From Territorial to Functional Sovereignty: The Case of Amazon

Frank Pasquale

Economists tend to characterize the scope of regulation as a simple matter of expanding or contracting state power. But a political economy perspective emphasizes that social relations abhor a power vacuum. When state authority contracts, private parties fill the gap. That power can feel just as oppressive, and have effects just as pervasive, as garden variety administrative agency enforcement of civil law. As Robert Lee Hale stated, “There is government whenever one person or group can tell others what they must do and when those others have to obey or suffer a penalty.”

We are familiar with that power in employer-employee relationships, or when a massive firm extracts concessions from suppliers. But what about when a firm presumes to exercise juridical power, not as a party to a conflict, but the authority deciding it? I worry that such scenarios will become all the more common as massive digital platforms exercise more power over our commercial lives.

A few weeks ago, the Friedrich Ebert Stiftung (a think tank affiliated with the Social Democratic Party in Germany) invited me to speak at their Conference on Digital Capitalism. As European authorities develop long-term plans to address the rise of powerful platforms, they want to know: What is new, or particularly challenging, in digital capitalism?

My answer focused on the identity and aspirations of major digital firms. They are no longer market participants. Rather, in their fields, they are market makers, able to exert regulatory control over the terms on which others can sell goods and services. Moreover, they aspire to displace more government roles over time, replacing the logic of territorial sovereignty with functional sovereignty. In functional arenas from room-letting to transportation to commerce, persons will be increasingly subject to corporate, rather than democratic, control.

For example: Who needs city housing regulators when AirBnB can use data-driven methods to effectively regulate room-letting, then house-letting, and eventually urban planning generally? Why not let Amazon have its own jurisdiction or charter city, or establish special judicial procedures for Foxconn? Some vanguardists of functional sovereignty believe online rating systems could replace state occupational licensure—so rather than having government boards credential workers, a platform like LinkedIn could collect star ratings on them.

In this and later posts, I want to explain how this shift from territorial to functional sovereignty is creating a new digital political economy. Amazon’s rise is instructive. As Lina Khan explains, “the company has positioned itself at the center of e-commerce and now serves as essential infrastructure for a host of other businesses that depend upon it.” The “everything store” may seem like just another service in the economy—a virtual mall. But when a firm combines tens of millions of customers with a “marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house…a hardware manufacturer, and a leading host of cloud server space,” as Khan observes, it’s not just another shopping option.

Digital political economy helps us understand how platforms accumulate power. With online platforms, it’s not a simple narrative of “best service wins.” Network effects have been on the cyberlaw (and digital economics) agenda for over twenty years. Amazon’s dominance has exhibited how network effects can be self-reinforcing. The more merchants there are selling on (or to) Amazon, the better shoppers can be assured that they are searching all possible vendors. The more shoppers there are, the more vendors consider Amazon a “must-have” venue. As crowds build on either side of the platform, the middleman becomes ever more indispensable. Oh, sure, a new platform can enter the market—but until it gets access to the 480 million items Amazon sells (often at deep discounts), why should the median consumer defect to it? If I want garbage bags, do I really want to go over to Target.com to re-enter all my credit card details, create a new log-in, read the small print about shipping, and hope that this retailer can negotiate a better deal with Glad? Or do I, ala Sunstein, want a predictive shopping purveyor that intimately knows my past purchase habits, with satisfaction just a click away?

a56ecad2c0f7f7bd4fb48e73216c905e--jungle-trees-forest-trees.jpgAs artificial intelligence improves, the tracking of shopping into the Amazon groove will tend to become ever more rational for both buyers and sellers. Like a path through a forest trod ever clearer of debris, it becomes the natural default. To examine just one of many centripetal forces sucking money, data, and commerce into online behemoths, play out game theoretically how the possibility of online conflict redounds in Amazon’s favor. If you have a problem with a merchant online, do you want to pursue it as a one-off buyer? Or as someone whose reputation has been established over dozens or hundreds of transactions—and someone who can credibly threaten to deny Amazon hundreds or thousands of dollars of revenue each year? The same goes for merchants: The more tribute they can pay to Amazon, the more likely they are to achieve visibility in search results and attention (and perhaps even favor) when disputes come up. What Bruce Schneier said about security is increasingly true of commerce online: You want to be in the good graces of one of the neo-feudal giants who bring order to a lawless realm. Yet few hesitate to think about exactly how the digital lords might use their data advantages against those they ostensibly protect.

Forward-thinking legal thinkers are helping us grasp these dynamics. For example, Rory van Loo has described the status of the “corporation as courthouse”—that is, when platforms like Amazon run dispute resolution schemes to settle conflicts between buyers and sellers. Van Loo describes both the efficiency gains that an Amazon settlement process might have over small claims court, and the potential pitfalls for consumers (such as opaque standards for deciding cases). I believe that, on top of such economic considerations, we may want to consider the political economic origins of e-commerce feudalism. For example, as consumer rights shrivel, it’s rational for buyers to turn to Amazon (rather than overwhelmed small claims courts) to press their case. The evisceration of class actions, the rise of arbitration, boilerplate contracts—all these make the judicial system an increasingly vestigial organ in consumer disputes. Individuals rationally turn to online giants for powers to impose order that libertarian legal doctrine stripped from the state. And in so doing, they reinforce the very dynamics that led to the state’s etiolation in the first place.

This weakness has become something of a joke with Amazon’s recent decision to incite a bidding war for its second headquarters. Mayors have abjectly begged Amazon to locate jobs in their jurisdictions. As readers of Richard Thaler’s “The Winner’s Curse” might have predicted, the competitive dynamics have tempted far too many to offer far too much in the way of incentives. As journalist Danny Westneat recently confirmed,

Chicago has offered to let Amazon pocket $1.32 billion in income taxes paid by its own workers.

Fresno has a novel plan to give Amazon special authority over how the company’s taxes are spent.

Boston has offered to set up an “Amazon Task Force” of city employees working on the company’s behalf.

Stonecrest, Georgia even offered to cannibalize itself, to give Bezos the chance to become mayor of a 345 acre annex that would be known as “Amazon, Georgia.”

Note that these maneuvers–what Tracey Kaye calls “corporate seduction” via tax and other incentives–are not new. But as they accelerate, they mark a faster transfer of power from state to corporate actors. The mayors are in a weakened position because their tax revenues are not high enough to support high quality municipal services, and now they’re succoring a corporate actor with a long history of fighting to push taxation even lower. Similarly, the more online buyers and sellers are relying on Amazon to do their bidding or settle their disputes, the less power they have relative to Amazon itself. They are less like arms-length transactors with the company, than they are like subjects of a despot, whose many roles include consumer and anti-fraud protection.

Even the federal government may soon privatize critical procurement functions, relying on Amazon’s giantism to extract deals that the Defense Department is itself unable to demand. Procurement premised on public purpose could contribute to a Green New Deal. When it is, instead, premised merely on the cheapest cost, it’s an open invitation to continue the same unethical sourcing that has plagued so much government purchasing.

Solutions to Amazon’s power will, no doubt, be hard to advance as a political matter—consumers like 2-day deliveries. But understanding the bigger picture here is a first step. Political economy clarifies the stakes of Amazon’s increasing power over commerce. We are not simply addressing dyadic transactions of individual consumers and merchants. Data access asymmetries will disadvantage each of them (and advantage Amazon as the middleman) for years to come. Nor can we consider that power imbalance in isolation from the way Amazon pits cities against one another. Mastery of political dynamics is just as important to the firm’s success as any technical or business acumen. And only political organization can stop its functional sovereignties from further undermining the territorial governance at the heart of democracy.

Frank Pasquale is a Professor of Law at University of Maryland Francis King Carey School of Law.

2 responses

  1. Pingback: managerialism, continued | Digifesto

  2. Pingback: Start Up: AlphaGo conquers chess, enter Amazon, Silicon Valley’s model problem, bitcoin’s future, and more | The Overspill: when there's more that I want to say

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