SIGNALS

So a woman walks into a store to buy a smart speaker. She sees that the speakers are selling for 20 bucks. “Wow,” she exclaims, and asks the store owner, “How can you sell these for such a low price?” The store owner responds, “Well, actually, each speaker costs us 30 bucks.” The woman says, “Then how do you make a profit?” The owner responds, “We make up for it on volume.” The woman says, “That's illegal!”

I want to get a good deal! You want to get a good deal! Everyone wants to get a good deal! Low prices are a good thing, right? Well, sometimes they might be a bad thing.

As you might know, various tech leaders were called before Capitol Hill last week to answer questions from lawmakers. One exchange was particularly interesting. Representative Jamie Raskin asked CEO Jeff Bezos whether Amazon priced the Echo speaker below cost. Mr. Bezos responded, “Not its list price, but it's often on promotion. And sometimes when it's on promotion, it may be below cost, yes.” That's not the most artful of answers, but to summarize: Amazon sometimes sells the Echo at below cost.

Isn't that a good thing? We like low prices, right? In the same way that a shaving company can give away the razor and profit from selling the blades, surely Amazon can lose money selling a smart speaker, but make money by ensnaring you into the Alexa ecosystem. Their profit might come from selling your usage data, encouraging you to buy more expensive Alexa products, or just generally giving you a warm and fuzzy feelings about Amazon thus encouraging you to buy more things from them. What's the problem?

Well, there's this thing called predatory pricing. That is when a company (and I am not implying that Amazon is doing this so please don't sue me) prices a product at a price that undercuts a competitor's ability to successfully sell a competing product. You can see that a bigger company could easily use that technique, absorbing losses for a time, to drive a small company out of business. When the competitor is gone, the prices go way up, of course. That practice is called predatory pricing and it is illegal. Interestingly, when an overseas company manufacturers and sells a product for less than a domestic company can make and sell it for, that is called Globalization.

Patrick Spence is the CEO of Sonos. He is not a big fan of Amazon or Google, and Sonos is involved in various litigation against Google. Regarding pricing of Echo smart speakers, in an interview with Protocol, Mr. Spence said, “That's predatory pricing,” and “That's illegal,” and “You gotta stand up to bullies.”

So where do you stand on the issue? On one hand, think of all the good things that big companies bring us. For starters, we benefit from the lower prices they offer, not just during price wars, but all the time, from their economy of scale. Competitive pricing is everywhere and leads to healthy competition, and that in turn drives innovation. Even if Amazon put all other smart-speaker companies out of business, and then jacked up their prices, soon more nimble competitors would appear with products that were better, and at a lower price. It's the free market, baby.

On the other hand, no one likes bullies. It doesn't seem fair that big companies can absorb losses and bankrupt a smaller competitor. Philosophically, morally, that's just not right. If we allowed that to happen, then eventually only the biggest companies would remain, and they would monopolize their markets, and take full advantage of them, hurting consumers. In order for capitalism to work, we need to regulate it. We need to protect competition, not allow it to be destroyed.

So, according it its CEO, Amazon sometimes sells the Echo below its cost to manufacture. Is Amazon a shaving company giving away the razor and selling blades, or a big company unfairly acting against smaller competitors?

Hmmm, that's a good question. I guess we could ask Alexa.