Isn’t that what Amazon did early on? If so, looks like it worked.
https://en.wikipedia.org/wiki/Anti-competitive_practices#Typ...
I have mixed feelings about some of the big money SV strategies. Antitrust concerns aside:
- They do allow some types of long-term transformative businesses, which would otherwise be impossible.
- They don't allow many forms of sustainable businesses to exist. If you and I have the same idea and ability to execute, whichever of us raises more money (and in an ideal free market, this means whichever of us is willing to accept less favorable terms) wins. This drains value from entrepreneurs to capital. Perhaps it speeds things up a little bit, but it's a net lose. It also leads to businesses with unsustainable debt and burn rates, and many viable business models crash-and-burn.
Imagine thinking that an individual or a group of normal people can be competitive in an economy like this.
I went through an entire economics PhD program, and had never before now heard of this founders' race to the bottom of investment terms. What a remarkable insight. Is there already a name for it?
I have about a half-dozen similarly remarkable insights each week. If you're interested in writing an econ paper about it, I'm glad to let you take first authorship.
We can call it the "Founders Race to the Bottom" or the "Brown Effect." :) If it goes viral, you'll be famous.
I've made that offer before on similar insights, and so far, no one has taken me up on it. And a few of them were really insightful.
Who knows? Perhaps you'll get a Nobel Prize for it. Econ give them out for less. Some of those insights were, er, less than deep.
The real insight behind this came in the Wealth of Nations. Adam Smith walks through this exact logic market-by-market, and for example, his section on rents leads to a similar degeneracy, where rents rise to match what the market can bare, and working people are driven to poverty by spending all excess income on rent. It's a great read.
This is very directly applying exactly his logic, just to a modern market.
As a fan of Henry George, I think the greatest trick pulled in economics was rentiers successfully getting Smith's concepts of capital and rent to be lumped together as "capital".
It is probably what allows Amazon to continue to exit as such a cesspool of fraudulent reviews counterfeit goods, shady sellers, and painfully bad search functionality. A near competitor could have pushed them to improve, but their moat is now too big except for certain niches, so we're stuck.
Also Amazon's moat isn't really its website, which is mediocre at best, but its backend systems like fulfillment. Plus brand recognition, size, general efficiency etc.
ISTM that it's draining value from entrepreneurs to the early adopters (on the consumption side) that make up the first-mover's market, and that the investors are just providing capital at competitive conditions, so they're not capturing any rent. Of course later-stage consumers can be seen as losers, if only because they must ultimately defray the increased cost of the initial excess-capacity building that results from imperfect competition.
There's nothing that suggests this is unique to the tech sector, BTW. It ought to apply whenever scale is sufficiently large and first-mover advantages sufficiently high.
I recently learned from a doordash courier that he and other Bangladeshi men had paid tens of thousands of dollars to a human trafficking organization to work doordash in exchange for getting to the United States. Of course he didn't have this money, it was debt to the organization, and he has to pay it out of his DoorDash wages, plus interest, to the organization. He lived in an apartment with dozens of other men in the same situation. He had a gps tracker around his ankle and everything.
How are you supposed to compete with a company that uses modern slavery in order to deliver your meal for $5 or less?
All the restaurants I know charge higher prices if you order online than if you call directly or go in person. I do not use food delivery apps, but I assume prices are similarly inflated there since people willing to purchase online or via app are amenable to paying more.
It is absolutely crazy to me the amount of premium people are willing to pay just to not have to pick up the phone or drive 5 min.
Crazy and awesome. It means people value their time highly, and can afford to buy it back.
Heck, Amazon is a fun example; they've long used their monopoly power to dictate to publishers, and are currently seeking to leverage their monopoly, Kindle Unlimited, etc, to help drive self-publishing on their platform, to cut out Publishers entirely. I'm not saying that removal of publishers is innately a bad thing, I -am- saying that making Amazon the largest publisher and the largest distributor of books in the world probably is. And they've achieved it not by simply being the best, but also via predatory pricing, and using money from AWS to cover costs in their retail arm to help gain market share, at the expense of smaller retailers who don't have a massively profitable cloud service to offset their losses with.
Source? Their financials do not indicate that they were or are subsidizing losses in their retail business with AWS.
https://dazeinfo.com/2019/11/06/amazon-net-income-by-year-gr...
AWS income did not even ramp up until a few years after it came out in 2006.
Their main competitive advantage was having a decent website and shipping operation early on when other retailers did not, and being able to sell goods to customers in most states without charging sales tax until the 2010s for most states.
You bet big, you win big. Of course, now it is just a side show since retail is playing for pennies, but they certainly were not "dumping" back then just to kill the competition, and then planning to raise prices. They clearly innovated and brought online shopping to the fore.
The market could have chosen Walmart, or Target or Home Depot too, but they did not (correctly) because the chances of the people working at those companies coming out with something like AWS is insufficient.
Amazon is a poor company to use as an example for one that dumps their product at below cost in hopes of gaining market share.
If you look at AMZN net income graph, they never really lost a ton of money.
Amazon is brought up often with regards to this, but somehow I've always encountered this argument when it was made as a rebuttal to a critique towards the business technique used by the Celebrity CEO at the helm of a particular car manufacturer (as well as battery manufacturer and solar panels manufacturer, oh and flamethrower manufacturer)