Hello, Predatory Discounting

On another forum I participate on, a small business owner asks: how do internet retailers get away with retailing my goods at below my wholesale cost — isn’t predatory pricing illegal?

U.S. antitrust laws, which prop the consumer up as an object of worship on the altar of price, had a few protections for merchants too, the most notable of which was protection from predatory pricing.  This practice is where one seller prices goods so low, presumably at a loss, such that it forces competitors out of the market.  The fear was that this predator could then raise prices later in a resulting environment with fewer competitors.

Nothing in the Sherman and Clayton acts of a century ago could envision the internet retailing environment we have today, however, nor how rapidly and thoroughly it would impact our culture and expectations for buying and selling.  I find it telling that the U.S. Department of Justice has neither brought forward nor prosecuted a single case of predatory pricing since 1993, at the advent of the internet.  Despite rampant and shameless predatory pricing within and into this country from foreign sellers today, no one in government, law, or anyone else seems to mind.  Those Amazon Prime accounts must be in the greater public interest.  Amazon’s CEO has even made statements about his competitors to the effect of driving them out of business while no U.S Attorney seems to care.

Therefore, given this new paradigm, we now have de-facto legal predatory discounting.  Hurray for consumers?  If only it were that simple.

Freeze all things in place and, yes, a single consumer may today enjoy a ridiculous discount on something and be net-ahead.  So too, a single tree in a dry forest may catch fire, burn alone, and do no significant damage to the ecology of the larger forest.  But does a single tree in the midst of others ever burn without spreading?  Neither does a single consumer get a one-time discount, saving the economy from harm.

What harm?  It’s simple.  All prices represent very little in the real value of the materials used to make them.  Understand this: almost all of the price represents the value of the labor of people who extracted resources from the ground, sea or air and brought forth a useful product that could be purchased.  Therefore, when a price is set that fairly rewards everyone who touched the product for their contribution to it, discounting that price means some one or more people take a pay cut.  The greater the discount, the greater the pay cut.

So what?  Not my (the consumer’s) problem, right?  That’s the single tree argument.  Your boughs may burn, but mine won’t.  Are we sure about that?

You see, we trees are made in communities.  Like forests, we not only live and work closely with one another, we are inseparably interdependent on each other.  That’s what an economy and marketplaces, in a nutshell, really measure.  Without each of us doing our work and selling it to each other, we die.  So, we are not solitary trees.  If I burn, you burn.

And so, when you get an amazing discount, again and again to the point of a shopping addict who avoids ever paying the fairly set price for goods, and as that forest fire spreads through all the trees, we are burning up our own paychecks and job opportunities which are the fuel for our consumer purchases.  Don’t believe me?  Ever hear about the 1929 theory called the “Six Degrees of Separation”, popularized in a 1990 play?  The theory states that everyone and everything is six or fewer steps away from any other person in the world.  Restated in an economic framework, the work you get paid to do as an employee is six steps away from anything you buy (and discount you enjoy).  Extract rewards for the work of people from the marketplace, and within six transactions that discount will come back around to make you and your work less affordable (in other words, there is pressure to discount you) too.

OK, so you can accept that there is some impact your purchases make on markets and even your own employ-ability, but like casting a vote for President, your sole decision to do something differently isn’t going to change the outcome.  That is true.  And that is why we sometimes must use law — in the public interest — to protect us from ourselves.

Antitrust laws were enacted in the public interest.  The problem with those laws today is that communication technology has largely undermined them.  As a result, we have a condition which is hurting our marketplaces.  Too little profit is just as destructive as too much.  When producers earn too little profit, they lay off workers, cut production corners, produce products more cheaply that are less satisfying and fail sooner, customer and warranty service quality plummets, and indeed entire specialty industries can be eradicated leaving users with no options but bad ones.  Here’s an easy impact we can all relate to: ever wait forever to talk to a rude customer service agent to help you with a product problem that you may have gotten a great price on??

As of this writing, political pundits are celebrating continued fall in the unemployment rate to between 5 and 6%.  It’s a ridiculous statistic to even report, since the “real” rate of unemployment is closer to 15% or more.  We just don’t count the double number of people who have been unemployed or underemployed for so long that they no longer get government benefits.  You see, you must be recently unemployed to be counted as such.  Again, ridiculous.  And why is good-paying work so hard to find?  Because good-paying consumers are so hard to find.  I guarantee that when you lose a job or a business, you will then most certainly be looking for bargains.

Somehow, we as a nation and an economy need to be willing to ask hard questions and consider whether there is some reform of law we need to make that, fairly to everyone, stops market pricing free-falls.  Yes, a price can be too low.  Paying for things what they are worth, in the share of value paid to people to make them, expands an economy, employs more people, pays them better, and gives them the extra dollars to pay the technically higher prices without reducing their standard of living.  In fact, profitably markets are accretive to the population — they make everyone a little wealthier and able to enjoy a little more of the good life.  Markets sickened with predatory discounting, on the other hand, place pressures on employment, wages, and product quality and makes everyone a little bit poorer even while they are drunk-in-love with the notion that they have saved their money through discounts.

Most will never understand what I am saying, here.  They don’t want to.  They won’t want to until government deficits, employment, and real wealth becomes such a crisis that when everyone is crying “someone do something!” they may finally let someone who understands the problem actually do it – like enforce predatory pricing laws once again.

Jeff Koenig