Thanks to smart antitrust, Whole Foods is no longer 'Whole Paycheck'

It turns out we can learn a lot about antitrust from cheap tomatoes. When Amazon acquired Whole Foods, the antitrust agencies’ failure to block the transaction was vigorously criticized as another indication of antitrust enforcers’ having fallen asleep at the regulatory wheel. 

Commentators pointed to the $13.4 billion transaction as evidence of the expanding reach of digital monopolies into every corner of the economy. The prognosis for competitive markets was so grim that some even argued (and still argue) that companies like Amazon should be broken up. 

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Yet, the market has disproved these doomsday predictions. So far, it appears that Amazon’s foray down the grocery aisle has done nothing but good for consumers. Whole Foods’ recent announcement of dramatic price reductions is only part of reinvigorated competition in the grocery market. 

The entry of a formidable competitor has precipitated substantial discounts and prompted “old economy” incumbents to invest in “new economy” innovations, such as expanding online ordering and home delivery services. 

This is exactly the type of price competition and product innovation that antitrust is designed to foster. Blocking the Whole Foods acquisition would have been classic policy overreach from the “big is bad” days of pre-Chicago antitrust.

The rush to condemn the Amazon-Whole Foods acquisition is indicative of a resurgent antitrust populism that has emerged in policy commentary and has been advocated by some politicians. These calls for dramatic intervention on antitrust grounds overlook three critical points. 

First, populist antitrust assumes that market concentration is at historically high levels, which therefore demands urgent intervention. Available evidence does not support this blanket assertion.

Consider the following: Amazon accounts for almost half of all online U.S. retail transactions, which potentially raises antitrust concerns. Yet, Amazon accounts for approximately 5 percent of online plus offline retail transactions.

Through Whole Foods, Amazon accounts for about 2 percent of the national grocery market (Walmart accounts for about 25 percent, so it would seem that Amazon is a welcome challenger). In short, concentration levels can vary considerably at appropriately granular levels of market definition and often may pose little risk to competition. 

Second, even when there is evidence of high concentration, populist antitrust does not seriously consider that high market share only confers pricing power to the extent that a firm is protected from entry. 

Google’s almost 90-percent share of the U.S. search engine market and Google Chrome’s almost 50-percent share of the U.S. browser market may be a cause for concern but only if users cannot easily switch and challengers cannot easily enter. 

If those assumptions are not satisfied (as to which there is much serious debate), then Google will act as if competition is just around the corner. While Google, Facebook, Netflix and Apple may seem untouchable, the same was once said of Blackberry, Nokia, AOL, MySpace and Yahoo! 

In 2009, Microsoft’s Internet Explorer represented about 70 percent of the U.S. browser market; in 2019, it's less than 5 percent. Technology incumbents fall often and quickly.

Third, populist antitrust does not pay sufficient attention to the inconvenient fact that certain industries efficiently converge on a handful of firms that win the race to capture the market.

To the extent that competitive forces persist (which raises those tricky factual questions about entry barriers), the race can always restart and consumers enjoy low prices even if market concentration is high. 

Digital markets are prone to winner-take-most outcomes due to a combination of economies of scale (it's really expensive to develop Microsoft Windows and really cheap to deliver one more file of Windows) and network effects (Instagram with one user is a curiosity, Instagram with lots of users is worth billions). 

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Yet those firms often give away valuable services at a zero out-of-pocket cost. Like the Amazon-Whole Foods acquisition, the result has generally been a bonanza for consumers, who enjoy access to a broader menu of products and services at a lower price than ever before. 

This is not to say that antitrust enforcers should go to sleep. To the contrary. The winner-take-most tendencies of digital markets merit a watchful eye from antitrust enforcers to ensure that incumbents do not tilt the playing field and avoid having to compete on the merits. 

But antitrust vigilance must be sharply distinguished from antitrust populism. The evidence-based toolkit of modern antitrust has been refined over decades of judicial reasoning and regulatory analysis. Throwing it overboard is likely to result in outcomes for consumers that are neither cheap nor smart. 

Jonathan M. Barnett is the Torrey H. Webb Professor of Law at the University of Southern California, Gould School of Law.