I’ve got a scenario for you that’s a little more complicated than supply and demand curves for a single market, but not much. Suppose I sell my product in two places, on Amazon.com and on my own website, mycompany.com. My supply curve is made up of three parts, production, fulfillment, and advertising. The production part is normal upward sloping and the same no matter where is sell the product. The cost of fulfillment is cheaper if I supply from my own website that using Amazon fulfillment, and the curve shapes are similar. Finally, the cost of advertising per unit sale is probably flat or even downward sloping for Amazon, but for my own website, advertising cost will slope steeply upward, as more and most expense is required to attract additional buyers to my website. I’m not going to spend advertising money to drive people to my website, but even without advertising my website, x% of potential customers are going to look up mycompany.com just to check it out. Since my marginal cost is less for my website, because my fulfillment expenses are lower, I will offer a lower price there. You could say there are two markets, a highly organized market on Amazon.com, and a disorganized market on the Internet outside of Amazon. The equilibrium price will be different in each market, because the supply and demand curves are not the same in each market. Except Amazon is using its market power to keep me from offering a lower price in a market that’s cheaper for me to operate in.

As an analogy, consider a farmer whose farm is 30 miles outside of a city. He sells most of his produce to a grocery chain that sells his produce in the city. He also runs a farm stand on the road by his farm. He has to sell most of his produce to the grocer, because the city is where the customer base is. That huge customer base is what Amazon has achieved with its “scale.” But he makes more profit on produce sold at the farm stand, and he maximizes that profit by charging a lower retail price at the farm stand, which entices some customers to drive out from the city to buy directly. What Amazon has been doing is telling the farm stand that prices have to be the same as in the grocery, or they will put his produce in the back with the light bulbs and expired bananas.

Amazon may complain that if everyone can offer lower prices on mycompany.com than on Amazon.com, people will shop on Amazon and then go to individual merchant sites to actually buy the product. Of course this was part of Amazon’s initial growth strategy, get people to shop at brick and mortar stores before buying for a lower price on Amazon. What’s sauce for the goose is sauce for the gander.

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I don’t disagree with this analysis, but I do think what is simplified to us economists is actually more complex than the intuition some people have about scale. I think how individuals interact in the market more intuitively understands the results of this model you have through the concept of “big business bad” simplifications. The fallacies can be really important to point out there if used in the wrong way (natural monopolies etc.) but I think these legal arguments at this level need to fly in the court of public opinion as much as economics and law. I hope your arguments help frame the latter, but I don’t expect people to frame the former with price theory (even if we like it). :)

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