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Amazon: Monopoly in the 21st Century, Part 2

- By Stepan Lavrouk

Earlier this week, we had a look at some of the ways in which Amazon (AMZN) uses predatory pricing to destroy competitors. By offering products like the Kindle and Prime at a loss, Amazon is able to push out smaller companies that need to operate similar services profitably. Once the competition is gone and consumers are locked into their platforms, Amazon is able to raise prices, as it did for Prime in 2014. Although there have been calls for regulators to step in against this clearly monopolistic behavior, little actual change has happened.

Indeed, Amazon's reach goes beyond retail and streaming. For years, Amazon has been building up its own network of warehouses, as well as a fleet of cargo planes. As was reported a few months ago, the company is stepping up its expansion plans for what it calls Amazon Air, in an effort to compete with logistics companies like UPS (UPS) and FedEx (FDX). The implications of this are far-reaching.

E-commerce is a monopsony

Amazon's grip on the logistics industry has actually been tightening for a few years. As noted in part one of this series, Amazon comprises roughly 50% of total U.S. e-commerce. As such, the market for e-commerce delivery in the U.S. is a monopsony -- that is, a situation where a single buyer (Amazon) substantially controls a market. Due to its enormous size, Amazon is able to demand steep discounts from companies like UPS and FedEx, as they are simply not in a position to refuse the business.

While this is obviously a problem for the logistics companies themselves, it is also a major problem for smaller sellers, who have to pay higher shipping fees, as UPS and FedEx need to make up the shortfall from their Amazon contracts somehow. Ironically, this has created a situation in which small sellers are increasingly turning to Amazon itself for delivery services. It's a lose-lose scenario for shipping companies -- they cannot afford to refuse the biggest buyer on the market, but doing business with Amazon makes their rates less attractive for the other half of the e-commerce market.

Fitting the pieces together

In this context, Amazon's latest push to develop its own delivery service is a no-brainer. Doing so allows Jeff Bezos to fit together the complementary pieces of this monopoly: Amazon controls what is by far the most popular e-commerce marketplace, it offers more competitive shipping rates than dedicated logistics companies (or is at least on the way to doing so), and it provides a wealth of cloud support services for independent retailers, which ensures a close relationship with those companies.

Since it owns the marketplace, Amazon is in a position to unfairly promote its own products at the expense of third-party sellers by displaying them more prominently, using fluctuating pricing that undercuts competition and charging sellers more for the use of these services.

Crucially, Amazon's size and vertical integration of everything from shipping and publishing to marketing and cloud services make it increasingly less likely that a viable alternative will emerge. Whilst everyone loves Amazon's lower prices, perhaps it is time to think about what the long-term implications of this are.

Disclosure: The author owns no stocks mentioned.

Read more here:

Amazon: Monopoly in the 21st Century, Part 1

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Joel Greenblatt: Focus on the Cash Flow

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This article first appeared on GuruFocus.