First Look at Price competition
The main criticism directs itself at price competition that Alibaba is promoting. Not inconsistent with our intuition, online platform has made prices more transparent, easier to search and compare prices, putting downward pressure on markups. This pushes sellers to sell closer to cost. The author argues that if the economic growth is stimulated by lower prices, there is no value, because it represents a zero-sum game between manufacturers. I think this is a stupid argument. The ultimate concern is whether consumers benefit--and I think consumers do benefit from lower prices. The whole idea of promoting competition is to reduce prices, especially monopoly pricing, which we think is inefficient and induces dead-weight loss. More intense price competition, exposes the relative strengths and weaknesses of different manufactures, distributors and retailers, allowing consumers shift from less efficient producers to more efficient ones. Less efficient producers will be forced to shut down or improve their efficiency. This is a good thing. It is like evolution, selecting out fittest to serve the demand. It would be a waste if we still rely on hugely inefficient producers if there are more efficient ones out there, simply because we do not know about them. Also, it gives incentive for people to get more efficient. State monopolies during the early years' of China's founding deteriorated dramatically in terms of efficiency, mainly because they have no competitors. I think most Chinese people still remember that painful history. The same logic applies to distributors and retailers. If an item could be sold online without taking up physical space in a huge department store, then be it. It is much more efficient. The physical space could be released for something else, like a cafe, or barbers. Or at least it will decrease the demand for real estates, resulting in lower rents which is passed on to consumers as lower prices."Ruinous" Competition?
Ruinous competition has been a favorite argument when one wants to criticize competition. Yes, we understand "some" competition is good, but we just have "too much competition". What is "too much"? They like to point to casualties, like those who lose their jobs or gets displaced. Unfortunately, that is how our progress comes. An over-quoted quote from Schumpeter concisely describes the process of "creative destruction":The process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one"Yes, destroying old ones. If we do not let go of the old ones, where can we find a place for new ones? There will be winners and losers. The fact that we have losers is not evidence that the competition is ruinous as a whole.
As a consequence, the anti-trust regulation in US is for“the protection of competition, not competitors", a point first made in the Supreme Court Case Brown Shoe vs. The United States, and recently emphasized again in United States vs. Apple Inc.
It is no coincidence that the same debate takes place in US as well, where e-commerce giant Amazon.com has been vigorously reducing prices on its website, bringing down many physical retailers. Judge Cote noted "The birth of a new industry is always unsettling...It is not the place of the Court to protect bookstores and other stakeholders from the vicissitudes of a competitive market". It is probably no-one's place to protect old industries from the force of creative destruction.
Of course US congress could be much more populist or merely corrupt. Due to lobbyist power from cotton farmers, US subsidize US cotton farmers, a clear violation of WTO agreements. Instead of letting go of this industry (clearly not essential for national security) and moving on to its competitive advantage, US government started paying 148 million dollars per year to Brazilian farmers so that it can keep subsidizing the cotton farmers. How ridiculous! What a perfect example of incumbents trying to insulate itself from competition and hurt the general public.
Innovation?
What about the argument that "unless the industry can make a decent profit, it will not want to innovate". That is perhaps the only argument with some merit. It has been a speculation for a long time, and recently there has been a study that seems to confirm this intuition. The study is about Intel. I have not read the research carefully enough to make a final judgement, but my first impression is that it is quite convincing. However, this is one industry and to extrapolate it to online retail takes several leaps of faith. For one thing, microprocessor industry is very capital-intensive, and R&D intensive. In fact, that is the reason why Andy Grove believed that the computer industry will change from a vertically integrated industry to a horizontally segmented industry. But look at what is sold on online? Mostly it is small everyday essentials, socks, clothes, wallet, cookware, hardly the type of items we associates with heavy R&D spending.It is also essential to realize that IP protection is a double-edged sword. It could encourage as well as block innovation. My sense is that unless we are talking about extremely capital-intensive R&D, strong IP protection hinders innovation. Most of the innovation with everyday items are more of tinkering. Those things build on each other. Innovators will have some lead time to make a profit, which is usually enough to cover the tinkering cost and encourage people to do so. I have no systematic study to prove my point, but some anecdotal evidence helps.
(Aside: Even in high-tech industries, lack of competition is not always a great thing. AT&T before Judge Greene's breakup, was a strong monopoly. Not coincidentally, it also argued that its monopoly would leads to a more "orderly and stable" market, allowing it to better serve "the greater good". While it did have some innovations, it did also stifle a lot of innovation for fear that those innovations would threaten its monopoly power)
Caveats--Information Asymmetry
A final point I want to address concerns those "fake items" or "pirated items". Everyone understands the LV or Gucci on Taobao is fake. But we buy them. because it satisfies our vanity, and they have nice designs. So the "pirating" is not to "confuse" consumers per se, but rather to freeride on brands in terms of design and popularity. Design is not copyright-able, so Alibaba is only infringing on the trademark value of those brands. If those brands are built on vanity and marketing ploys, do we think protecting brands will matter much for economic growth? Of course, it is a beg-thy-neighbor problem, as our gain probably comes from the loss of those brands. But gain and loss relative to what? I am not of the view that international regulations are completely fair in this regard. Protecting luxury brands not based on true quality differential but on marketing distortions, is hardly justifiable for me.A related point is on quality. I think quality issue will resolve by itself. It is not a problem of the e-commerce. It is a problem of any starting retail channels. Back in the days when China first opened up, we get low-quality goods from physical stores and had no way telling them from good ones. As e-commerce platform evolves, it will solve this problem. The reason is simple. If a platform does not solve this problem and consumers suffers, they will leave the platform and moves on to another platform that does a better job at solving information asymmetry. Or they might just shop from physical stores entirely. Once again, free competition is the core of this process.
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