Earlier this year, the Yale Law Journal published a 24,000-word "note" by Khan titled "Amazon's Antitrust Paradox." The article laid out with remarkable clarity and sophistication why American antitrust law has evolved to the point that it is no longer equipped to deal with tech giants such as Amazon.com, which has made itself as essential to commerce in the 21st century as the railroads, telephone systems and computer hardware makers were in the 20th.
It's not just Amazon, however, that animates concerns about competition and market power, and Khan is not the only one who is worrying. The same issues lie behind the European Union's recent $2.7 billion fine against Google for favoring its own services in the search results it presents to its users. They are also at the heart of the long-running battle in the telecom industry over net neutrality and the ability of cable companies and Internet service providers to give favorable treatment to their own content. They are implicated in complaints that Facebook has aided the rise of "fake news" while draining readers and revenue from legitimate news media. They even emerge in debates over the corrupting role of corporate money in politics, the decline in entrepreneurship, the slowdown in corporate investment and the rise of income inequality.
And just this week, Democrats cited stepped-up antitrust enforcement as a centerpiece of their plan to deliver "a better deal" for Americans should they regain control of Congress and the White House.
For Amazon, which prides itself on its relentless consumer focus, the suggestion that its spectacular growth might not be in the public interest poses a particular challenge. Since it was published, Khan's "note" has drawn more than 50,000 readers online — an extraordinary reach for a law review article. Her work has been cited by the Economist, the Financial Times, Forbes, Wired, the Wall Street Journal and the New York Times, and she has appeared on major broadcast media. Last spring, she was invited to join some of the most prominent academics in antitrust law to speak at an economic conference at the University of Chicago.
Khan is amazed and a bit amused by all the attention. Born in London, where her Pakistani parents met as college students, she grew up in a well-to-do New York City suburb before heading off to Williams College, where she was editor of the school newspaper. Looking toward a future in journalism, she moved to Washington and soon found herself working as a researcher at New America in its Open Markets Program on issues relating to economic power. (Khan cut her teeth writing about the dangers of industry consolidation for the Washington Monthly magazine.)
Thinking a law degree would allow her to be a more effective advocate, she headed off to Yale Law, where she impressed instructors with her keen mind, thorough preparation and passion for economic justice. In her second year, she began researching the history of antitrust law to understand why it has failed to provide much of a check on corporate power. "Amazon's Antitrust Paradox" was the result.
"I was blown away by what she produced," said David Grewal, a professor who advised Khan on her project. "It didn't read like a student note. It was equal to the best legal scholarship, combining scholarly elegance with an activist agenda and enormous attention to detail.
"Most of my colleagues would give their little finger for a piece that got that much attention," Grewal said, only half joking.
Next year, after the bar exam and a wedding, Khan will return to Yale for a postgraduate year before heading off for a clerkship with Judge Stephen Reinhardt on the U.S. Court of Appeals for the 9th Circuit in California, a "feeder judge" to clerkships on the Supreme Court.
'The Antitrust Paradox'
Next year will mark the 50th anniversary of the publication of Robert Bork's "The Antitrust Paradox," a book that even its critics acknowledge changed the direction of antitrust law.
Although a longtime law professor at Yale, Bork was a charter member of the "Chicago school" of law and economics, which argued that judges should use rigorous analysis of economic consequences in deciding antitrust cases. Previously, much of antitrust doctrine was based on somewhat vague political notions that big was bad — that large corporations with large market shares inevitably used their power to drive rivals from the market, raise prices, buy favorable treatment from legislators and regulators. In 1963, the Supreme Court even went so far as to declare that any merger that achieved more than 30 percent share of any market should be considered unlawful.
Relying on economic theories that competition — or the threat of it — could be counted on to discipline dominant firms, Bork argued that rather than helping consumers, most antitrust enforcement was likely to do the opposite, stifling innovation and preventing companies from realizing efficiencies of scale and scope that could be passed on to consumers in the form of lower prices, more choice and greater convenience.
Chicago school economics was a marriage of the latest in economic modeling and free market ideology. In considering whether a proposed merger or business practice would harm competition, courts and regulators narrowed their analysis to ask whether it would hurt consumers by raising prices. And since Chicago theory pretty much assumed away the ability of even a dominant firm to raise prices, the answer was almost always no.
And so began a 30-year stretch in which the government blocked relatively few mergers and prosecuted almost no companies for monopolizing competition.
"The Chicago school runs deep, and the courts still partake of the Borkian Kool-Aid," said Steven Salop, an antitrust expert at the Georgetown University Law Center who has long argued that antitrust enforcement is too permissive.
At the Chicago conference this spring, Richard Posner, a federal appeals court judge who, with Bork, is considered a pioneer of Chicago antitrust analysis, asked mischievously, "Antitrust is dead, isn't it?"
There is little debate that this cramped view of antitrust law has resulted in an economy where two-thirds of all industries are more concentrated than they were 20 years ago, according to a study by President Barack Obama's Council of Economic Advisers, and many are dominated by three or four firms. What's now at issue is whether the outcome has benefited society.
Research by John Kwoka of Northeastern University, for example, has found that three-quarters of mergers have resulted in price increases without any offsetting benefits. Kwoka cited industries such as airlines, hotels, car rentals, cable television and eyeglasses.
And even former antitrust officials acknowledge that their approval of Google's purchase of YouTube and ITA Software and Facebook's acquisition of Instagram and WhatsApp look naive in hindsight, eliminating the kinds of companies that might have someday challenged the tech sector's most dominant firms.
"The current market is not always a good indication of competitive harm," said Khan in laying out for me her critique of the way the government goes about analyzing proposed mergers. "They have to ask what the future market will look like."
Economists, meanwhile, complain that antitrust analysis has failed to fully incorporate the insights of modern game theory, information theory and behavioral economics that go a long way to explaining why consumers, companies and markets don't behave the way Chicago school theory says they should.
As Nobel Prize-winning economist Jean Tirole has demonstrated, Chicago antitrust theory is ill equipped to deal with high-tech industries, which naturally tend toward winner-take-all competition. In these, most of the expenses are in the form of upfront investments, such as software (think Apple and Microsoft), meaning that the cost of serving additional customers is close to zero. Customers naturally gravitate to the platform with the largest network of customers (think Facebook). Or their success depends on having the most customer data (think Google).
They also often have two sets of customers who need each other, such as credit card companies that serve merchants and cardholders, or Internet service providers that link content producers with content consumers.
What this "post-Chicago" economics shows is that in such industries, firms that jump into an early lead can gain such an overwhelming advantage that new rivals find it nearly impossible to enter the market, while even experienced ones find it difficult to stay in the game.
To varying degrees, Amazon displays all these characteristics, and by its breadth and complexity, confounds traditional antitrust analysis. What began as an online book retailer now sells just about everything— not just online but, more recently, also through physical stores and pickup depots. In hundreds of high-volume categories, Amazon is not only a retailer but also produces its own branded line of merchandise.
Through its online marketplace, customers can buy from Amazon but also from millions of competing retailers who typically pay a 15 percent to 20 percent commission and now account for half of all unit sales on the Amazon platform — and a quarter of Amazon's total profits. Many of these "third-party sellers" pay additional fees to store their inventory in Amazon warehouses, use Amazon robots and personnel to fulfill customer orders, or rely on Amazon to deliver their goods to customers across the globe through its fleet of 25 planes and 4,000 trucks or its deeply discounted delivery contracts with UPS and FedEx.
This remarkable business machine, offering 350 million items for sale, is fast approaching the point where it can claim nearly every household in America as a customer. And through its $99-a-year Prime program, Amazon uses free delivery and access to its premium video service to bolster loyalty of customers who each spend an average of $1,500 per year. (The experience of my own household surely attests to this.) By one estimate, at current growth rates, half of all American households will be Prime customers by 2020.
This description of Amazon's business is drawn largely from its public filings and reports from market analysts. As is its custom, Amazon declined to comment or answer questions for the record. Jeffrey P. Bezos, the company's founder and chief executive, is the owner of The Washington Post.
"Amazon has brought us to a new and better place," Khan said. "So did the early railroads and steel company giants. But I don't think Amazon is the problem — the state of the law is the problem, and Amazon illustrates that in a powerful way."
Amazon's business boom
Is Amazon so successful, is it getting so big, that it poses a threat to consumers or competition? By current antitrust standards, certainly not.
Here is a company, after all, known for disrupting and turbocharging competition in every market it enters, lowering prices and forcing rivals to match the relentless efficiency of its operations and the quality of its service. That is, after all, usually how firms come to dominate an industry, and there is nothing illegal about that. But under the antitrust law, once a firm is dominant, its actions and business practices become subject to more rigorous scrutiny, to make sure it is not abusing its dominant position. And like all dominant firms, Amazon disputes its dominance.
Much is made of the fact that more than half — 55 percent — of Americans begin their online shopping trips on Amazon. But as Amazon is quick to point out, online sales still account for less than 10 percent of all retail sales, which is the more relevant figure as the line between online and bricks-and-mortar disappears. By that standard, Walmart is still nearly four times Amazon's size.
Retailing, however, is a sector, not a product market, the usual frame of reference for antitrust analysis. And other than books, Amazon's original market where it maintains a commanding 40 percent market share, Amazon doesn't have anything close to monopoly-like market shares.
In clothing, for example, where it has made a big push, Amazon accounts for 20 percent of online sales but less than 7 percent overall. Amazon will soon dethrone Best Buy as the largest seller of consumer electronics, but even there, its overall share will be only 20 percent. Amazon's purchase of the parent of Diapers.com has helped give it a 43 percent share of the online baby products market, but that translates into less than 20 percent of sales in that category.
Even with the Whole Foods purchase, Amazon will have only a 2 percent share of the $600 billion-a-year American grocery market, well below the more than 20 percent market share for Walmart and 7 percent for Kroger. That is why most antitrust experts think there is little chance that the government will try to block the deal.
But in her article, Khan argues that these metrics do not capture the "architecture" of Amazon's emerging market power.
If Amazon is so small and its growth so benign, she asks, then why does the prospect of Amazon's entry into a market dramatically drive up its own stock price while driving down those of its rivals?
Why, she asks, have so many large and successful bricks-and-mortar retailers been unable to make significant inroads into online retailing while so many small retailers feel they have no choice but to use Amazon's platform to reach customers?
Antitrust analysis generally assumes dominant firms often exercise their market power by raising prices, but what if Amazon exercises its market power, Khan asks, by squeezing the profit margins of its suppliers? What if its strategy is to keep prices low in markets it dominates to gain entry into new markets that will generate still more sales and profits?
How, she asks, can antitrust regulators analyze the structure of a market, and Amazon's bargaining power in it, when so many of Amazon's competitors are also its customers or suppliers? Why did Sears stock rise 19 percent on the day that it announced its Kenmore line of appliances would be sold through Amazon? Why do Walmart, Google, Oracle and UPS all consider Amazon their biggest threat?
And if Amazon is not a monopolist, Khan asks, why are financial markets pricing its stock as if it is going to be?
"Antitrust enforcers should be . . . concerned about the fact that Amazon increasingly controls the infrastructure of online commerce and the ways it is harnessing this dominance to expand and advantage its new business ventures," Khan wrote in her law review article.
As Khan sees it, Amazon's strategy and business practices are "neither anticipated nor understood by current antitrust doctrines," and the language and tools by which regulators and judges now analyze the company's business practices "totally miss the game."
"What's the difference between behavior designed to increase market share and behavior to drive out competitors?" Khan asks. "The problem is they look a lot alike."
Antitrust's old guard
It probably won't surprise you to learn that most antitrust practitioners reject accusations from a third-year law student that the legal precedents and analytical tools they have developed and mastered over the years are inadequate to the task of protecting us from the predations of Big Tech.
"Lame argument," huffs Timothy Bresnahan, an economics professor at Stanford who, as chief economist for the Justice Department's antitrust division, helped bring the monopolization case against Microsoft.
"I don't lie awake at night worrying that there are so few creative people in this country that one company might turn out to be the best at everything," said a former head of the antitrust division.
A former member of the Federal Trade Commission put it this way: "The antitrust law I believe in is that we want to give as much latitude as possible to innovate and deliver better products at lower prices, and only stop them when we see some evidence of conduct that excludes others from competing."
They also scorn Khan's suggestion that the consumer welfare standard that underlies most antitrust analysis should be broadened to a public interest standard that takes into account the impact of dominant firms on workers, communities and the political process. As they see it, such vague and subjective standards would invite political and ideological mischief.
But if you push, most of these old hands will acknowledge that the law has not fully come to grips with the competitive dynamic in the era of online platforms and networks.
"I think there is a fair bit of flexibility in the law to allow us to adjust and adapt to modern markets and technologies," said Diana Moss, president of the American Antitrust Institute.
Moss cited recent cases that looked beyond consumer prices to take in issues such as innovation, bargaining power and arrangements that lock consumers into existing products. The real problem, she said, is in getting more judges and enforcement agency officials to pay attention.
Indeed without the focus on prices, judges would be forced to make more subjective judgments about the intent behind a company's action or speculate about whether new companies would, or could, enter a market in the future. While judges are reluctant to wade into such murky waters, particularly in markets where the technology and business strategies are rapidly evolving, it is precisely in those industries that a more holistic approach is required.
Lurking in the background of the current debate is U.S. v Microsoft, the biggest antimonopoly case to come along in a generation. While the Chicago school's adherents view the Clinton-era prosecution as a flagrant overreach against a successful innovator, defenders cite it as proof that current law has been successful in dealing with high-tech monopolists. And if the ruling had been fully upheld, that might be the proper conclusion.
But, in fact, a federal appeals court subsequently narrowed that ruling and rejected the trial judge's order that the company should be broken up, as John D. Rockefeller's Standard Oil Trust had been nearly a century before. In the end, the case was settled by the Bush administration on terms considered largely favorable to Microsoft.
The ambiguous legacy of the Microsoft case — and the relative weakness of American antitrust law — was highlighted last month when the European Union imposed a record fine on Google for using its virtual monopoly in search to favor its own comparative shopping sites. The Federal Trade Commission had looked at the same issue several years before and closed its investigation without taking serious action. One reason: It was not clear that, even if Google is favoring its own site (which it denies), such practices are illegal.
That wasn't always the case. Back in the pre-Chicago days when big was bad, the Supreme Court had ruled that Eastman Kodak could not leverage its monopoly in the film market to gain advantage in the market for film developing. But in more recent cases, the Supreme Court and two appeals courts, relying on Chicago law and economics, raised the bar, declaring that there must be a "dangerous probability" of obtaining a second monopoly for a dominant firm's behavior to be illegal.
Some observers point to the E.U.'s Google case as an example of the difference between the American and European approach: They protect competitors; we protect consumers. This often-used distinction betrays a cultural smugness on the part of Americans, one based on the view that our approach fosters the kind of creative destruction that results in great leaps of technological, managerial or financial innovation, while theirs allows second-rate rivals to accomplish through politics what they could not accomplish in the marketplace.
To me, this view betrays a naive belief that in our open market system, every person and every company has the same opportunity to succeed. Although government cannot and should not try to neutralize all the ways in which success breeds more success, neither should we assume that success in the marketplace is solely due to hard work, ingenuity and superior execution. Leveling the playing field is a legitimate policy goal. A good economic system is not only efficient but also conforms to common intuitions of fair play.
The logic and intent behind America's century-old antitrust laws is that even innovation- and productivity-inducing competition needs to be managed to ensure a healthy ecosystem in which a relatively few corporate giants don't use the economic advantages they have won to tilt the playing field even further in their favor.
"I think we have to go back to the original spirit of the antitrust laws," said Luigi Zingales, an economist at the University of Chicago's business school known for his skepticism about government regulation. "A narrow, purely economic approach has been unable to capture the concerns people have about the concentration of economic and political power."
When to step in
While Amazon is not yet a threat to competition, it is well on its way to becoming one, which is probably why the company is taking these arguments more seriously. Amazon is reported to be in the market for an antitrust economist, and in the wake of the Whole Foods announcement, it has engaged the services of two former heads of the Justice Department antitrust division, one Democrat and one Republican.
I can't tell you exactly at what point the government should step in to block Amazon from buying another company or curtail some of its practices. I am, however, fairly confident in saying it ought to be well before Amazon achieves a 40 percent market share in books, groceries, clothing, hardware, electronics and home furnishings. And it ought to be before Amazon pulls even with UPS in shipping, Oracle in computing and Comcast in media content. Khan's reasonable insight is that if we don't yet have the tools to identify when companies have reached that competitive tipping point, then someone ought to invent them.
And as for those "bad old days" when officials still had the courage to call a monopolist a monopolist, let's remember it was the government's aborted prosecution of IBM, the most innovative and respected company of its day, that made Microsoft possible; the prosecution of Microsoft that made Google possible; and the breakup of AT&T that made Apple and wireless telephony possible.
"Google, Apple and Amazon have created disruptive technologies that changed the world, and every day they deliver enormously valuable products," said Sen. Elizabeth Warren (D-Mass.) in a speech last month at New America. "But the opportunity to compete must remain open for new entrants and smaller competitors."
There is nothing in economic theory that makes it inevitable that successful disrupters will be disrupted. Indeed, what history demonstrates — and what a 28-year-old law student reminds us — is that it sometimes takes a little public power to keep private power in check.