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Amazon and Whole Foods – The Miseconomics of Competition or the Economics of Miscompetition?

by Andrew White  |  August 29, 2017  |  Comments Off on Amazon and Whole Foods – The Miseconomics of Competition or the Economics of Miscompetition?

In Digital Platforms Force Rethink in Competition Theory I expanded on an FT opinion piece that expressed the concern that digital (multi-sided platforms) will force a rethink of the law and forms of competition.  One of the points I noted is what is generally refereed to in the press as “winner takes all” economics.  The idea is that certain firms get so big and, as a result, they can instantiate a number of actions that keep them at a certain size and even effectively keep new, small start-ups, from becoming a threat.

One might think this situation is a weakness or flaw of capitalism.  In fact, McKinsey seems to talk of this right now.  Check out Re-imagining Capital – a new paper from the consultancy.  I liked the premise of the paper but I noted a huge issue with it:

“If you take what has been practiced in the United States, and also to a large extent in Britain, it resulted in huge income inequalities that eroded the middle class and resulted in less competitiveness and less innovation, while the Scandinavian countries, in particular, and some of the European countries came up in terms of being more competitive and more innovative.”

McKinsey argues that capitalism has evolved – whereas I think this is a twisted view.  What has evolved is the way in which different states and governments have interacted with capitalism and tried to overlay their own views of what their societies want from it – even to the point of belief where such organizations think they exist independent of the market.   As states evolved their approaches (more or less regulation, more or less public policy in favor of innovation or education) firms developed their own competitive response.  Some of these firms grew faster and/or larger than others.  It is not that the free market gave rise to such behemoths.  It is combination of unintended consequences of (failed?) public policy and innovative business practices in the private sector.  Which came first is a good question – but let’s get back on point.

Look at what Amazon is now able to do as it closes the Whole Foods deal.  At a stroke Amazon can acquire a new market segment (e.g. grocery) and due to its size and environment, it can absorb losses (for a time) stemming from a marker share-grab by dropping Whole Foods’ prices.  This is a clever move by Amazon’s – if logical.  But is it a natural act executed in a free market?  Is it the kind of move that proves that multi-sided platforms do change the nature of competition?  Is this a digital business model leveraging its digital strength to trump analog-based competition?  Isn’t this just a dominant, “safe” business simply leveraging economics in one market (retail/digital) to strengthen its competitive position in another (retail/analog)?

The answer is probably “yes” to all of these questions.  But I like to think its the last question that explains the move: an effective digital business is inserting itself into an analog business and leveraging its muscle to improve that analog position.  So bottom line I think the economics of the digital world are simply driving competitive shifts in the analog world – as well as the digital world.  “Winner take all” economics might be real – but that is outside the remit of this blog.  The invisible back-hand may or may not catch up with such giants.

Category: amazon-vendors  competition  digital-business  digital-business-platform  

Andrew White
Research VP
8 years at Gartner
22 years IT industry

Andrew White is a research vice president and agenda manager for MDM and Analytics at Gartner. His main research focus is master data management (MDM) and the drill-down topic of creating the "single view of the product" using MDM of product data. He was co-chair… Read Full Bio

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