
Big tech is built on predatory pricing - DrPsyker
https://medium.com/@HenryInnis/big-tech-is-built-on-predatory-pricing-why-arent-we-talking-about-it-2afee533d32e
======
habosa
What Uber is doing here should absolutely not be allowed. Whenever you go to a
city where Uber is in it's first year of operations the prices are insanely
low. This also happens when Uber launches a new product like Pool. This
enables them to crowd out any competition and then raise prices once they've
got control of the market.

I have a friend in SF who takes Uber to work every day. It's about 3.5 miles.
I assumed he was dropping boatloads of money but he told me it's $2.50 each
way! The IRS estimates vehicles costs alone at about $0.55 a mile and that's
not including actual pay to the driver and Ubers cut. Offering a service at
this price is not only unfair to for-profit competitors but messes with public
transport as well. It's using VC money to crowd out the market.

Unlike with cloud services (the other example) it's much harder for
competition to Uber to reappear once it's disappeared. There's a fixed supply
of willing drivers and big network effects at play.

~~~
basseq

      What Uber is doing here should absolutely not be allowed.
    

What Uber is doing is called loss leading. It would be very hard to outlaw or
regulate in any sort of "fair" way. The result you fear--a monopoly with price
control--is illegal and is tightly regulated.

~~~
crdoconnor
>The result you fear--a monopoly with price control--is illegal

Monopolies are not illegal.

~~~
Veen
> Monopolies are not illegal

No, they aren't. But can you think of any examples of a company that built a
monopoly and refrained from exploiting it to the detriment of the market and
consumers in the long term?

------
philipkglass
Regarding Amazon, I seem to recall reading similar accusations leveled at Wal-
Mart around the turn of the millennium. Their low prices were going to destroy
local small retail businesses, then they'd reap monopoly profits after the
competition died.

It looks like the first thing happened but the second didn't. Prices might
have rebounded a bit at a Wal-Mart after their initial arrival in a community,
but they didn't rebound enough to match (much less surpass) the old prices of
Bob's Local Hardware Store or Alice's Wine and Spirits.

It's hard to tell if Amazon's retail aim is genuinely predatory the way the
author accuses it, or if Amazon's just planning to legitimately, sustainably
live with lower margins than other retailers, by dint of huge scale and long
term cost-containment efforts. They're investing in roboticized warehouses and
have no brick-and-mortar retail locations apart from Whole Foods.

~~~
PenguinCoder
Thing is, the profit margin is still there or even greater for Wal-Mart than
'Bobs Local Hardware Store'. Wal-Mart items are generally poor quality
(cheaper) and they are notorious for bullying manufacturers and distributors
for meeting a target price. They often win in these cases, which keeps their
prices lower. But make no mistake, some of the cheaper items are not the same
items you would get from even another big box retailer, let alone the mom and
pops that used to be in business.

~~~
skybrian
Yes, I've read elsewhere that they're often not the same items. Whether this
is good or bad for consumers is hard to say. Are the corners being cut things
that their customers care about? If the customers are happy with what they
get, the lower price is a win, and Walmart is right to encourage their
suppliers to economize where they can.

Of course, there are also places where quality _shouldn 't_ be cut, and other
side-effects of the drive to lower prices (lower pay for workers, etc). But
this still seems like a subjective judgment call to be made on a case-by-case
basis, not an obvious black-and-white issue.

------
jondubois
I would say that almost all VC money goes towards executing various predatory
strategies.

VCs have a monopoly over user attention through their connections to industry
influencers. They essentially control all the tech blogs and media channels
and they use them to drive traffic to companies that they have invested in.

Bloggers are rewarded for doing writeups on VC-backed startups and they are
punished for doing writeups on bootstrapped startups.

VCs also drive up online advertising prices to make it not viable for small
players to compete based on CPC.

Finally, VCs have a monopoly over acquisition channels within most large
corporations so they can make sure that your startup will never be acquired by
a large corporation unless you accept VC funding.

For the last decade, the tech industry has been ripe with corruption and
injustice. That's why we have cryptocurrencies now, it's a desperate solution
to allow people to sidestep the entirety of the existing system.

~~~
amelius
> I would say that almost all VC money goes towards executing various
> predatory strategies.

It's not just VC money.

For example, YouTube has been financed by Google search, operating at a loss
for many years, driving competitors out of business and raising barriers to
entry.

~~~
jondubois
True, what's particularly unfair about it is that the companies tend to use
proceeds from an industry in which they have a monopoly to fund their price
war in other industries where they don't yet have a monopoly. The strategy
seems to be to monopolise each industry one after another, using the proceeds
of the previously captured monopoly to capture the next one.

If this keeps going, eventually we're going to end up with one giant mega-
corporation which owns everything. There will be no more government to protect
citizens; everyone will work for that company and it will be the most unfair
class system imaginable.

~~~
DrPsyker
This is bang on.

------
bryanrasmussen
the thing is, will it work. I can understand it has worked in the past but it
seems to me in the case of Amazon, it seems they've been doing this for more
than a decade and it hasn't seemed to work yet in that they are not yet at the
level where they can raise their prices.

The same with Uber, will they ever really kill off Lyft, local taxi services
(especially with local government fighting them doing so) and public transit,
as well as the other competitors springing up. It seems like a massive
transfer of VC wealth to the public without a really well thought out plan as
to when and how they will be in a position that they can securely raise the
prices. I think they will never be able to. That a tactic has worked in some
industries and situations does not mean it will work in every situation. I
mean where I live there are other, non-Uber services that allow you to easily
pick up cars sitting around the city by using your app to get into them. These
are also competitors. Self driving cars might allow them to cut costs, but
these will also allow others to compete on other services. In short, I think
the VCs who dream of Uber someday gouging their customers are deluded, and the
same for Bezos - if that day was ever gonna come it would have come some time
ago.

------
skybrian
This analysis seems pretty shallow. It's interesting that Amazon is losing
money in North America. But why? That's clue worth investigating further, not
a reason to immediately assume predatory pricing.

~~~
banku_brougham
This article should have led with Uber, the author picked only on quarterly
YoY and posted a misleading statement about losses, when it was just a decline
in income. Yes, very shallow analysis.

~~~
DrPsyker
Well, given there's shipping costs here blowing out and Prime has been proven
to be losing money the more a customer buys, not sure your statement holds up.

~~~
ocb
I'm certain there's some compelling argument to made about Amazon abusing its
market position but this isn't it.

You say "Prime has been proven to be losing money the more a customer buys"
like that isn't an obvious consequence of having flat pricing for shipping.
The idea that Prime and Amazon's shipping as a whole are a loss leader isn't a
new insight.

------
dredmorbius
The term _monopoly_ originates from the concept not of pricing behaviour, but
of _control_ :

 _" exclusive control of a commodity or trade," 1530s, from Latin monopolium,
from Greek monopolion "right of exclusive sale," from monos "single, alone"
(from PIE root _ men- (4) "small, isolated") + polein "to sell," from PIE root
* pel- (4) "to sell."*

[https://www.etymonline.com/word/monopoly](https://www.etymonline.com/word/monopoly)

There's a related term, little used today, that references actively seeking to
control a market with an interest in manipulating price:

 _To purchase either the whole or large quantities of, for the purpose of
enhancing the price and making a profit; hence, to take or assume in undue
quantity, proportion, or degree; as, to engross commodities in market; to
engross power._

(Definition #5.)

[http://www.dict.org/bin/Dict?Form=Dict2&Database=*&Query=eng...](http://www.dict.org/bin/Dict?Form=Dict2&Database=*&Query=engrossing)

Much of modern economics underplays this at best. The Libertarian favourite,
Henry Hazlitt's _Economics in One Lesson_ , fails to mention the matter of
monopolies at all.

[https://www.mises.org/library/economics-one-
lesson](https://www.mises.org/library/economics-one-lesson)

Sometimes it's the censorship and deletions that tell you most of what an
organisation or ideology is concerned with.

------
alexasmyths
The idea is interesting but I don't think he proved his premise.

------
stale2002
This reminds me of an old Russian joke.

3 business owners are in a communist jail. That ask each other what they are
in for.

Person 1: "I set my prices lower than my competitors, and got sent to jail for
price dumping!"

Person 2 "I set my prices higher than my competitors and got sent to jail for
price gouging!"

Person 3 "I set my prices to be the same as my competitors and got set to jail
for price fixing!"

It has been almost 20 years since Amazon got started. When are those mythical
monopoly price increases coming?

I bet that in another 20 years people are going to be saying the same argument
about price dumping or whatever.

~~~
jacknews
"When are those mythical monopoly price increases coming?"

They are not.

But the "promise" that they are, or could, inflates Amazon's stock price.

This is how they bank profit, not by traditional profit on income. This has
the advantage that they don't need to pay tax, since they don't make any
accounting profit.

~~~
stale2002
Ok then. How are consumers harmed then, if prices never increase?

If prices forever stay low, then consumers ALWAYS benefit, right?

You are making a different argument than the one that the article makes, FYI.

~~~
dredmorbius
A monopolist _controls the market_.

[http://www.latimes.com/books/jacketcopy/la-et-jc-amazon-
and-...](http://www.latimes.com/books/jacketcopy/la-et-jc-amazon-and-hachette-
explained-20140602-story.html)

The focus on price, alone, is a distraction. The monopolist can choose winners
and losers, favour or exclude sellers _or_ buyers, unilaterally determine and
dictate dispute resolution (e.g., Amazon's purchase dispute process), in
favour of buyers, or sellers, or parties specified on other bases.

Or as comms providers have done in the past, and it is feared they might do if
network neutrality obligations are lifted, as the FCC are attempting to ram
through presently.

The monopolist isn't answerable to the public or citizenry, as a government
body is.

A monopoly market is _not_ a competitive market, with many buyers and sellers,
to which any given buyer or seller has a recourse should one counterparty
decline business or terms.

A monopolist creates a situation of rents, by controlling and regulating
supply. This allows for price inflation if demand can then be influenced, much
as is the case with land.

That's just off the top of my head. Any further questions?

~~~
stale2002
Maybe your points are correct.

But my argument is that there must be provable consumer harm, and that
consumers are the only thing that matters.

So all those bad things that you mentioned, do they hurt consumers AND is
Amazon actually doing them? That is the only thing that matters, and would be
the thing that should be determined by whatever court case happens.

~~~
dredmorbius
I disagree with both points.

There may be _highly probable_ harms which cannot be directly proven, or for
which various standards of proof are thwarted by the monopolist itself. Since
"wealth is power" (Thomas Hobbes, Adam Smith), monopoly power itself conveys
additional power. There's a strong argument for additional responsbility,
limits, and/or oversight as a result, for which there's a long list of
supporting argument (Smith, Mill, Marx, Galbraith, off the top of my head).

Secondly, consumers are only one of several parties potentially affected. The
other groups may be competitors, suppliers, vendors, the public at large,
natural systems, etc. I'd have to think over this at greater length.

The argument that price and "consumers" are the only factors of significance
in considering monopoly harms is a distinctly modern one, promulgated almost
exclusively by monopolists themselves. To rather great effect.

After all, wealth is power.

------
thisisit
The author seems to be confused on cause and effect. The newspaper example
shows customers were better off 3+years with "The Times" pricing.

The whole thing needs to be understood by looking at how things actually
started. Let's take the example of Uber. People weren't happy with the way
taxi services were operating so it was ripe for "disruption". But, getting
into a stranger's car for a ride was not really a solution.

So Uber had to create a two way market - entice people to offer their cars and
entice people to take a stranger's car. They also had to offer up incentives
on both sides of the market to ensure participation - offer drivers with perks
and higher payouts while the riders got cheap pricing. Once the market was
established and verified they had to find a way to make money. The only
problem was riders or customers could not be inconvenienced, at least a lot.
So, now the drivers had to bear the brunt.

But, this will lead to some unintended consequences. An example is that
instead of trying to charge customers fairly Uber uses "surge pricing" \- so
much so that there are place which are mulling to ban this practice. Then
there are cases of drivers trying to defraud riders too. This invariably
causes lowered customer experience.

------
safsdafsa
Its very important for people here to remember that there are three ways to
increase price:

1\. I increase the nominal price 2\. I decrease the amount I give you 3\. I
lower the quality of what I give you.

So all the comments that state: "There's no observed increase in price by
[insert monopolist]" have to also assert that points 2 and 3 didn't occur.

If I sell you a chocolate bar and I start using food grade wax in increasing
quantities I'm effectively increasing the price of chocolate (and recreating
Hershey's ;).

So, if I can't reliably buy genuine batteries (or much of anything really)
with Amazon and I have to choose between them and Costco, then Amazon's are
effectively more expensive.

Not saying amazon is or isn't awesome... but they have been jacking their
prices!

------
eevilspock
The most damaging effect of predatory pricing is the squeezing of the labor
force providing the underlying goods or services. Amazon, Uber and their
customers win, and the low income people working the textiles, assembling the
electronics, or driving the cars, lose.

------
programminggeek
Ironically, if they charged more, the odds are there would be scores of
articles about how they are making TOO MUCH profit and should give the money
away to worthy causes instead of being "greedy" and keeping the money for
themselves.

In truth, people will always complain about something when you are successful.
This probably means Amazon is doing something right.

~~~
rtpg
Alternatively people are complaining because Amazon is doing something bad.

Imagine if you're trying to sell lemonade on the street at a reasonable price,
and the rich kid down the block sells at 50% the cost of goods. And all that
just being funded by their dad.

At one point they're going to be the only lemonade salesperson on the block,
and those subsidies are probably going to end. Meanwhile a market was up-ended
and everyone who isn't the "winner" ends up losing.

Short term, customers are happy because someone is just giving them free
money! But in the end it's not sustainable.

If we think we should let VCs subsidize services, we can just cut out the
middlemen and tax their money away instead of playing these kinds of games.

~~~
repsilat
And what happens when the prices get jacked up? Ideally (perhaps too
optimistically) new competitors will arrive on the newly competitive market.

If the loss-leading is unsustainable then it hardly needs to be discouraged,
and if it's sustainable it's not really loss-leading. (If it's funded by some
other venture with higher margins, like AWS, other players can compete in
_that_ market without the albatross of having to maintain the cross-
subsidies.)

------
m0llusk
Capitalism ultimately requires basic disclosure of product content,
manufacture, and other costs. Simply informing people of the percentage of
spreadsheet magic in offerings along with the ingredients, labor costs, and so
on could allow market to observe and react to this kind of thing without
external regulation.

------
hknecht
>> “I’m all for capitalism. But predatory pricing to build market share isn’t
capitalism. It’s simply anti-competitive and we must call it out. “

I have to disagree, creating a monopoly is part of the capitalistic process of
creating profits in the long term and I would say it’s one of the aims of
capitalism itself: when you compete do you want as many competitors as
possible? It could be for some reasons but it certainly can be the opposite
for more reasons as well.

While I do agree that this may have some negative consequences for customers,
I can’t understand how they would legislate this:

If they keep with this strategy they either fail (or just crash very hard) for
not having a scalable business or they prosper in some way, let’s say by
increasing prices: if they prosper the only thing we could do is making sure
that customers can access more convenient offers elsewhere.

That’s why I think having transparent and accessible information is truly
enforcing meritocracy, while preventing monopolies is not

~~~
Veen
> if they prosper the only thing we could do is making sure that customers can
> access more convenient offers elsewhere

Once they succeed, there isn't a viable "elsewhere" left.

------
tejasmanohar
Interesting read, but the analysis felt super surface level. It would be
useful to understand what expenses cause Amazon to be unprofitable and whether
they can become cheaper over time through market dominance.

------
kapauldo
Great research and writing. The inevitable conclusion is that Amazon and uber
are either doomed or are doing to jack up pricing some day.

~~~
QAPereo
_...are either doomed or are doing to jack up pricing some day._

...Thus dooming themselves to be, if nothing else, undercut by their own
previous strategies.

------
vbrendel
The article is clearly written by someone who has a vested interest in the
incumbents who are now up against Uber and Amazon.

Uber burns cash like pretty much any funded startup but there's nothing in the
article suggesting their unit economics are flawed. Is the author really
suggesting that competition law should force companies like Uber to set their
price higher than the competition?

It's called disruption for a reason.

~~~
Veen
> The article is clearly written by someone who has a vested interest in the
> incumbents.

How is that clear? Have you researched this author and established that they
have ties to competitors, or are you just flinging poo with no justification
at all?

> Uber burns cash like pretty much any funded startup

See the title of the article: Big tech is built on predatory pricing

~~~
DrPsyker
To be clear the author is a friend of mine. He just writes shit that interests
him. Believe he has a few tech investments himself as well.

