and has stated publicly, absent any formal hearing, that the company is “guilty of antitrust violations and should be broken up.” Should this bill pass, whether Amazon could get a fair hearing at the FTC is a legitimate concern. The company believes it cannot.
Which brings us back to the law of unintended consequences.
While the sponsors of the bill may have good intentions, they fail to comprehend that no company, in its right mind, would expose itself to such legal liability. Amazon, and other “covered platforms,” will find ways to minimize exposure to this presumed-guilty, high-consequence regulatory intrusion based on vague “discrimination” language. Of course, sponsors of the legislation merely want Amazon and other covered platforms to alter their behavior toward third parties. But the vague standards, presumed guilt, and high financial stakes nearly preclude this outcome. Since the law applies only to “covered platforms,” the more rational response may be to avoid being a covered platform at all. For Amazon, that means shuttering third-party sales, or else modifying relationships to avoid the legislation.
Unsurprisingly, Amazon has informed its partners that the legislation, if codified, may force the company to shutter third-party sales. Sponsors of the bill are livid and argue nothing in the legislation requires Amazon to cease third-party sales. But even a cursory examination of the legislation explains Amazon’s position. Given the poor drafting of the legislation, the risks of maintaining the third-party platform may be simply too great. Shutting its third-party sales would certainly hurt Amazon’s profits, but not doing so might hurt profits more. The harm is not limited to Amazon. Ending third-party sales would reduce the value of the platform to consumers, third-party sellers, and Amazon’s employees.
Both the House and Senate must tread carefully as they contemplate updates to our antitrust laws. Whether one believes antitrust reform is warranted or not, Congress should contemplate the potential unintended consequences of its actions before it rushes to enact legislation that may last generations. In those respects, the American Innovation and Choice Online Act is a poor start.
Dr. George S. Ford is the Chief Economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies (www.phoenix-center.org), a non-profit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.