Home Business Mr Orlowski, Platforms, Brands And Economic Profits

Mr Orlowski, Platforms, Brands And Economic Profits

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Andrew Orlowski in The Telegraph tells us that the big platforms really do need to be considered. Because their actions prevent the arising of branded goods – not that they actively conspire to do so, but that the ecosystem they run makes it difficult for them to arise or survive if they do. Everything sold on them seems to be lowest price noname nothing.

And, well, yes. To a certain interpretation of free market economics that’s a good thing. Proof perfect that the platforms are working and don’t need to be dealt with by antitrust action. Which is a bit of a problem for the contention that this is proof that they must be.

Under classical economics, clever people should now be responding to this brave new platform world by scrambling to create brands for higher quality, differentiated goods.

Probably not classical economics, no, that’s Smith, Ricardo, Marx. As a part of neoclassical economics perhaps yes. We know what he means though, under the classic interpretations then this should be happening. And we can fit that into the Smithian view if we wish. People find a new way to make money, the other capitalists note it, copy it, the profits are competed away. The consumer benefits, the capitalists look for the next Big Thing. This is regarded as good by the way.

Amazon’s defenders argue that this practice is similar to supermarkets pushing their own brands, and no more harmful. But this is sophistry; the manipulation is far more extensive, and involves far more goods than just Amazon’s Basics range. Amazon fundamentally skews the supply chain, making brands and niches vanish.

Take another example, “dark kitchens”. These are food factories typically located under flyovers or on industrial estates, that create meals to be delivered by JustEat or Deliveroo. Independent neighbourhood favourites tempted to join the “food delivery revolution” face a similar fate to brands on Amazon: to be replaced at some point by clones – by phony restaurants instead of no-name electronics companies.

Well, yes, the brand of the restaurant is competed away by equally good food cooked in those dark kitchens. And?

At which point a little more background. The neoclassicals try to distinguish between economic profits and regular profits. The regular stuff is enough profit to attract the capital necessary to run the business. Capital is a necessity, capital has a cost, the cost of capital is a necessary expense of running a business. So, it gets reflected in the prices in a perfectly competitive market.

That is, that model of a perfectly competitive world is not one in which no one ever makes a profit. It’s one in which no one makes – if we’re to get more sophisticated, sustainably makes – more profit than their cost of capital. If the general market return is 3% on capital then businesses tend to make about 3% on capital. Adjust for risk as you wish and all that but that’s the base idea.

Some go on to make economic profits. These are profits above that general return to capital. The existence of these is taken to be evidence of some aberration. That’s why the Mirrlees Review suggests not taxing ordinary returns but only economic profits.

Now, sometimes economic profits will come from good reasons. Like innovation, doing summat better than others. That’s something Smith would approve of. As too the noticing of this by other capitalists, their copying of it, the economic profits being competed away and the consumer benefiting.

A brand can indeed be this sort of thing. A brand which arises organically will indeed be just this. My examples – not necessarily accurate entirely but the story still works – being Heinz and Campbell’s canned soups and goods. In the early days canning was a risky technology. Easy to kill people with botulism etc. Heinz and Campbell’s killed fewer of their customers, people trusted the source, so arises a brand. Cool.

Folks in business are not fools, they note this. A brand allows the making of economic profits. So, everyone would like to own a brand, or create one. This is what Warren Buffett means when he likes a moat around a business. See’s Candy being an excellent example.

Also cool.

But to that radically free market economist this is a bad idea. The very fact that economic profits are being – sustainably over time and not for reasons of continued innovation – made is proof that there’s not enough competition. For those economic profits should be competed away.

At which point along come the platforms and economic profits are competed away in the absence of sustainable brands. This is not a bad thing to be dealt with by antitrust action. This is, in fact, the desired outcome of any rational antitrust policy. That economic profits be competed away and that consumers thereby benefit.

On Amazon, in as little as two years, many trusted brands have all but disappeared, with unknown names making undifferentiated products of rock-bottom quality. Attempting to choose a magnetic battery pack for an iPhone 12 recently, I counted eight unfamiliar names. I made a brief mental table of which one would set fire to my house first but ultimately decided not to risk it at all.

Competition, ain’t it a luvverly thing? Significant choice at low prices, no one is making economic profits. It’s not just that this isn’t a reason for antitrust action, it’s that this is the end goal of antitrust policy. We’re in that perfectly competitive (yes, you know, it’s a model, reality never does entirely conform to a model etc) end state that is the purpose of considering antitrust actions at all.

I do get what Andrew is talking about. But I think he slightly misses the part where this is actually the point of the exercise. Enough competition to abolish economic profit.

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  1. ” I made a brief mental table of which one would set fire to my house first but ultimately decided not to risk it at all.”

    That is the basic reason why a brand would exist – a consumer has no visibility into whether an electronic product will set fire to his house, so he needs some reason to trust. If you look at the back of a laptop you will see a number of labels testifying that the product passes certain tests.

    Unfortunately for the Amazon tat there doesn’t seem to be the same push to label. Probably because it’s made by some place you’ve never heard of in a regime that is hostile to consumer lawsuits. If the label gets too notorious it folds up and the same people open up a new label with no history behind it.

    • Added – this is a bad example. Safety is actually adding value (and cost for the testing etc.), so I don’t think I’d call any extra profit from that economic profits.

      I think the idea behind the concept is likely false – the idea that people will pay more for certain products “just because” and it’s not “earned” in any fashion. People are not generally idiots with their own money – it’s another story when it’s someone else’s (or money given to them).

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