Over the past weekend, I read an opinion written by an economist who addressed the recent adventures of WeWork. This start-up provides flexible office space for rent in major cities. Recently, WeWork was scheduled to have its initial public offering (IPO) in which the firm’s stock would be available for sale to outside investors. An IPO is one of the last stages of financial maturation for a start-up firm, and it usually represents a high level of success as well as a significant boost in wealth to the founders. However, the WeWork IPO was canceled and the firm’s CEO (Adam Neumann) stepped down.
The purpose of the economist’s article was to explain the problems that led to the canceled IPO. His basic argument was that WeWork violated economic fundamentals by attempting to dominate their market in an uncompetitve way. In particular, the author argued that the early investors in WeWork provided more money than the firm deserved or needed so they could grow fast and dominate the work-space rental market. To help their path to domination, WeWork charged less for their services than their costs (predatory pricing), so other firms who did not have extensive funding to absorb these losses could not compete. The author concluded by noting that this pattern has been used by several other start-up firms, including prominent players like Amazon, Netflix, and Uber.
This story points to a key policy debate that has emerged among competition regulators. Current US antitrust policy tends to favor consumers, so firms that cut prices in order to dominate their market may not be subject to antitrust prosecution because the consumers benefit from lower costs. Alternatively, existing federal antitrust laws also allow regulators to prosecute firms that behave in ways that reduce competition, even if consumers are not directly harmed. A growing number of economists argue that US competition policy should shift from its consumer-focused stance to a more balanced approach that also considers fairness among competitors.
Should firms be allowed to dominate their markets as long as it is good for consumers, or should regulators assure fairness among the competitors, as well? Would the more balanced approach to competition policy also benefit consumers? Can you think of any other companies that offer great deals to consumers but may have established their market position through predatory pricing or other unfair advantages?
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