Nov 12, 2019

Amazon and the Diffuse Power of Consumers

Consumers have more power over Amazon than most people realize
Walter Stover Staff writer, Anne Hobson Staff writer

Franklin Foer’s article in the Atlantic on Jeff Bezos’s master plan offers insight into the mind of the famed CEO, but his argument that Amazon is all-powerful is flawed. Foer overlooks the role of consumers in shaping Amazon’s narrative. In doing so, he overestimates the actual autonomy of Bezos and the power of Amazon over its consumers. 

The article falls prey to an atomistic theory of Amazon. The thinking goes like this: I am an atom, and Amazon is a (much) larger atom. Because Amazon is so much larger than I am, I need some intervening force to ensure that Amazon does not prey on me. This intervening force must belong to an even larger atom (the US government) in order to check Amazon’s power. The atomistic lens sees individuals as interchangeable and isolated from each other, able to be considered one at a time.

Foer’s application of this theory appears in his treatment of Hayek, one of the staunchest opponents of aggregation and atomism. For example, when he summarizes Hayek’s paper “The Use of Knowledge in Society,” he phrases Hayek’s argument as that “…no bureaucracy could ever match the miracle of markets, which spontaneously and efficiently aggregate the knowledge of a society.” Hayek found the notion of aggregation highly problematic, as seen in another of his articles, “Competition as a Discovery Procedure,” in which he criticizes the idea of a “scientific” objective approach to measuring market variables. His argument against trying to build a science on macroeconomic variables notes that “…the coarse structure of the economy can exhibit no regularities that are not the results of the fine structure… and that those aggregate or mean values… give us no information about what takes place in the fine structure.”

Neither Amazon nor the market can aggregate the knowledge of a society. We can try to speak of the market in aggregate terms, but we end up summing up all of the differences between individuals and concealing the action and agency of the individuals at the bottom. We cannot speak of market activity without reference to the patterns of individual interactions. It is best to think of the market as an emergent, unintended outcome of a constellation of individual actors, not atoms, each of whom have different talents, wants, knowledge, and resources. Actors enter into exchanges with each other and form complicated, semi-rigid, multi-leveled social networks.

Foer describes the great power and wealth of “knowledge” that Amazon has acquired:

“Amazon, however, has acquired the God’s-eye view of the economy that Hayek never imagined any single entity could hope to achieve. At any moment, its website has more than 600 million items for sale and more than 3 million vendors selling them. With its history of past purchases, it has collected the world’s most comprehensive catalog of consumer desire, which allows it to anticipate both individual and collective needs. With its logistics business—and its growing network of trucks and planes—it has an understanding of the flow of goods around the world. In other words, if Marxist revolutionaries ever seized power in the United States, they could nationalize Amazon and call it a day.”

“…[Amazon] distributes economists across a range of teams, where they can, among other things, run controlled experiments that permit scientific, and therefore effective, manipulation of consumer behavior.”

Yet, having data (or having PhD economists, for that matter) is not the same as having complete knowledge or predictive power. Again, the atomistic theory reappears in the assumption that the behavior of individuals can be predicted based on past information in the same way we could compute the trajectory of a single billiard ball. The local, dispersed knowledge Hayek discussed in “The Use of Knowledge” is subjectively held in the minds of the actors, and thus inaccessible to outside observers. People do not, in fact, carry around independently fixed utility functions in their heads from which they–or anyone else–can accurately predict what they will choose in the future. 

 Instead, as economist James Buchanan argues, choices are genuine in that “participants do not know until they enter the process what their own choices will be.” In other words, wants are themselves generated in the choosing process. Amazon cannot reverse engineer the process from any single snapshot, or any series of snapshots, because choices are subjective and dynamic. As an example, any behavior–such as targeted ads or preferential pricing–based on attempts to predict future patterns of consumer behavior is itself information that enters into consumer purchasing decisions. 

Even assuming that Amazon could perfectly predict consumer preferences, this would not pose any kind of threat to consumer welfare, because consumers still retain the ability to shop elsewhere. And competition on the retailer front is still rampant. Walmart has 265 million customers each week and 2.2 million global employees. By contrast, Amazon has 105 million prime subscribers and 613,300 global employees. As long as Amazon cannot exercise coercive authority over consumers, it remains unclear why, exactly, increased predictive power would damage consumer welfare. 

When discussing the high level of trust consumers have in Amazon, Foer argues that “…while Amazon is trusted, no countervailing force has the inclination or capacity to restrain it.” 

Foer again ignores the diffuse countervailing power of consumers, somewhat similar in fashion to Hayek’s notion of dispersed knowledge. Individuals may not be able to exercise much power by themselves against Amazon, but they wield extraordinary power when taking the entire constellation of actors into consideration. This is not the same thing as a collective, organized response such as unions or consumer welfare protection organizations such as the Better Business Bureaus, though these organizations doubtless have very important roles to play. 

In the same way that the market order is a spontaneous outcome of individuals pursuing their own interests, the decentralized actions of consumers in the market similarly can result in the fortunes or fall of a firm without the need to organize everyone involved. Every choice made in the market on the margin is a signal to the firm. A decision to buy books from other websites (for example, from Alibris and not Amazon) is a minute manifestation of this diffuse power of consumers. One signal by itself does not carry much leverage, but when taken in totality, they constitute an ordered force that exerts powerful feedback on a firm’s actions. 

Such a theory of diffuse power can appear profoundly unsatisfactory. We tend to favor narratives of Davids versus Goliaths in part perhaps because we are unaccustomed to trying to think about spontaneous orders in general. In the long run, Amazon will live or die, but not according to the schedule or preferences of a single consumer. 

Diffuse power might seem to be a weak check, but what is the alternative? There are risks to policy intervention (as Foer points out, Marxists could nationalize Amazon and then try to use the consolidated information to run the economy, with disastrous results). Policymakers could restrict Amazon’s growth or activity in a way that limits innovation. It could step in too early and prevent consumer signals from running their course and changing Amazon’s direction to align more with our wants. 

Consumer signals in totality do serve as a countervailing force. And the evidence is in Foer’s article. Amazon (and Bezos in particular) is obsessed with consumer satisfaction and we all benefit from his obsession.

Note: This piece is part three of a series on the epistemic limitations of Artificial Intelligence. Part one on “The Limits of AI in Predicting Human Action” of that series can be found here. Part two on “Amazon, Artificial Intelligence, and Digital Market Manipulation” can be found here.

Photo credit: ERIC BARADAT/AFP via Getty Images

Support Mercatus

Your support allows us to continue bridging the gap between academic ideas and real-world policy solutions.Donate