What is market distortion?

Samantha Fields Nov 10, 2020
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Amazon CEO Jeff Bezos testifies via video conference during a House hearing about online platforms and market power on Capitol Hill. Amazon is now under fire by the EU for allegedly distorting competition. Graeme Jennings/Getty Images

What is market distortion?

Samantha Fields Nov 10, 2020
Amazon CEO Jeff Bezos testifies via video conference during a House hearing about online platforms and market power on Capitol Hill. Amazon is now under fire by the EU for allegedly distorting competition. Graeme Jennings/Getty Images
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European Union regulators on Tuesday announced they are charging Amazon with antitrust violations for allegedly harvesting data from smaller companies that use its platform and selling cheaper versions of popular products. 

“Amazon illegally distorted competition in online retail markets,” European Commission Vice President Margrethe Vestager said. “We do not take issue with the success of Amazon or its size. Our concern is very specific business conducts which appear to distort genuine competition.”

What does it mean to distort competition, or distort the market?

“A market distortion is when something gets in the way of setting the price of a good or service, so it no longer reflects private decisions of suppliers and demanders,” said Vincent Reinhart, chief economist at Mellon.

Often, it’s the government distorting the market, through things like agricultural subsidies, tariffs on steel, or taxes on cigarettes. 

“We as a nation subsidize ethanol production, and so the price of corn is higher than it would be if we didn’t do that. That’s a market distortion,” Reinhart said. “We also tax cigarettes. And so the price of cigarettes to the consumer is higher than would be otherwise.”

Sometimes, though, it’s private companies distorting the market in a way that unfairly reduces competition, according to Ann Owen, an economics professor at Hamilton College.

“If you take advantage of some position that you have, that everybody cannot take advantage of,” she said, “what you’re doing is distorting the market, you’re reducing the competition in the market.”

That’s what European antitrust regulators say Amazon is doing when allegedly harvesting data from third-party sellers and using it to compete against them by selling similar products — say, a blender or sheets — for less. 

That “could potentially drive some of those sellers out of business,” Owen said. “And then that would create less competition. And that would be considered a market distortion.”

Bottom line — a market distortion is anything that changes how things are priced. 

But a totally distortion-free market exists “only in the textbooks,” Owen said. “If you take Econ 101, we will talk about perfect competition, and we will talk about all the wonderful things that happen when there’s perfect competition, but in reality, that doesn’t exist anywhere.”

In the context of antitrust, she said, the problem arises when a powerful company intentionally distorts a market for its own benefit. 

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