Nonprofit organizations that incorporate some form of revenue generation through commercial means into their operations. Income-generating activities are not conducted as a separate business, but rather are integrated into the organization's other activities. Is it the size of the income-generating activity; the amount of revenue earned; its legal structure, or type of staff involved that determines whether or not a income-generating activity can be considered a social enterprise?
Though subtle, and subject to debate, the defining characteristic is that an income-generating activity becomes a social enterprise when it is operated as a business. It has a long-term vision and is managed as a going concern. Growth and revenue targets are set for the activity in a business or operational plan. Qualified staff with business or industry experience manage the activity or provide oversight, as opposed to nonprofit program staff.
More than half of all nonprofits are engaged in some form of income generation, though few have the tools, knowledge, expertise or desire to develop these activities into enterprises, thus realizing their potential social and economic benefit for the organization. The example below demonstrates how elephant waste was turned into an earned income activity in one zoo and a social enterprise in anther. Although the humorous product is popular among local organic gardeners, the "Zoo Doo" venture is not treated as a business and the income it earns is insignificant.
Opportunities to scale Zoo Doo into a viable enterprise by selling the product in nurseries and gardening catalogues, as well as adding other "zoo products" to the line have not been realized. Instead Zoo Doo functions as an innovative public relations and marketing strategy used to attract visitors and patrons to the National Zoo.
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The small amount of money it generates is considered a plus. Using the same raw material, Zookeepers in Bangkok, Thailand turned their Elephant dung into lucrative business. The Thais transform the animal excrement into high-quality handmade paper which are sold in stationary stores, nature shops, and used in premium paper products in domestic and export markets.
The enterprise employs several people who process the organic pulp to produce handmade paper. To keep up with demand, Thai zookeepers source dung from other zoos and elephant habitats. Unlike Zoo Doo, the Elephant dung products are not advertised to consumers as such; rather, socially-conscious consumers are sold on organic nature of the product and the fact that proceeds from sales are used to fund zoo activities and animal protection organizations.
Social enterprises use entrepreneurship, innovation and market approaches to create social value and change; they usually share the following characteristics:. Social enterprises may be structured as a department within an organization or as a separate legal entity, either a subsidiary nonprofit or for-profit. Social enterprises can be classified based on their mission orientation For-profit companies that operate with dual objectives-making profit for their shareholders and contributing to a broader social good.
Ben and Jerry's and Body Shop are examples of this type of hybrid.
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In socially responsible businesses the degree to which profit-making motives affect decisions and the amount of profit designated for social activities ranges. Socially responsible businesses are willing to forsake profit or make substantial financial contributions rather than distribute earnings privately, and frequently place social goals in their corporate mission statements. In some cases a socially responsible business may be considered a social enterprise when it is a registered for-profit subsidiary owned by a nonprofit organization parent organization created for the purpose of earning income for the parent organization as well as supporting a social cause.
For additional information, see the Business for Social Responsibility web site. At GMCR every business decision is anchored in the company's core values concerning the environmental and the social impact of its business actions. In , GMCR established an environmental committee comprised of employees to explore the many ways its corporate environmental vision could be executed in its business practices. One outcome was the establishment of the Company's extensive on-site recycling program. In , GMCR launched its "Stewardship" line of coffees, which are grown and harvested using ecologically-sound sustainable farming techniques beneficial for the land and workers.
These visits help develop strong relationship with the growers and better profits. In , GMCR funded construction of a "beneficio and hydro" plant for 16 coffee-farming families in Peru. This project has already grown to include over participants. In addition to these socially responsible business activities, GMCR contributes 7. For-profit businesses whose motives are financially driven, but who engage in philanthropy.
A private company or corporation engages in socially beneficial activities such as grant-making, community involvement, volunteering company personnel, and sponsorship as a means to improve public image, employee satisfaction, sales, and customer loyalty. Corporate social responsibility is not classified as social enterprise, although philanthropic activities may support social enterprises, make a positive social impact, or contribute significantly to a public good.
Amanco, part of the Nueva Group based in Costa Rica, produces and markets piping for irrigation construction, infrastructure, and industry in 13 countries of Latin America. The money is used to buy school supplies, tools, seeds, and other items. The company provides them with a space to create a library and meeting center, for which Amanco employees collected the first books. Employees will also teach classes. Amanco identified community leaders who will be trained to continue the work organized by the Oasis Group, and plans to bring other companies in the region into the program, which will be expanded to work with other local community groups.
Two distinct families of organizations reside on the hybrid spectrum. The characteristic that separates the two groups is purpose. Profit shareholder return is the primary purpose of socially responsible businesses and corporations practicing social responsibly , whereas social impact is the primary purpose of social enterprises and nonprofits with income-generating activities. For this reason, organizations rarely evolve or transform in type along the full spectrum.
Those that transform from social enterprise to socially responsible company or visa-versa must first reorient their primary purpose then realign their organization. Nonprofits are founded to create social value, however, financial sustainability cannot be achieved without external or self-generated funds. For-profits are established to create economic value, yet often must make social contributions to survive in the marketplace. Therefore, both types of hybrids pursue dual value creation strategies to achieve sustainability equilibrium.
Nonprofits integrate commercial methods to support their social purpose and for-profits incorporate social programs to achieve their profit making objectives. As a hybrid, the social enterprise is driven by two strong forces. First, the nature of the desired social change often benefits from an innovative, entrepreneurial, or enterprise-based solution. Second, the sustainability of the organization and its services requires diversification of its funding stream, often including the creation of earned income.
Distinguished by their dual value creation 2 properties--economic value and social value--social enterprises have the following characteristics:. Examples include economic opportunities for the poor, employment for the disabled, environmental conservation, education, human rights protection, strengthening civil society, etc. Financial Objectives focused on financial sustainability economic value creation vary according to funding needs and business model. Financial measures are drawn from both private and nonprofit practice. Examples include cost recovery of social service, diversifying grant funding with earned income, self-financing programs or making a profit to subsidize the organization's operations.
The concept of "blended value" 4 arises from the notion that value has within it three component parts: economic, social, and environmental. While traditionally people have thought of nonprofits being responsible for social and environmental value and for-profits for economic value; in fact both types of organizations generate all three value sets. The rise of social enterprise, corporate social responsibility, social investing, and sustainable development are all examples of how various actors are pursuing a blend of financial, social, and environmental value. In hybrid organizations money and mission are intertwined like DNA; however, they are not always equal partners.
In practice, financial and social objectives are often in opposition or competition with one another. The initial decision to undertake a social enterprise is frequently motivated by either financial need or mission benefit. The following diagram shows the relationship between mission orientation and type of organization. The following scatter diagram shows the relationship between the type of organization and its motives. The inherent challenge of operating a social enterprise is managing to its dual objectives.
In practice, the business of generating social and economic value means decisions and actions are in frequent opposition. This translates into calculated trade-offs: decisions to forsake social impact to gain market share or increase profit margins; or conversely, expanding the scope of social good at a financial cost. Problems occur when an organization's enthusiasm to meet its financial goals begins to overwhelm its social mandate. Nonprofits' long history of struggling to secure funding can, in the advent of earned income, threaten to swing the pendulum too far in the other direction.
In the early days of microfinance, donors and practitioners toiled to set parameters on "how far is too far" on the mission-money spectrum by quantifying loan sizes, duration of client relationships, and interest rates before arriving at a model that was both viable and scaleable. The concern many nonprofit practitioners and donors face is that incorporating commercial approaches into a nonprofit will compromise the organization's mission or social services by causing a "drift" too far into the for-profit camp.
Running a social enterprise is a balancing act, which requires vigilance and a clear understanding of the organization's purpose and priorities: what is the social impact that the organization is trying to achieve, and how much money does it need to make? It means strong market discipline coupled with an equally strong sense of ethics and integrity--and leadership consensus about limits on "how far is too far" in any direction.
Generating economic value, or making money, is not an evil act; on the contrary, it's a tool for generating social value in a way that is more sustainable than relying on donor funds. The social enterprise model and design will largely inform how its dual purposes are achieved; it is up to the leadership to manage the tensions. The following exhibit shows this relationship in the product and market mix. Income is earned directly from nonprofit program activities. Nonprofit sells existing social service and products to its target market or to a third party payer on behalf of target market.
Income covers the cost of service delivery and may fund all or a portion of overhead. Example: A microfinance institution sells micro-loans to low income microentrepreneurs. Income from interest and fees is used to cover the service delivery costs as well as the operating and financial costs of the microfinance institution. Income is earned by enhancing nonprofit program activities. Nonprofit sells new products and services to its existing target population or constituents.
Example: In addition to its educational and advocacy programs, a biodiversity organization adds an exhibit hall to its offices. Visitors pay admission fees, which fund the operating costs of the exhibit as well as a portion of the organization's overhead. Income subsidizes social programs and parent organization overhead. Example: A senior services organization provides grant-subsidized care management services to poor seniors, and sells the same services in its eldercare business to a private pay market.
Income generated from the private eldercare business is used to subsidize social program costs and a portion of the parent organization's overhead. A nonprofit sells new products or services in a market other than to its target population or constituents. The decision to use this mix is financially motivated. This type of social enterprise most often takes the shape of auxiliary or unrelated businesses, and its income is used to fund social programs and the parent organization at-large.
A youth organization owns a real estate holding company with several commercial rental properties. Space is rented to tenants that have no relationship with the commercial activities of the youth organization. Profit from the real estate business is used to fund the youth organization's overhead and programs. Social enterprise is a means to achieve sustainability through earned income; however, it is important to note that financial objectives differ among organizations. Unlike the microfinance field, the financial objective of a social enterprise is not by default viability generating sufficient income to cover all costs.
Social enterprises don't need to be profitable to be worthwhile. They can improve efficiency and effectiveness of the organization by:. Nonprofit organizations have varying financial motives for incorporating social enterprises into their organizations, ranging from income diversification to full financial self-sufficiency:. The level of social enterprise self-sufficiency is based on financial objectives, the type of enterprise, and its maturity. Social enterprise methodology does not dictate breakeven or profit-making; rather, financial performance is appraised by the ability of the social enterprise to achieve the financial objectives it has set.
For this reason, the chart below 1 does not represent gradation from one stage of development to the next, unless the social enterprise's express objective is to move across the continuum and performance is a question of maturity. Social enterprises use a variety of methods to generate commercial income to sustain operations. At any given time, a social enterprise may use one or a combination of methods, based on the type of enterprise and business strategy. Social enterprises, like any other business--micro or corporation, need capital to grow.
It's not only a question of financing, but also of the right kind; capital must correspond to social enterprise financial needs, business cycles, and maturity. Furthermore, like any other business, the best make good use of borrowed capital and their own risk capital. Access to capital, however, is a constraint social enterprises continue to face.
The reasons are fourfold:. Market maturity and limited available resources present significant problems. Agencies such as the Inter-American Development Bank and social investors such as Calvert Foundation or Partners for the Common Good have worked to fill funding gaps with low interest loans and innovative financing programs, such as SEP. On the other hand, few donors have come to the table to fund start-up or early stage social enterprise with grants.
In cases where donors have funded social enterprises, the philanthropic funding cycle is typically slower than the social enterprises' business cycle production and sales cycle , which can further challenge capitalization. To exacerbate matters, there is the worrisome misconception that once an organization has launched a social enterprise, it no longer needs grants for social programs, when in fact early capitalization of the enterprise dictates the opposite. There is also the misperception that social enterprises only need loans. Capitalizing a nonprofit social enterprise may take four or five times longer than its private sector counterpart, due to the social costs and encumbrances of supporting dual objectives.
These financial limitations hinder efforts of many social enterprises to take their activities beyond the start-up stage and to stabilize, expand, and diversify. Appropriate funding instruments and greater awareness of capitalization issues is needed to facilitate the growth of the social enterprise field as a viable sustainability strategy for nonprofits.
Assisting the development of social enterprises' capital markets is a role that onors, philanthropists, and local governments can play. The following exhibit shows the range of funding across the nonprofit and for-profit spectrum. Many of the same funders support both traditional nonprofit and hybrid nonprofit enterprises; however, greater participation and diversity of funding instruments are needed in the latter if this field is to emerge as a mainstay of international development.
Socially screened funds Shareholder activism Socially screened and traditional venture capitalists Investment banks Individual investors Traditional venture capitalists Investment banks Other investment assets Individual investors Stock Investment Objective High social return--no expected financial return High social return with below market or no financial return Market rate of financial return and some social return Full market rate of financial return and no expected social return 1.
Revenues Over Time External Financing vs. From Time 0 to Time A moving along the X-axis , the SE goes through a start-up phase requiring a lot of external financing. Expenses increase faster than revenues. This is a critical phase during which decision-makers must carefully weigh business expenses based on their potential for generating future revenues. From Time A to Time B, the SE goes through a growth phase during which external financing is still required, but revenues grow at a faster pace than expenses, leading the way to traditional financial sustainability.
The SE reaches its first breakeven point in Time B, at which point the SE becomes sustainable as a traditional business a business that does not incur additional social expenses. The difference between all Business Expenses and Revenues between Time 0 and Time B represent the total business investment over that period of time light gray area on the chart. Even the best management team implementing the best business model cannot succeed in bringing a business to that critical point if decision-makers fail to recognize and budget the level of external financing that will be required over that certain period of time, both of which can vary greatly based on a variety of factors all of which are considered during the business planning phase.
Depending on the model, some social enterprises never grow beyond that point, in which case they serve in a context in which both SE Revenues and external social subsidies can be effectively leveraged to create social impact. Additional SE revenues now generate a profit that can fund social programs outside of the SE. From a programmatic perspective, social enterprise addresses one of the most pressing issues nonprofit organizations face--how to achieve ongoing sustainable impact.
In some organizations social enterprise is highly compatible with the mission and hence, is a natural program fit. For example, program activities concerned with economic development revolve around work and wealth creation. The missions and objectives of social welfare and human development organizations focused on employment training and welfare-to-work transitioning also mesh neatly with social enterprise as a program methodology. Agricultural organizations offer ample opportunities to marry program activities of sustainable crop cultivation and livestock rearing with social enterprises that process food or sell fair trade products, etc.
In these cases, organizations often employ embedded and mission-centric social enterprises as a principal program strategy to accomplish their missions while simultaneously increasing their financial self-sufficiency. Opportunities to utilize social enterprise as a program strategy may be less evident in some organizations than in others. Here social enterprise is an auxiliary activity that compliments or expands the organization's mission and social activities, but is not the core social program.
For example, an arts-and-culture organization may commercialize its products--i. An environmental organization may launch an eco-tourism enterprise as a vehicle to educate people about environmental conservation and employ community members but its main social activities are concerned with reforestation and anti-erosion. In these cases, social enterprises are often integrated within the organization, their activities related to the mission , but are not used as a core program strategy to accomplish the mission.
Program activities described in this section are not comprehensive, rather they relate only to social enterprise programs. All technical program areas have numerous activities not elaborated herein. Economic opportunities programs focus on starting social enterprises for the express purpose of creating fair-wage jobs or employment opportunities in a geographic target area. Other program activities center on developing transferable skills, job placement, or opportunities that foster self-employment.
Economic opportunities programs may be single-focused on business or integrated with other social services such as insurance, literacy, health education, etc. Community and rural development programs develop community-based social enterprises aimed to provide local jobs, increase purchasing power, reduce urban flight, increase community wealth, and strengthen community cohesion.
These social enterprises may be designed as community businesses intended to benefit the entire community by investing surplus revenue in wells, schools, libraries, community centers, gardens, etc. Market development programs start or support social enterprises that spur and facilitate growth in underdeveloped and under-served markets. These social enterprises operate in markets that are unattractive to private companies due to high market penetration costs often related to rural distribution and educational marketing , slim margins, or both.
The objective is to provide access to vital good and services to marginalized communities while strengthening markets to entice private sector players. Social enterprises working in market development consider private sector competition or cannibalization an exit strategy.
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Socially responsible fair trade organizations also serve to develop markets, but do not seek to exit markets based on emerging competition. In markets unattractive to the private sector, but where social need and demand coexist, the social enterprise fills a vital niche by providing access to products and services. Poor and rural markets are largely under-served due to high transaction costs, low purchasing, and low margins, making access difficult for many people in need of products and services, such as medical services, health inputs, financial services, etc.
Employment development creates employment and vocational training for disenfranchised, disabled or at-risk populations. These so-called "hard-to-employ" people earn a livable wage and develop marketable skills through their employment in the social enterprise. Employment development models of social enterprises were popularized in the US, and have proven successful in Latin America. Programs that foster the growth and development of microenterprises businesses that employ people and self-employed people microentrepreneurs through the provision of affordable credit or business support services training, technology, market information, etc.
Institutional development programs are aimed at building the capacity of nonprofit organizations to self-govern and become sustainable. In addition to training and technical assistance in organizational development and nonprofit management, programs focus on income-generation and financial self-sufficiency, thus may incorporate social enterprise. This section describes a number of nonprofit sectors and some social enterprise applications in those sectors.
This is by no means an exhaustive list; social enterprise can be applied in any nonprofit sector, particularly if is it used as a financing strategy. The sectors highlighted in this section are generally conducive to incorporating social enterprise as a program strategy.
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Economic development is a sector that uses social enterprise as a sustainable program strategy to create economic opportunities and community wealth-building to enable poor people to attain economic security for themselves and their families. In many cases, business activities are "embedded" within the economic development organization; the social enterprise is the program--the means to effect social impact. Some of the possible social impact goals include increased household income, asset accumulation, investments in productive activities, job creation, increased school attendance, improved health, and quality of nutrition.
Eco-tourism's growing popularity provides lucrative opportunities to social entrepreneurs interested in capturing intrepid travelers. The tourist market, unlike many nonprofit "client markets," has money; therefore this business easily marries the social enterprise's financial and social objectives. Many environmental social enterprises also sell products, such as shade-grown coffee or items made from recycled materials. In other examples, environmental social enterprises operate organic markets or home delivery food businesses to finance sustainable agriculture and education programs.
In some social welfare and human development organizations, there is crossover with employment development and job training programs, whereby the social service organization creates jobs and develops skills for clients--homeless, physically and mentally disabled, and at-risk populations--through a social enterprise. Human development organizations that target recovering drug addicts and alcoholics, former welfare recipients, or ex-convicts use social enterprises as rehabilitative programs.
In other cases, the social welfare organization may commercialize its social services to a private pay market to fund its programs. Within the context of the cultural organization, social enterprise offers a range of possibilities to serve social and financial objectives. Selling cultural products through outlets such as an art gallery, cinema or theater; or educational services such as art, drama, music, cultural history, etc. In the health sector, nonprofit organizations have been incorporating social enterprise for many years.
Hospitals and clinics are common examples. Pharmacies, medical supply companies, and group-purchasing businesses are also widely applied models. Selling health services is a growing industry in social enterprise: nutrition counseling, physical therapy, mental health counseling, care management, and alternative therapies.
Agricultural production, sustainable farming, food processing and animal rearing offer many social enterprise opportunities for rural communities in developing countries where few other economic opportunities exist. In the United States, social enterprises in the agricultural sector range from nonprofit or cooperative organic farms to economic development organizations that support entrepreneurs and small scale producers cheese, jam, salsa, beer, etc. Educational institutions have long used social enterprise as a means to diversify their income and strengthen education programs.
Tuition or "fee-for-service" is the obvious method used by schools, colleges and universities. Many universities obtain research contracts with the government or private sector. Specialized skill or technology institutions provide an option to follow the service subsidization model by repackage classic education to new markets for a fee. Many nonprofit organizations serving adolescents and young adults, particularly from low-income families, conduct entrepreneurship and vocational skills training, or run hands-on business programs such as youth run enterprises or incubators.
These types of program provide multiple opportunities for integrating social enterprise programs within the organization. Other children and youth organizations operate child-focused enterprises such as birthday parties, camp, after school programs, test preparation, tutorials, classes, extra curricular activities and sports. Democracy and governance programs are concerned with facilitating democratic and self governed organizations, advocacy, enabling legal environments, human rights and rule of law. Although democracy and governance organizations are not an intuitive fit for a social enterprise program, many provide paid legal services, training, consulting to nonprofits, government bodies and private companies.
Creative examples exist in this sector; one social enterprise sells encryption services to human rights organizations. Social enterprises can be classified either based on their mission orientation or based on the level of integration between social programs and business activities. The enterprise is central to the organization's social mission. These social enterprises are created for the express purpose of advancing the mission using a self-financing model.
Organizations created to employ disadvantaged populations employment development and microfinance institutions are examples of this type of social enterprise. Mission-centric social enterprises often take the form of embedded social enterprises. MMP uses social enterprise as strategy to create economic opportunities for its clients through new jobs, by opening markets, and supporting self-employment.
The organization's target population benefits from its social enterprises in four ways, as: employees, business owners, customers and community members. As well, MMP's enterprises achieve supplementary impact by mitigating another critical social problem its clients face: food insecurity. In central Haiti, where food supplies are unreliable; little sustainable farming knowledge exists; and there is a lack of access to agricultural inputs, people often go hungry. To address this problem and accomplish its mission, MPP began three mission-centric cooperative enterprises: a bakery that makes and sells traditional Haitian flat bread, a farm, and a store that sells agricultural and farm inputs.
In sum, MPP's three businesses create nearly jobs for local peasants and supply essential goods and services to the community. Financially, the social enterprises are self-sufficient, not only covering their own costs, but earning a surplus which MMP uses to subsidize its literacy, advocacy, micro-loans, agricultural and education programs. The enterprise is related to the organization's mission or core social services. Commercialization of social services is a common form of the mission-related social enterprise.
One example is a family services organization that provides free meals to the children of low income families enrolled in the organization's day care programs. Utilizing its industrial kitchen, staff dietitian and cooks, the organization starts a catering business serving the "social institutional" market segment--schools, day care centers, hospitals willing and able to pay for this service. Mission expansion is another type of mission-related social enterprise. An example is a women's economic development organization that supports self-employed single mothers through small business consulting services; and then expands its mission by opening a sliding-scale fee-based childcare social enterprise to permit its clients more time to focus on their business.
Mission-related social enterprises often take the form of integrated social enterprises. Through its professional staff, corps of volunteers, and close collaboration with other organizations, IONA provides services and access to programs designed to meet the needs of seniors and their families. IONA commercialized its core social services to start Essential Eldercare, a premier eldercare social enterprise, as a means to generate income to support the organization's nonprofit activities. Essential Eldercare EE sells premium eldercare services to middle and high income seniors in the greater Washington Metro area.
Although there are marginal differences between the types of eldercare services rendered by IONA and EE, the main difference is the markets they serve, thus Essential Eldercare social enterprise's activities are related to IONA's mission. It's important to note that IONA's mission does not dictate the economic status of the seniors it serves. Therefore by expanding eldercare services into an affluent market, IONA is able to reach a greater number of seniors and increase its social impact.
Assets and synergies are leveraged across the nonprofit and social enterprise. For example, IONA rents office space and infrastructure computer lab, fitness facilities, etc. EE benefits from IONA's location, superb facility, name recognition and stellar reputation to sell its products. By meeting the needs of an affluent target market, Essential Eldercare will generate excess revenue and capacity to serve more economically and socially disadvantaged frail seniors.
The enterprise is not related to the organization's mission, or intended to advance the mission other than by generating income for its social programs and operating costs. Business activities may have a social bent, add marketing or branding value, operate in an industry related to the nonprofit parent organization's services or sector, however, profit potential is the motivation for creating a social enterprise unrelated to mission.
Social enterprises unrelated to mission usually take the form of external social enterprises. Save the Children is an international development organization dedicated to creating real and lasting change for children in need. Save the Children was founded in and operates in over 40 developing countries and in 17 states across the United States.
In addition to traditional nonprofit fundraising activities and child sponsorship, Save the Children has established a corporate licensing program to help fund its social programs and overhead.
The first licensing agreement was negotiated in with an exclusive line of neckties featuring original artwork created by children. It would not be an exaggeration to say that today millions of Americans recognize the Save the Children name, logo and distinctive artwork on a host of products.
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Several dignitaries, including President Clinton, and have been photographed wearing Save the Children's ties and scarves. Licensing relationships are sought with companies in consumer-related industries, based on the mutually beneficial goal of increased profit for companies and a significant and steady income stream for Save the Children's work worldwide.
Licensees use Save the Children's name, logo to market their products. Enclosed with each licensed item is a tag that describes the organization's mission and work, which functions as a marketing vehicle for Save the Children. Corporate partners benefit from Save the Children's reputation to boost their image and to attract socially conscious consumers. Since the program's inception, Save the Children has developed licensing agreements with some 30 companies representing a wide range of products: infant wear, men's boxer shorts, bow ties, cummerbunds, eyeglass cases, mugs, cookie jars, checks, t-shirts, greeting cards, stationary, candles, puzzles, and women's silk scarves.
Although unrelated to Save the Children's program activities concerning children's education, health, economic security, physical safety, etc. The licensing social enterprise is structured as a profit center within the organization along with other corporate partnership alliance programs such as cause-related marketing campaigns. Social enterprises can be classified based on the level of integration between social programs and business activities. Social programs and business activities are one and the same.
Nonprofits create Embedded Social Enterprises expressly for programmatic purposes. The enterprise activities are "embedded" within the organization's operations and social programs, and are central to its mission. Social programs are self-financed through enterprise activities and thus, the embedded social enterprise also functions as a sustainable program strategy.
Due to their mission focus, most embedded social enterprises are usually structured as nonprofits to protect against mission drift, but may also be registered as for-profits depending on the legal environment. The relationship between the business activities and the social programs are comprehensive: financial and social benefits are achieved simultaneously. Equal Exchange EE is a US-based fair trade coffee company legally structured as an employee-owned cooperative and an example of embedded social enterprise. Equal Exchange purchases coffee beans and cocoa directly from small democratically-run farmer cooperatives in developing countries at fair trade prices--a guaranteed minimum price regardless of how low commodities markets fall.
The embedded nature of Equal Exchange's social programs is evidenced in its business activities. Marketing strategy --the company uses educational marketing campaigns to raise awareness of the positive social impact purchasing fair trade coffee has on low income farmers. Equal Exchange's coffee packaging contains information regarding the social benefits of fair-trade purchasing. Distribution channels --in addition to retail outlets, products are sold through interfaith organizations and nonprofits that educate their constituents about fair trade coffee; then retain a margin on each sale to support their social activities.
Quality products --Equal Exchange assists farmers with sustainable techniques to promote ecological-friendly cultivation of coffee. Social Impact --EE works with twenty-five trade partners, farmer cooperatives, in twelve countries, and achieves social impact in two significant ways: supplier credit and fair trade premiums. The dollar figures are a monetary representation of Equal Exchange's sustainable mission accomplishment. Equal Exchange is a mission-centric social enterprise; its business decisions and activities are central to accomplishing its mission: "To build long-term trade partnerships that are economically just and environmentally sound, to foster mutually beneficial relations between farmers and consumers and to demonstrate through our success the viability of worker-owned cooperatives and fair trade.
Social programs overlap with business activities , often sharing costs and assets. Organizations create integrated social enterprises as a funding mechanism to support the nonprofit's operations and mission activities. Integrated social enterprises leverage tangible and intangible assets, such as expertise, program methodology, relationships, brand, and infrastructure, as the basis from which to create their businesses.
The integrated social enterprise may be structured as a profit center or enterprise department within the nonprofit, or as separate entity. The relationship between the business activities and the social programs are synergistic, adding value--financial and social--to one another. Scojo Foundation is health social enterprise specialized in eye care. In developing countries where optometry is a privilege of the middle income and wealthy, presbyopia can have a devastating affect on the productive activities of the poor, who typically have little access to eye care.
Seamstresses, rug makers, weavers, mechanics, bookkeepers, automobile or bicycle repair people, hairdressers, and others with occupations that require up close vision can loose their livelihoods and their incomes if they suffer from presbyopia. Simple low-cost readymade reading glasses, or simple magnifiers, enable these people to continue to work. Scojo Foundation founders began their program activities using a traditional nonprofit approach: distributing free readymade reading glasses to the target population in greatest need, the rural poor, but quickly learned that this model was not sustainable.
In , they launched Scojo India, an integrated social enterprise that operates in two distinct markets in Andhra Pradesh state: urban centers, targeting working and middle class customers; and rural markets, targeting poor and low income people. Characteristics of Scojo's urban market such as high population density, existing retail distribution, coupled with local purchasing power and product price elasticity indicate suitable conditions for a profitable ready-made eyeglass business.
Scojo's rural market, on the other hand, has notoriously high costs to sell and distribute eyeglasses in sparsely populated areas to customers target population who lack the ability to pay. Therefore, Scojo India created a social enterprise that integrates its business activities. The urban market is the commercial side of the social enterprise's operations while the rural market is the social program side of the social enterprise. Manufacturing --Products for both markets are manufactured in the same local nonprofit facility, and though style is differentiated in urban markets according to preferences, there is no difference in quality.
Scojo transfers modern spectacle frame- and lens-making technology to its Indian partner, building local capacity to enable production of higher quality readymade glasses than are currently available in India. The production facility creates employment opportunities for local people. Distribution and sales --Integration occurs at the level of the marketing function, but not in the sales activities. Scojo India set a total sales target of , low-cost readymade reading glasses in the first three years of operation ; urban markets represent In urban areas Scojo uses teams of sales agents to sell readymade glasses to non-optical retail stores such as pharmacies, general stores, and bookstores.
Sales agents are also dispatched in innovative mobile sales units, vans stocked with glasses, to bring reading glasses to local factories. Scojo India sells reading glasses to hospitals, health and microcredit NGOs, who channel the glasses through their existing network of community-based vision health workers or microentrepreneurs, making it possible for Scojo to penetrate the rural market. Scojo also sells reading glasses to the State Government for re-sale to their employees.
Financial strategy and viability --Scojo India uses a cross-subsidization strategy to achieve social objectives while achieving financial viability. Profits generated from urban sales subsidize price and distribution costs in rural areas where the need for affordable reading glasses is greatest. Social Impact --By year end , more than , Indians who obtained reading glasses will have improved their productivity and functionality. In three years Scojo India will have created employment opportunities, of which for very low income individuals. The inclusion of moderate income urban customers permits Scojo to expand its target population and reach more people who can benefit from reading glasses, while providing additional funding to serve rural clients sustainably.
Market development and exit strategy --distribution of reading glasses in India is controlled by eye care professionals who lack the financial motivation to sell readymade reading glasses to people from low economic classes. Market development inevitably brings competition. Rather than a threat, this is an opportunity for Scojo to achieve sustainability by transferring its interests to a local social enterprise and to exit the market, and then invest in new markets where the need for readymade reading glasses still exists.
As with other models, the integrated social enterprise model is not straightforward, the degree of integration between the program and business activity in the operational model depends on its purpose--the extent to which the enterprise is used as a funding mechanism or program mechanism. Unlike many integrated social enterprises, Scojo India is a mission-centric example: "to create a sustainable eyeglass manufacturing and distribution operation that makes affordable, quality readymade reading glasses readily available to all low to moderate income individuals in India.
IONA Senior Services is and example of a mission-related social enterprise where less integration occurs between business and social activities. Social programs are distinct from business activities. External social enterprises generally do not benefit from leveraging, cost sharing or program synergies, therefore to serve their purpose, they must be profitable.
External social enterprise may be structured within the parent organization as a profit center, or separately as a nonprofit or for-profit subsidiary. Legal status is often a function of the regulatory environment in which the external social enterprise operates, or a requirement to access capital, i. External social enterprises registered as for-profit entities are subject to local tax laws. The relationship between the business activities and social programs is supportive, providing unrestricted funding to the nonprofit parent organization. External social enterprises are often unrelated to mission ; their business activities are not required to advance the organization's mission other than by generating income for the its social programs or overhead.
The Organizational Support Model often take the form of external social enterprise. CCC's mission is to "serve the growing number of uninsured by reducing cost, improving quality of care, and strengthening the capacity of community health centers to improve community health," which it accomplishes through three linked but separate entities: two nonprofits and one for profit subsidiary--an external social enterprise.
CCC's primarily social activities are advocacy, working to change laws to protect at-risk populations and strengthen the health safety net for uninsured and underinsured people. Under the umbrella of CCC is another nonprofit, Community Clinic Health Network CCHN , which provides technical assistance services to build capacity of community clinics in several areas of healthcare and management. The third structure is a for-profit, Council Connections, a wholly owned for-profit subsidiary of CCC.
Notably, some prominent liberals—including John Kenneth Galbraith—ratified this idea, championing centralization. Focusing antitrust exclusively on consumer welfare is a mistake. This vision promotes a variety of aims, including the preservation of open markets, the protection of producers and consumers from monopoly abuse, and the dispersion of political and economic control.
Protecting this range of interests requires an approach to antitrust that focuses on the neutrality of the competitive process and the openness of market structures. First, as described in Section II. B, this idea contravenes legislative history, which shows that Congress passed antitrust laws to safeguard against excessive concentrations of private power.
Second, by adopting this new goal, the Chicago School shifted the analytical emphasis away from process —the conditions necessary for competition—and toward an outcome —namely, consumer welfare. Antitrust doctrine has evolved to reflect this redefinition. The recoupment requirement in predatory pricing, for example, reflects the idea that competition is harmed only if the predator can ultimately charge consumers supracompetitive prices.
The same is true in the case of vertical integration. The modern view of integration largely assumes away barriers to entry, an element of structure, presuming that any advantages enjoyed by the integrated firm trace back to efficiencies. More generally, modern doctrine assumes that market power is not inherently harmful and instead may result from and generate efficiencies.
In practice, this presumes that market power is benign unless it leads to higher prices or reduced output—again glossing over questions about the competitive process in favor of narrow calculations. Companies may exploit their market power in a host of competition-distorting ways that do not directly lead to short-term price and output effects.
I propose that a better way to understand competition is by focusing on competitive process and market structure. Instead, I claim that seeking to assess competition without acknowledging the role of structure is misguided. This is because the best guardian of competition is a competitive process, and whether a market is competitive is inextricably linked to—even if not solely determined by—how that market is structured. In other words, an analysis of the competitive process and market structure will offer better insight into the state of competition than do measures of welfare.
Moreover, this approach would better protect the range of interests that Congress sought to promote through preserving competitive markets, as described in Section II. Foundational to these interests is the distribution of ownership and control—inescapably a question of structure. Promoting a competitive process also minimizes the need for regulatory involvement. A focus on process assigns government the task of creating background conditions, rather than intervening to manufacture or interfere with outcomes.
In practice, adopting this approach would involve assessing a range of factors that give insight into the neutrality of the competitive process and the openness of the market. These factors include: 1 entry barriers, 2 conflicts of interest, 3 the emergence of gatekeepers or bottlenecks, 4 the use of and control over data, and 5 the dynamics of bargaining power.
An approach that took these factors seriously would involve an assessment of how a market is structured and whether a single firm had acquired sufficient power to distort competitive outcomes. Does the structure of the market create or reflect dependencies? Has a dominant player emerged as a gatekeeper so as to risk distorting competition?
Attention to structural concerns and the competitive process are especially important in the context of online platforms, where price-based measures of competition are inadequate to capture market dynamics, particularly given the role and use of data. Amazon has established dominance as an online platform thanks to two elements of its business strategy: a willingness to sustain losses and invest aggressively at the expense of profits, and integration across multiple business lines.
Recently, Amazon has started reporting consistent profits, largely due to the success of Amazon Web Services, its cloud computing business. Through , Amazon had generated a positive net income in just over half of its financial reporting quarters. Even in quarters in which it did enter the black, its margins were razor-thin, despite astounding growth.
The graph below captures the general trend. On a regular basis, Amazon would report losses, and its share price would soar. Analysts and reporters have spilled substantial ink seeking to understand the phenomenon. In his first letter to shareholders, Bezos wrote:.
We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand.
We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise. To achieve scale, the company prioritized growth. And, by many measures, Amazon has succeeded. Its year-on-year revenue growth far outpaces that of other online retailers.
As with its other ventures, Amazon lost money on Prime to gain buy-in. As a result, Amazon Prime users are both more likely to buy on its platform and less likely to shop elsewhere. Non-Prime members, meanwhile, are eight times more likely than Prime members to shop between both Amazon and Target in the same session. It may, however, also reveal the general stickiness of online shopping patterns. But in several key ways, Amazon has achieved its position through deeply cutting prices and investing heavily in growing its operations—both at the expense of profits. The fact that Amazon has been willing to forego profits for growth undercuts a central premise of contemporary predatory pricing doctrine, which assumes that predation is irrational precisely because firms prioritize profits over growth.
The retailers that compete with it to sell goods may also use its delivery services, for example, and the media companies that compete with it to produce or market content may also use its platform or cloud infrastructure. At a basic level this arrangement creates conflicts of interest, given that Amazon is positioned to favor its own products over those of its competitors. Critically, not only has Amazon integrated across select lines of business, but it has also emerged as central infrastructure for the internet economy. Amazon controls key critical infrastructure for the Internet economy—in ways that are difficult for new entrants to replicate or compete against.
By making itself indispensable to e-commerce, Amazon enjoys receiving business from its rivals, even as it competes with them. Moreover, Amazon gleans information from these competitors as a service provider that it may use to gain a further advantage over them as rivals—enabling it to further entrench its dominant position.
These cases suggest ways in which Amazon may benefit from predatory pricing even if the company does not raise the price of the goods on which it lost money. The other examples, Fulfillment-by-Amazon and Amazon Marketplace, demonstrate how Amazon has become an infrastructure company, both for physical delivery and e-commerce, and how this vertical integration implicates market competition. These cases highlight how Amazon can use its role as an infrastructure provider to benefit its other lines of business.
Amazon entered the e-book market by pricing bestsellers below cost. Additionally, analyzing the issues raised in this case suggests that Amazon could recoup its losses through means not captured by current antitrust analysis. In late , Amazon rolled out the Kindle, its e-reading device, and launched a new e-book library.
In , the DOJ sued the publishers and Apple for colluding to raise e-book prices. This perspective overlooks how heavy losses on particular lines of e-books bestsellers, for example, or new releases may have thwarted competition, even if the e-books business as a whole was profitable. That the DOJ chose to define the relevant market as e-books—rather than as specific lines, like bestseller e-books—reflects a deeper mistake: the failure to recognize how the economics of platform-based products differ in crucial ways from non-platform goods. Unlike with online shopping, each trip to a brick-and-mortar store is discrete.
If, on Monday, Walmart heavily discounts the price of socks and you are looking to buy socks, you might visit, buy socks, and—because you are already there—also buy milk. On Thursday, the fact that Walmart had discounted socks on Monday does not necessarily exert any tug; you may return to Walmart because you now know that Walmart often has good bargains, but the fact that you purchased socks from Walmart on Monday is not, in itself, a reason to return. Internet retail is different. On Thursday, you would be inclined to revisit Amazon—and not simply because you know it has good bargains.
Several factors extend the tug. Put differently, loss leading pays higher returns with platform-based e-commerce—and specifically with digital products like e-books—than it does with brick-and-mortar stores. The marginal value of the first sale and early sales in general is much higher for e-books than for print books because there are lock-in effects at play, due both to technical design and the possibilities for and value of personalization.
In this context, the traditional distinction between loss leading and predatory pricing is strained. Sony closed its U. Reader store and is no longer introducing new e-readers to the U. Because the government deflected predatory pricing claims by looking at aggregate profitability, neither the government nor the court reached the question of recoupment. Given that—under current doctrine—whether below-cost pricing is predatory or not turns on whether a firm recoups its losses, we should examine how Amazon could use its dominance to recoup its losses in ways that are more sophisticated than what courts generally consider or are able to assess.
Most obviously, Amazon could earn back the losses it generated on bestseller e-books by raising prices of either particular lines of e-books or e-books as a whole. This intra-product market form of recoupment is what courts look for. This underscores a basic challenge of conducting recoupment analysis with Amazon: it may not be apparent when and by how much Amazon raises prices. Online commerce enables Amazon to obscure price hikes in at least two ways: rapid, constant price fluctuations and personalized pricing. By one account, Amazon changes prices more than 2. There is no public evidence that Amazon is currently engaging in personalized pricing, but online retailers generally are devoting significant resources to analyzing how to implement it.
If retailers—including Amazon—implement discriminatory pricing on a wide scale, each individual would be subject to his or her own personal price trajectory, eliminating the notion of a single pricing trend. It is not clear how we would measure price hikes for the purpose of recoupment analysis in that scenario. There would be no obvious conclusions if some consumers faced higher prices while others enjoyed lower ones. But given the magnitude and accuracy of data that Amazon has collected on millions of users, tailored pricing is not simply a hypothetical power.
It is true that brick-and-mortar stores also collect data on customer purchasing habits and send personalized coupons. But the types of consumer behavior that internet firms can access—how long you hover your mouse on a particular item, how many days an item sits in your shopping basket before you purchase it, or the fashion blogs you visit before looking for those same items through a search engine—is uncharted ground. The degree to which a firm can tailor and personalize an online shopping experience is different in kind from the methods available to a brick-and-mortar store—precisely because the type of behavior that online firms can track is far more detailed and nuanced.
And unlike brick-and-mortar stores—where everyone at least sees a common price even if they go on to receive discounts —internet retail enables firms to entirely personalize consumer experiences, which eliminates any collective baseline from which to gauge price increases or decreases.
The decision of whichproduct market in which Amazon may choose to raise prices is also an open question—and one that current predatory pricing doctrine ignores. Courts generally assume that a firm will recoup by increasing prices on the same goods on which it previously lost money.
But recoupment across markets is also available as a strategy, especially for firms as diversified across products and services as Amazon. Although current predatory pricing doctrine focuses only on recoupment through raising prices for consumers, Amazon could also recoup its losses by imposing higher fees on publishers. For example, when renewing its contract with Hachette last year, Amazon demanded payments for services including the pre-order button, personalized recommendations, and an Amazon employee assigned to the publisher.
The fact that Amazon has itself vertically integrated into book publishing—and hence can promote its own content—may give it additional leverage to hike fees. While not captured by current antitrust doctrine, the pressure Amazon puts on publishers merits concern. Traditionally, publishing houses used a cross-subsidization model whereby they would use their best sellers to subsidize weightier and riskier books requiring greater upfront investment.
Under the predatory pricing jurisprudence of the early and mid-twentieth century, harm to the diversity and vibrancy of ideas in the book market may have been a primary basis for government intervention. For instance, the risk that Amazon may retaliate against books that it disfavors—either to impose greater pressure on publishers or for other political reasons—raises concerns about media freedom.
A market with less choice and diversity for readers amounts to a form of consumer injury. First, Amazon is positioned to recoup its losses by raising prices on less popular or obscure e-books, or by raising prices on print books. In either case, Amazon would be recouping outside the original market where it sustained losses bestseller e-books , so courts are unlikely to look for or consider these scenarios.
Additionally, constant fluctuations in prices and the ability to price discriminate enable Amazon to raise prices with little chance of detection. Lastly, Amazon could recoup its losses by extracting more from publishers, who are dependent on its platform to market both e-books and print books. This may diminish the quality and breadth of the works that are published, but since this is most directly a supplier -side rather than buyer-side harm, it is less likely that a modern court would consider it closely.
In addition to using below-cost pricing to establish a dominant position in e-books, Amazon has also used this practice to put pressure on and ultimately acquire a chief rival. While theory may predict that entry barriers for online retail are low, this account shows that in practice significant investment is needed to establish a successful platform that will attract traffic.
Amazon intervened and made an aggressive counteroffer. Amazon achieved this by slashing prices and bleeding money, losses that its investors have given it a free pass to incur—and that a smaller and newer venture like Quidsi , by contrast, could not maintain. After completing its buy-up of a key rival—and seemingly losing hundreds of millions of dollars in the process—Amazon went on to raise prices.
In November , a year after buying out Quidsi , Amazon shut down new memberships in its Amazon Mom program. Does online retailing of baby products resemble shoe retailing or railroading? Given the absence of formal barriers, entry should be easy: unlike railroading, selling baby products online requires no heavy investment or fixed costs. However, the economics of online retailing are not quite like traditional shoe retailing. Given that attracting traffic and generating sales as an independent online retailer involves steep search costs, the vast majority of online commerce is conducted on platforms, central marketplaces that connect buyers and sellers.
As several commentators have observed, the practical barriers to successful and sustained entry as an online platform are very high, given the huge first-mover advantages stemming from data collection and network effects. Investment in online platforms lies not in physical infrastructure that might be repurposed, but in intangibles like brand recognition. These intangibles can be absorbed by a rival platform or retailer with greater ease than a railroad could take over a competing line.
Courts also tend to discount that predators can use psychological intimidation to keep out the competition. Even as Amazon has raised the price of the Amazon Mom program, no newcomers have recently sought to challenge it in this sector, supporting the idea that intimidation may also serve as a practical barrier.
However, even this strategy has skeptics. In this case, Amazon raised prices by cutting back discounts and at least temporarily refusing to expand the program. Even if a firm viewed the unmet demand as an invitation to enter, several factors would prove discouraging in ways that the existing doctrine does not consider. In theory, online retailing itself has low entry costs since anyone can set up shop online, without significant fixed costs. But in practice, successful entry in online markets is a challenge, requiring significant upfront investment. It requires either building up strong brand recognition to draw users to an independent site, or using an existing platform, such as Amazon or eBay, which can present other anticompetitive challenges.
The fact that no real rival has emerged, even after Amazon raised prices, undercuts the assumption embedded in current antitrust doctrine. Amazon has translated its dominance as an online retailer into significant bargaining power in the delivery sector, using it to secure favorable conditions from third-party delivery companies. This in turn has enabled Amazon to extend its dominance over other retailers by creating the Fulfillment-by-Amazon service and establishing its own physical delivery capacity. This illustrates how a company can leverage its dominant platform to successfully integrate into other sectors, creating anticompetitive dynamics.
Retail competitors are left with two undesirable choices: either try to compete with Amazon at a disadvantage or become reliant on a competitor to handle delivery and logistics. What then becomes a virtuous circle for the strong buyer ends up as a vicious circle for its weaker competitors. To this two-fold advantage Amazon added a third perk: harnessing the weakness of its rivals into a business opportunity.
Amazon had used its dominance in the retail sector to create and boost a new venture in the delivery sector, inserting itself into the business of its competitors. Amazon has followed up on this initial foray into fulfillment services by creating a logistics empire.
Building out physical capacity lets Amazon further reduce its delivery times, raising the bar for entry yet higher. Most recently, Amazon has also expanded into trucking. Last December, it announced it plans to roll out thousands of branded semi-trucks, a move that will give it yet more control over delivery, as it seeks to speed up how quickly it can transport goods to customers.
The way that Amazon has leveraged its dominance as an online retailer to vertically integrate into delivery is instructive on several fronts. First, it is a textbook example of how the company can use its dominance in one sphere to advantage a separate line of business. To be sure, this dynamic is not intrinsically anticompetitive.
Because Amazon was able to demand heavy discounts from FedEx and UPS, other sellers faced price hikes from these companies—which positioned Amazon to capture them as clients for its new business. By overlooking structural factors like bargaining power, modern antitrust doctrine fails to address this type of threat to competitive markets.
Second, Amazon is positioned to use its dominance across online retail and delivery in ways that involve tying, are exclusionary, and create entry barriers. For example, sellers who use FBA have a better chance of being listed higher in Amazon search results than those who do not, which means Amazon is tying the outcomes it generates for sellers using its retail platform to whether they also use its delivery business. In interviews with reporters, venture capitalists say there is no appetite to fund firms looking to compete with Amazon on physical delivery. The fact that Amazon competes with many of the businesses that are coming to depend on it creates a host of conflicts of interest that the company can exploit to privilege its own products.
Amazon has already raised Prime prices. As described above, vertical integration in retail and physical delivery may enable Amazon to leverage cross-sector advantages in ways that are potentially anticompetitive but not understood as such under current antitrust doctrine. The clearest example of how the company leverages its power across online businesses is Amazon Marketplace, where third-party retailers sell their wares. Since Amazon commands a large share of e-commerce traffic, many smaller merchants find it necessary to use its site to draw buyers.
Third-party sellers using Marketplace recognize that using the platform puts them in a bind. By going directly to the manufacturer, Amazon seeks to cut out the independent sellers. In other instances, Amazon has responded to popular third-party products by producing them itself. Last year, a manufacturer that had been selling an aluminum laptop stand on Marketplace for more than a decade saw a similar stand appear at half the price.
The manufacturer learned that the brand was AmazonBasics , the private line that Amazon has been developing since The difference with Amazon is the scale and sophistication of the data it collects. Whereas brick-and-mortar stores are generally only able to collect information on actual sales, Amazon tracks what shoppers are searching for but cannot find, as well as which products they repeatedly return to, what they keep in their shopping basket, and what their mouse hovers over on the screen. In using its Marketplace this way, Amazon increases sales while shedding risk. It is third-party sellers who bear the initial costs and uncertainties when introducing new products; by merely spotting them, Amazon gets to sell products only once their success has been tested.
The anticompetitive implications here seem clear: Amazon is exploiting the fact that some of its customers are also its rivals. The source of this power is: 1 its dominance as a platform, which effectively necessitates that independent merchants use its site; 2 its vertical integration—namely, the fact that it both sells goods as a retailer and hosts sales by others as a marketplace; and 3 its ability to amass swaths of data, by virtue of being an internet company. Notably, it is this last factor—its control over data—that heightens the anticompetitive potential of the first two.
Evidence suggests that Amazon is keenly aware of and interested in exploiting these opportunities. For example, the company has reportedly used insights gleaned from its cloud computing service to inform its investment decisions. How Amazon has cross-leveraged its advantages across distinct lines of business suggests that the law fails to appreciate when vertical integration may prove anticompetitive.
This shortcoming is underscored with online platforms, which both serve as infrastructure for other companies and collect swaths of data that they can then use to build up other lines of business. In this way, the current antitrust regime has yet to reckon with the fact that firms with concentrated control over data can systematically tilt a market in their favor, dramatically reshaping the sector. But it also reflects a failure to update antitrust for the internet age.
This Part examines how online platforms defy and complicate assumptions embedded in current doctrine. Specifically, it considers how the economics and business dynamics of online platforms create incentives for companies to pursue growth at the expense of profits, and how online markets and control over data may enable new forms of anticompetitive activity. Economists have analyzed extensively how platform markets may pose unique challenges for antitrust analysis. Legalanalysis of online platforms is comparatively undertheorized.
Starting in , the FTC pursued an investigation into Google, partly in response to allegations that the company uses its dominance as a search engine to cement its advantage and exclude rivals in other lines of business. While the FTC closed the investigation without bringing any charges, leaks later revealed that FTC staff had concluded that Google abused its power on three separate counts.
For the purpose of competition policy, one of the most relevant factors of online platform markets is that they are winner-take-all. This is due largely to network effects and control over data, both of which mean that early advantages become self-reinforcing. The result is that technology platform markets will yield to dominance by a small number of firms. Since popularity compounds and is reinforcing, markets with network effects often tip towards oligopoly or monopoly. Involvement across markets, meanwhile, may permit a company to use data gleaned from one market to benefit another business line.
D, is an example of this dynamic. Control over data may also make it easier for dominant platforms to enter new markets with greater ease. Given that online platforms operate in markets where network effects and control over data solidify early dominance, a company looking to compete in these markets must seek to capture them. Recognizing that enduring early losses while aggressively expanding can lock up a monopoly, investors seem willing to back this strategy. As the Introduction and Part III describe, Amazon has charted immense growth while investing aggressively—both by expanding provision of physical and online infrastructure and by pricing goods below cost.
In essence, investors have given Amazon a free pass to grow without any pressure to show profits. The firm has used this edge to expand wildly and dominate online commerce. The idea that investors are willing to fund predatory growth in winner-take-all markets also holds in the case of Uber. One might dismiss this phenomenon as irrational investor exuberance. But another way to read it is at face value: the reason investors value Amazon and Uber so highly is because they believe these platforms will, eventually, generate huge returns.
Yet bringing a predatory pricing suit against an online platform would be almost impossible to win in light of the recoupment requirement. Strikingly, the market is reflecting a reality that our current laws are unable to detect. In addition to overlooking why online platform dynamics make predation especially rational, current doctrine also fails to appreciate how a platform might recoup losses.
For one, investor support allows Amazon to strategize and operate on a time horizon far longer than what the Brooke Group or Matsushita Courts confronted. Raising prices in a third year after enduring losses for two is different from engaging in a decade-long quest to become the dominant online retailer and provider of internet infrastructure. That longer timeline, meanwhile, makes available more recoupment mechanisms.
Not only has Amazon inaugurated an entire generation into online shopping through its platform, but it has expanded into a suite of additional businesses and amassed significant troves of data on users. This data enables it both to extend its tug over customers through highly tailored personal shopping experiences, and, potentially, to institute forms of price discrimination, as described in Section IV.
Both the latitude granted by investors and control over data equip an incumbent platform to recoup losses in ways less obviously connected to the initial form of below-cost pricing. These recoupment mechanisms may also be more sophisticated than what a judge or even rivals would be able to spot. This last point becomes even more apparent in the context of Uber , whose dynamic pricing has conditioned users not to expect a stable or regular price. While Uber claims that its algorithms set prices to reflect real-time supply and demand, initial research has found that the company manipulates the availability of both.
Although platforms form the backbone of the internet economy, the way that platform economics implicates existing laws is relatively undertheorized. But because current predatory pricing doctrine defines recoupment in overly narrow terms, competitors generally have not been able to make an effective legal case. Similarly, because current doctrine largely discounts entry barriers, the anticompetitive effects of vertical integration are difficult to cognize under the existing framework.
There are signs that enforcers are becoming more attuned to the special factors that may render current antitrust analysis inadequate to promote competition in internet platform markets. For example, in the United States successfully challenged a merger between two leading providers of online ratings and reviews platforms. In its complaint, DOJ acknowledged that data-driven industries can be characterized by network effects, which increase switching costs and entry barriers.
While this burgeoning recognition is heartening, the unique features of platform markets require a more thorough evaluation of how antitrust is applied. An approach more attuned to the realities of online platform markets would also recognize the variety of mechanisms that businesses may use to recoup losses, the longer time horizon on which recoupment might occur, and the ways that vertical integration and concentrated control over data may enable new forms of anticompetitive conduct.
Revising antitrust to reflect the dynamics of online platforms is vital, especially as these companies come to mediate a growing share of communications and commerce. If it is true that the economics of platform markets may encourage anticompetitive market structures, there are at least two approaches we can take. Key is deciding whether we want to govern online platform markets through competition, or want to accept that they are inherently monopolistic or oligopolistic and regulate them instead.
If we take the former approach, we should reform antitrust law to prevent this dominance from emerging or to limit its scope. Reforming antitrust to address the anticompetitive nature of platform markets could involve making the law against predatory pricing more robust and strictly policing forms of vertical integration that firms can use for anticompetitive ends. Importantly, each of these doctrinal areas should be reformulated so that it is sensitive to preserving the competitive process and limiting conflicts of interest that may incentivize anticompetitive conduct.
While predatory pricing technically remains illegal, it is extremely difficult to win predatory pricing claims because courts now require proof that the alleged predator would be able to raise prices and recoup its losses. And given that platforms are uniquely positioned to fund predation, a competition-based approach might also consider introducing a presumption of predation for dominant platforms found to be pricing products below cost. Several reasons militate in favor of a presumption of predation in such cases. First, firms may raise prices years after the original predation, or raise prices on unrelated goods, in ways difficult to prove at trial.
Second, firms may raise prices through personalized pricing or price discrimination, in ways not easily detectable.
Third, predation can lead to a host of market harms even if the firm does not raise consumer prices. Within a consumer welfare framework, these harms include degradation of product quality and sapping diversity of choice. Within a broader framework—which seeks to protect the full range of interests that antitrust laws were enacted to safeguard—the potential harms include lower income and wages for employees, lower rates of new business creation, lower rates of local ownership, and outsized political and economic control in the hands of a few.
Introducing a presumption of predation would involve identifying when a price is below cost, a subject of much debate. The Supreme Court has not addressed the issue, but most appellate courts have said that average variable cost is the right metric. The current approach to antitrust does not sufficiently account for how vertical integration may give rise to anticompetitive conflicts of interest, nor does it adequately address the way a dominant firm may use its dominance in one sector to advance another line of business.
This concern is heightened in the context of vertically integrated platforms, which can use insights generated through data acquired in one sector to undermine rivals in another. Potential ways to address this deficiency include scrutinizing mergers that would enable a firm to acquire valuable data and cross-leverage it, or introducing a prophylactic ban on mergers that would give rise to conflicts of interest.
Thus, it could make sense for the agencies to automatically review any deal that involves exchange of certain forms or a certain quantity of data. International transactions granting foreign corporations access to data on U. A stricter approach would place prophylactic limits on vertical integration by platforms that have reached a certain level of dominance.
Adopting this prophylactic approach would mean banning a dominant firm from entering any market that it already serves as a platform—in other words, from competing directly with the businesses that depend on it. These two businesses would have to be separated into different entities, in part to prevent Amazon from using insights from its role as a third-party host to benefit its retail business, as it reportedly does now. This form of prophylactic ban has a long history in banking law. The policy goals of this regime are worth reviewing because they have analogues in antitrust and competition policy.
Like bank holding companies, Amazon—along with a few other dominant platforms—now play a crucial role in intermediating swaths of economic activity. Amazon itself effectively controls the infrastructure of the internet economy. This level of concentrated control creates hazards analogous to those recognized in banking law.
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As in banking, enabling an essential intermediating entity to compete with the companies that depend on it creates bad incentives. Allowing a vertically integrated dominant platform to pick and choose to whom it makes its services available, and on what terms, has the potential to distort fair competition and the economy as a whole. The other two concerns—safety and soundness, and excessive economic and political power—are also worth considering. It is true that Amazon and other dominant platforms like Uber and Google have extended directly into financial services.
Rather, the systemic risks created by concentration among platforms are of a different kind. One involves concentration of data. That a huge share of consumer retail data may be concentrated within a single company makes hacks of or technical failures by that company all the more disruptive. A few instances where Amazon Web Services crashed led to disruptions for scores of other businesses, including Netflix. Lastly, there is sound reason to ask whether permitting Amazon to leverage its platform to integrate across business lines hands it undue economic and political power.
As described above, one option is to govern dominant platforms through promoting competition, thereby limiting the power that any one actor accrues. The other is to accept dominant online platforms as natural monopolies or oligopolies, seeking to regulate their power instead.
In this Section, I sketch out two models for this second approach, traditionally undertaken in the form of public utility regulations and common carrier duties. Industries that historically have been regulated as utilities include commodities water, electric power, gas , transportation railroads, ferries , and communications telegraphy, telephones. Although largely out of fashion today, public utility regulations were widely adopted in the early s, as a way of regulating the technologies of the industrial age.
Animating public utility regulations was the idea that essential network industries—such as railroads and electric power—should be made available to the public in the form of universal service provided at just and reasonable rates. The Progressive movement of the early twentieth century embraced public utility as a way to use government to steer private enterprise toward public ends. It was precisely because essential network industries often required scale that unregulated private control over these sectors often led to abuse of monopoly power.
Famously, the Interstate Commerce Commission—which instituted a form of common carriage for railroads—was created partly in response to the abusive conduct of railroads, whose control over an essential facility enabled them to pick winners and losers among farmers. In the United States, the first case applying public utility regulations to a private business was Munn v. Illinois , in which the Supreme Court upheld state legislation establishing maximum rates that companies could charge for the storage and transportation of grain.
Given that Amazon increasingly serves as essential infrastructure across the internet economy, applying elements of public utility regulations to its business is worth considering. Of these three traditional policies, nondiscrimination would make the most sense, while rate-setting and investment requirements would be trickier to implement and, perhaps, would less obviously address an outstanding deficiency.
A nondiscrimination policy that prohibited Amazon from privileging its own goods and from discriminating among producers and consumers would be significant. This approach would permit the company to maintain its involvement across multiple lines of business and permit it to enjoy the benefits of scale while mitigating the concern that Amazon could unfairly advantage its own business or unfairly discriminate among platform users to gain leverage or market power. Rate setting would be trickier.
This would involve setting a ceiling on the prices that Amazon can charge to both producers and consumers. Lastly, it is not clear that imposing capitalization and investment requirements would be necessary. A traditional reason for these policies has been that that the economics of creating and running a utility can be unfavorable, occasionally leading private companies to scrimp on investing and upkeep.
That said, a public utility regime could also be justified on the basis that succeeding as an online platform requires incurring heavy losses—a model that Amazon and Uber have pursued. This approach would treat market-share chasing losses as a capital investment, suggesting the public utility domain may be appropriate.
Practically, ushering in a public utility regime may prove challenging. Public utility regulations suffered an intellectual and policy attack around mid-century. For one, critics challenged the theory of natural monopoly as an ongoing rationale for regulation, arguing that rapid economic and technological change would render monopolies temporary problems.
Second, critics portrayed public utility as a form of corruption, a system in which private industry executives colluded with public officials to enable rent seeking. Ultimately these lines of criticism substantially thinned the very concept of public utility. Although the concept of public utility regulation remains somewhat maligned today, there are signs that a robust movement to apply utility-like regulations to services that widely register as public—such as the internet—can catch wind.
The core of the net neutrality debates, for example, involved foundational discussions about how to regulate the communication infrastructure of the twenty-first century. Another would require breaking up parts of Amazon and applying nondiscrimination principles separately; so, for example, to Amazon Marketplace and Amazon Web Services as distinct entities. That said, given the political challenges of ushering in such a regime, strengthening and reinforcing traditional antitrust principles may—in the short run—prove most feasible.
A lighter version of the regulatory approach would be to apply the essential facilities doctrine. This doctrine imposes sharing requirements on a natural monopoly asset that serves as a necessary input in another market. As Sandeep Vaheesan explains:. This doctrine rests on two basic premises: first, a natural monopolist in one market should not be permitted to deny access to the critical facility to foreclose rivals in adjacent markets; second, the more radical remedy of dividing the facility among multiple owners, while mitigating the threat of monopoly leveraging, could sacrifice important efficiencies.
Unlike the prophylactic ban on integration, the essential facilities route accepts consolidated ownership. But recognizing that a vertically integrated monopolist may deny access to a rival in an adjacent market, the doctrine requires the monopolist controlling the essential facility to grant competitors easy access. This duty has traditionally been enforced through regulatory oversight. While the essential facilities doctrine has not been precisely defined, the four-factor test enumerated by the Seventh Circuit in MCI Communications Corp.
This decision by the Court to effectively reject its prior case law on essential facilities followed challenges on other fronts: notably from Congress, enforcement agencies, and academic scholars, all of whom have critiqued the idea of requiring dominant firms to share their property. Essential facilities doctrine has traditionally been applied to infrastructure such as bridges, highways, ports, electrical power grids, and telephone networks.
While the essential facilities doctrine has not yet been applied to the internet economy, some proposals have started exploring what this might look like. Yet evidence shows that competition in platform markets is flagging, with sectors coalescing around one or two giants. As a result, the company has positioned itself at the center of Internet commerce and serves as essential infrastructure for a host of other businesses that now depend on it.
In particular, current law underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. First, the economics of platform markets incentivize the pursuit of growth over profits, a strategy that investors have rewarded. Under these conditions predatory pricing becomes highly rational—even as existing doctrine treats it as irrational. In order to capture these anticompetitive concerns, we should replace the consumer welfare framework with an approach oriented around preserving a competitive process and market structure.
More specifically, restoring traditional antitrust principles to create a presumption of predation and to ban vertical integration by dominant platforms could help maintain competition in these markets. If, instead, we accept dominant online platforms as natural monopolies or oligopolies, then applying elements of a public utility regime or essential facilities obligations would maintain the benefits of scale while limiting the ability of dominant platforms to abuse the power that comes with it. My argument is part of a larger recent debate about whether the current paradigm in antitrust has failed.
Though relegated to technocrats for decades, antitrust and competition policy have once again become topics of public concern. America needs a dose of competition. Animating these critiques is not a concern about harms to consumer welfare, but the broader set of ills and hazards that a lack of competition breeds. As Amazon continues both to deepen its existing control over key infrastructure and to reach into new lines of business, its dominance demands the same scrutiny. To revise antitrust law and competition policy for platform markets, we should be guided by two questions.
First, does our legal framework capture the realities of how dominant firms acquire and exercise power in the internet economy? And second, what forms and degrees of power should the law identify as a threat to competition? Without considering these questions, we risk permitting the growth of powers that we oppose but fail to recognize.
Ida Tarbell, John D. Self-Reliance 10 Nov. Partly due to the success of Amazon Web Services, Amazon has recently begun reporting consistent profits. Times Apr. Though this trend departs from the history on which I focus, my analysis stands given that I am interested in 1 the losses Amazon formerly undertook to establish dominant positions in certain sectors, 2 the investor backing and enthusiasm that Amazon consistently maintained despite these losses, and 3 whether these facts challenge the assumption—embedded in current doctrine—that losing money is only desirable and hence rational if followed by recoupment.
See id. Investors have granted the company much wider leeway to do so than other technology companies of its size often receive, because of its history of delivering outsize growth. Times Dec. See, e. Times Nov. Investors gave Mr. Bezos enormous leeway to spend billions building out a distribution-center infrastructure, but it remained a semi-open question if the scale and pace of investments would ever pay off. Could this company ever make a whole lot of money selling so much for so little?
Times: Bits Blog Oct. Times Oct. David Streitfeld , supra note Times Jan. Times Mar. See United States v. Apple Inc. Restrictions on price and output are the paradigmatic examples of restraints of trade that the Sherman Act was intended to prohibit. Sonotone Corp. Bain, Industrial Organization 2d ed. The institutionalists —scholars who emphasized the importance of social rules and organizations in producing economic outcomes—were also influential in this vein.
Commons, Legal Foundations of Capitalism United States, U. But it is worth noting that a new group of scholars at the University of Chicago—such as Luigi Zingales and Guy Rolnik —have departed from the neoclassical approach and are studying market competition with an eye to power. Richard A. See Robert H. Eisner , supra note 31, at George J. Stigler, The Organization of Industry 67 In judging consumer welfare, productive efficiency, the single most important factor contributing to that welfare, must be given due weight along with allocative efficiency.
As has been widely noted, Bork defines consumer welfare not as consumer surplus but as total welfare. As a result, for Bork, outcomes that might otherwise be understood to harm consumers are not thought to reduce consumer welfare. For example, Bork concludes that wealth transfers from consumers to monopolist producers would not harm consumer welfare.
This is not dead-weight loss due to restriction of output but merely a shift in income between two classes of consumers. The consumer welfare model, which views consumers as a collectivity, does not take this income effect into account. Reiter v. Lehigh Valley Hosp. Horizontal Merger Guidelines , U.
Grunes , Big Data and Competition Policy See Christopher R. Monopoly price refers to the price profitably above cost that a firm with monopoly power can charge. Standard Oil Co. United States, 22 U. Leslie, supra note 50, at quoting United States v.
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Anheuser—Busch, Inc. Consumer Aff. See Dr. Miles Med. John D. Schwegmann Bros. Calvert Distillers Corp. McGuire Act, Pub. See FTC v. This basis for distinguishing legitimate from illegitimate price-cutting echoed other decisions. Morton Salt Co. The Robinson- Patman Act was passed to deprive a large buyer of such advantages. Great Atl. Tea Co. Ward S. Bork , supra note 32, at See Jonathan B.
The narrow spectrum of views between a white tiger and a unicorn fairly reflects the Chicago School view that predatory pricing is almost always irrational, and so is unlikely actually to occur. See Bork , supra note 32, at See D. The government argued in the case as amicus curiae in support of Matsushita. Matsushita , U. Monfort of Colo. Christopher R. Leslie, Predatory Pricing and Recoupment , Colum. Poultry Farms, Inc. Rose Acre Farms, Inc. Without it, predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced. The only recent case in which plaintiffs survived a motion for summary judgment is Spirit Airlines, Inc.
Northwest Airlines, Inc. Zerbe , Jr. Mumford, Does Predatory Pricing Exist? Robert H. Clayton Act, ch. Sherman Act, ch. Federal Trade Commission Act, ch. Foods Corp. Yellow Cab Co. River Corp. FTC, F. But see United States v. Columbia Steel Co. Ford Motor Co. In an influential essay that presaged his later arguments in The Antitrust Paradox , Bork defended vertical integration as nearly always procompetitive.
Bowman, Jr. The product and its distribution are complements, and an increase in the price of distribution will reduce the demand for the product. Assuming that the product and its distribution are sold in fixed proportions. Hahn ed. But in an article later commissioned by Google, Bork returned to a critique of leverage theory, deriding the idea that Google could leverage its position in the general search market to gain additional profits in downstream markets.
Competition L. William E. Kovacic , Built To Last? Daily , June 17, , at A For example, Democrat-appointed antitrust leaders have also adopted the Chicago School view that most vertical mergers are benign. James B.