Peter Morici: Washington would be crazy to break up Amazon

Donald Trump has upped the ante with Amazon by ordering a review of the U.S. Postal Service’s finances. However, as with charges that Amazon is a tax scofflaw and unfairly threatens small businesses, the notion that Amazon gets a sweetheart deal on package delivery doesn’t hold water.

The new tax law will substantially lower Uncle Sam’s take from Amazon AMZN, +0.24%  , GOOG, +0.34%  and Facebook FB, -0.25%  but that’s how the GOP choose to write the legislation. It’s patently unfair to blame Amazon for doing what its competitors do — take advantage of the opportunities the tax code provides.

Online and brick-and-mortar retailers are not required to collect state sales taxes on shipments to states where they don’t have a physical presence. Amazon has fulfillment centers in 45 states and pays sales taxes on products shipped from its warehouses into those states.

Amazon has been accused of tough price competition that has shaken up markets; for example for diapers delivered directly to homes and book publishing. Regarding the former, it can’t be exploiting consumers now that weaker competitors have been driven out, because the primary vendors for diapers are grocery stores. Walmart WMT, +1.17%  has a bigger footprint and that disciplines Amazon’s pricing.

Prior to Amazon, the market for popular books was reduced to a handful of large publishing houses that overcharged on best sellers to subsidize unprofitable authors — promising writers and titles that publishers simply liked.

Now thanks to Amazon, best sellers are less expensive, and it has a remarkable self-publishing platform through Kindle. That contributed to a new venue — electronic publishing — that permits authors to bypass the cultural screening of big houses and lets the public decide who should be read.

Overall, Amazon has been threatening to hidebound smaller merchants and mall owners for the same reasons that General Motors GM, +0.79%  and other 20th century firms got big in their heydays — better ways of making and distributing goods. It can deliver to consumers with about half as much labor as brick-and-mortar stores, and many shoppers prefer the convenience of at home delivery to the hassle of going to stores.

USPS has two principal lines of business: first class and bulk mail, and packages. Its congressionally granted monopoly requires that it deliver mail to every address in the United States and charge the same 50 cents for a first-class letter no matter how remote the destination. The latter just about guarantees a loss—trying to set the first-class rate high enough would drive too much paper mail to private delivery services and email.

USPS has managed to reduce the red ink from mail delivery by providing last-mile service for the less-urgent packages of delivery giants like FedEx FDX, +2.09%  , UPS UPS, +0.88%   and Amazon. All three firms get the same deal, and the postal service regulator requires these contracts cover the marginal costs to the postal network plus some portion of the fixed cost.

Allocating fixed costs between these two lines of business is a classic joint product problem in economics — akin to solving a system of 2 equations with 3 unknowns in mathematics. It has no solution without a value judgment and, in this case, that choice is colored by the fact that the USPS is required to carry mail to uneconomical destinations—for example, Death Valley.

Contracts with FedEx, UPS and Amazon already help reduce USPS losses by piggybacking packages on the system’s mandated infrastructure. The real problem at the USPS lies in the inflexibilities imposed by its regulators on its route system, delivery practices and mail-pricing structure.

Importantly, Amazon’s greatest successes are coming by taking on industry giants. It’s the dominant player in cloud computing, beating out IBM IBM, +1.38%  , Microsoft MSFT, +0.82%  and Google, its Echo is giving Apple’s AAPL, +0.34%  Siri a tough challenge, and now it’s taking on UPS and FedEx in express delivery and venturing into ocean shipping.

Amazon seeks a major role in drones, autonomous drive cars and artificial intelligence — fields populated by the largest defense contractors, auto companies and other tech giants. Amazon has not likely violated antitrust rules.

Washington would be crazy to alter antitrust law just to bust up or otherwise clip the wings of one of the nation’s best and brightest players in these critical industries of the future.

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