At the outset, I should observe that I am not an expert in either antitrust or consumer law or economics. But I got to thinking about the problem of time-inconsistent preferences when I read this article in today's WSJ:
Amazon.com Inc. AMZN +1.99% is planning to build and expand Whole Foods stores across the U.S., people familiar with the plans said, to put more customers within range of the e-commerce giant’s two-hour delivery service. ...
Amazon offers Prime Now, a two-hour delivery option to members of its Prime subscription service in more than 60 cities, and online grocery pickup from Whole Foods stores in as little as 30 minutes from nearly 30 cities. Amazon plans to expand those services to nearly all of its roughly 475 Whole Foods stores in the U.S., according to another person familiar with the plans. Amazon also wants to use benefits for Prime members to attract new customers to Whole Foods and draw them back more often. ...
The Prime Now service is becoming more popular. Amazon said it delivered more turkeys than ever through Prime Now and the company’s AmazonFresh service this past Thanksgiving, while Whole Foods broke a record for Thanksgiving bird sales. Data firm Numerator found in a recent survey of about 1,200 shoppers that nearly half said they were shopping at Whole Foods more because of Prime promotions.
So here's my concern: I have serious reservations about mega-sized online businesses like Amazon. I discussed one set of my reservations in my essay Corporate Purpose in a Populist Era:
Size and the resulting potential for concentrated economic power are … recurring themes in the populist critique of the corporation. Late 19th Century populists thought that the growing power of corporations was a significant threat to their economic and even political liberty. The Southern Agrarians likewise believed, as Agrarian Lyle Lanier observed, that “the corporate form of our economic system makes possible a scale of exploitation unheard of in history.” In particular, the Agrarians saw large corporations as Leviathans trampling on their employees. The labor such corporations provided lacked security. It was performed under dehumanizing conditions. Yet, the law protected it by enshrining the rights of corporations into the constitution. The Southern Agrarians further believed that the concentration of economic power in large corporations had created “a plutocratic capitalist class” that effectively ruled the country and thus stood ready to fully exploit their power over farmers and workers.
Much the same set of concerns motivates many Tea Party members. In response to the Citizens United decision, for example, Tea Party co-founder Dale Robertson complained that “[c]orporations are not like people. Corporations exist forever, people don’t. Our founding fathers never wanted them; these behemoth organizations that never die. ... It puts the people at a tremendous disadvantage.” Tea Party activists also tend to be uncomfortable with business’ political agenda and business’ lack of support for Tea Party social issues. The inability or unwillingness of large corporations to assist in addressing “the political alienation and economic instability” felt by many gave rise to “both left- and right-wing populism” and helped elect Donald Trump.
For someone like myself who lives somewhat to the right of center, these concerns are compounded by theemergent class of social justice warrior CEOs, whose views on a variety of critical issues are increasingly closer to those of blue state elites than those of red state populists. See generally Joel Kotkin, The New Class Conflict 9-10 (2014) (discussing leftward shift among richest Americans, especially among elites in the financial and tech sectors). A liberaltarian (contrary to what Apple's autocorrect thinks, that's not a typo) like Jeff Bezos definitely raises such concerns. Look at how frequently Amazon has been accused of abusive employment practices. And, of course, Amazon wants to use robots and drones to replace people as quickly as possible.
Amazon also calls to mind some of the concerns I expressed in my essay The Conservative Case Against Wal-Mart:
In his article, Thwarting the Killing of the Corporation: Limited Liability, Democracy, and Economics, 87 Nw. U. L. Rev. 148 (1992) (Westlaw sub. req'd), law professor Stephen Presser writes eloquently about the role small business plays in our democracy. Presser explains that corporations were endowed with limited liability precisely so as to encourage the growth of small business:
The popular democratic justification for limited liability is rarely observed by modern scholars. Nevertheless, it appears that to the nineteenth-century legislators in states such as New York, who mandated limited liability for corporations' shareholders, the imposition of limited liability was perceived as a means of encouraging the small-scale entrepreneur, and of keeping entry into business markets competitive and democratic. Without limitations on individual shareholder liability, it was believed, only the very wealthiest men, industrial titans such as New York's John Jacob Astor, could possess the privilege of investing in corporations. Without the contributions of investors of moderate means, it was felt, the kind of economic progress states like New York needed would not be achieved.
The author of the most comprehensive study of New York legislative policy toward corporations in the nineteenth century concluded that New York's policy of limited liability, and its policy of encouraging incorporation by persons of modest means "facilitated the growth of a viable urban democracy by allowing a wide participation in businesses that could most advantageously be organized as corporations." "More importantly," he suggested, New York's general incorporation statutes "helped equalize the opportunities to get rich. The passage of general incorporation laws for business corporations was the economic aspect of the political and social forces that democratized the United States during the Age of Jackson, 1825-1855."
Note carefully this line: the "policy of encouraging incorporation by persons of modest means 'facilitated the growth of a viable urban democracy by allowing a wide participation in businesses that could most advantageously be organized as corporations.'" By trampling small businesses underfoot, through its mix of volume pricing and subsidies, Wal-Mart and its ilk undermine the possibility of "wide participation in businesses." Prospective entrepreneurs are thus pushed out of fields like retail.
Of course, maybe Wal-Mart makes up for that by buying products from small entrepreneurs in places like China. But do we really want to encourage our nation’s most likely future superpower rival to further build up its economy with massive trade deficits?
Now what's all that got to do with the problems known to behavioral economists as time inconsistent discount rates and multiple selves.[1]As to the former, the discount rate an individual applies when making net present value calculations often declines as the date of the reward recedes. Korobkin and Ulen offer the following example of this phenomenon, which is known as hyperbolic discounting:
Suppose that an individual is to choose between Project A, which will mature in nine years, and Project B, which will mature in ten years. Suppose, further, that an individual who compares the two projects across all their different dimensions prefers Project B to A. Now suppose that we bring the dates of maturity of the two projects forward while maintaining the one-year difference in their maturity dates. Because discount rates increase as maturity dates get closer, it is possible that the individual’s preference will switch from Project B to Project A as the dates of maturity decline (but preserving the one-year difference).[2]
Richard Thaler offers a more homely explanation of the same phenomenon: “In the morning, when temptation [Project B] is remote, we vow to go to bed early, to stick to our diet, and not have too much to drink [collectively, Project A]. That night we stay out to 3:00 a.m., have two helpings of chocolate decadence, and sample every variety of Aquavit at a Norwegian restaurant.”[3]Put yet another way, one consequence of hyperbolic discounting is that people “always consume more in the present than called for by their previous plans.”[4]In response, the actor may develop a precommitment strategy designed to restrict over time the rate at which the good in question is consumed.
The somewhat related phenomenon of multiple selves posits that individuals do not have a single utility function, but rather multiple competing utility functions. Because each self orders preferences differently, there is an ever-present risk that the self predominating at a given moment may make decisions not in the complete individual’s best interest. Again, Korobkin and Ulen explain: “A stiff tax on cigarettes, to take an obvious example, can be viewed as aiding the future-oriented self in its battle with a more present-oriented self that values immediate gratification over long-term health. . . . Today’s self can attempt to make commitments that either will completely bind tomorrow’s self or, at least, raise the cost of taking action that today’s self wishes to avoid.”[5]In Homer’s tale of Odysseus and the Sirens, Odysseus lashed himself to the mast precisely so that his future self would be unable to satisfy its expected desire to prolong exposure to the Sirens’ song. Being lashed to the mast was a precommitment strategy by which he avoided making an unwise decision in the future. Hence, Odysseus privileged the desires of his farsighted “planner” self, who was concerned with lifetime utility, over those of his myopic and selfish “doer” self.[6]In general, where precommitment strategies are desirable to disempower the myopic “doer” self, “people rationally chose to impose constraints on their own behavior.”[7]
Amazon poses a problem for me not unlike the one the Sirens posed for Odysseus. In theory, I would prefer to shop at local stores selling locally-sourced products. (See Rod Dreher's Crunchy Cons for an explanation of why conservatives like Rod and myself can have preferences usually associated with Birkenstock wearing Berkley-based SJWs.)
In practice, Amazon makes it so easy to translate desire into nearly-instant gratification, I am constantly choosing to punch a few buttons and wait for the doorbell to ring. Smartphones and tablets have made it even worse. My doer self consistently trumps my planner self.
Now suppose there is general agreement that Amazon's incipient monopolization of retailing is socially undesirable, but each of us as individuals inevitably succumb to the beguiling temptations of immediate gratification. Now we have a serious public policy issue. We would all be better off if we could precommit to shopping elsewhere. Yet, we all will inevitably choose to free ride on others. The benefits of shopping with Amazon are immediate and obvious, while the costs are longterm and diffuse. So we choose to tell Alexa what we want and hope somebody else bears the costs of constraining Amazon's growth. As a result, nobody boycotts Amazon and it just gets bigger and more powerful.
Amazon thus looks like a case study of the need for what Class Sunstein and Richard Thaler call "libertarian paternalism." In their book Nudge, they propose that the law "nudge" decisions in certain directions by imposing both procedural and substantive constraints that limit the available choice set to those that are social welfare maximizing.
Before the government starts nudging us into shopping at the local Farmer's Market instead of AmazonFresh, however, a few caveats are in order. First, we need more information about the cost-benefit analysis. So far the case that Amazon's continuing growth is socially undesirable is based mostly on anecdote rather than data. Second, even if government regulation benefits most consumers, inevitably there will be some who are worse off. Creating space for privately-initiated precommitments enforced by social norms would be less infringing on liberty. Finally, of course, regulators are never disinterested observers, but rather self-interested actors who se output therefore may not be socially optimal.
At least in the United States, the government has watched benevolently Amazon relentlessly pursues market share at the expense of revenue, which would strike some as the sort of behavior one expects from an aspiring monopolist. Likewise, Amazon has bought out potential competitors rather than allowing them to grow into serious challengers. Amazon's employment practices are suspect, at best, but have drawn little more than media disapprobation.
The time for letting Amazon slide by with little scrutiny is over. The time for letting government nudge us into new shopping patterns may well be coming.
[1]See generally Russell B. Korobkin & Thomas S. Ulen, Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics, 88 Cal. L. Rev. 1051, 1119-24 (2000) (explaining how these problems can lead actors to make choices inconsistent with the predictions of the standard neoclassical model of rational choice)..
[2]Korobkin & Ulen, supra note 1, at 1120.
[3]Richard H. Thaler, The Winner’s Curse 98 (1992).
[4]Id.
[5]Korobkin & Ulen, supra note 1, at 1123.
[6]See generally Richard H. Thaler & H.M. Shefrin, An Economic Theory of Self-Control, 89 J. Pol. Econ. 392, 394-95 (1981) (distinguishing between planner and doer selves).
[7]Id. at 398.
