STRS: Innovation In Retail Helps Consumers And Small Businesses
Despite what you may have heard from the newly launched “Small Business Rising” coalition, innovation has been a pro-consumer force for centuries, delivering better and new products, lower costs, and more choices. And it’s not just consumers that benefit — new technologies lower barriers to entry, enabling small businesses to grow and new businesses to emerge. Keep in mind:
— Disruptive innovation benefits the economy, especially consumers.
— Regulating away competition means consumers pay the price.
— Small businesses have instant access to more customers and tools because of the scale of online marketplaces.
— Efforts to break up marketplaces based on lines of business are shortsighted and would make small businesses worse off.
Disruptive innovation benefits the economy, especially consumers.
Online retail is a clear form of pro-consumer innovation: US households each enjoyed a consumer surplus of $1,000 in 2017 as a result of the emergence of online retail channels, find researchers from Stanford and Visa. “The first is the pure convenience gain, which we think of as the ability to purchase online instead of offline exactly the same set of items from the same merchant at the same prices. We estimate a binary consumer choice of online vs. offline transactions, and find convenience gains equivalent to at most 0.4% of consumption. We then write down a representative consumer model which allows for substitution across merchants and both variety and quality gains. Our main estimate using this model is a welfare gain equivalent to over 1% of consumption in 2017, or over $1,000 per household.”
Innovation results in expanded economic growth, shows a study from researchers at the Stanford Graduate School of Business. “Coauthored by Amit Seru, a professor of finance at Stanford Graduate School of Business, the study confirms that the pace of innovation is indeed a disruptive force between competitors — perhaps more than previously thought. But it also finds that periods of rapid tech innovation, such as the 1920s, the 1960s, and the 1990s, lead to a measurable increase in overall productivity and economic growth. ‘If innovation were only about McDonald’s getting ahead of Burger King, we wouldn’t really care,’ Seru says. ‘But our study shows that something more important is happening. When firms innovate, they are expanding the pie, and we see increased aggregate growth.”
Regulating away competition means consumers pay the price.
Fearing loss of market share as a result of this disruption, incumbent businesses incapable of competing often turn to regulatory moats, writes then-FTC Commissioner Josh Wright. “When a new technology or a new business model is likely to disrupt an entire industry, the entity that develops the disruption is likely to have interests that are more closely aligned with consumers. The disruptor wants to enter and compete. Incumbents, relying on soon-to-be outdated technologies or business models that once competed with one another for regulatory favoritism, are now aligned against a common cause: they want to forestall the disruptor’s entry and hamstring its ability to compete.”
When businesses are protected from competition, the result isoften higher prices and less relevant product choices for consumers, write Veronique de Rugy and Tad DeHaven of the Mercatus Center. “Shielded from the discipline of a competitive market, managers and workers at government-privileged businesses may exert less effort and may be less efficient than they would be under competitive circumstances. Production costs in a privileged business, then, will tend to be greater than those of a nonprivileged business. Privileged businesses are also unlikely to be sufficiently attentive to consumer desires and will tend to produce lower-quality or less desired products. The privileged business will also sell less, consumers will gain less from exchange, and the ‘deadweight loss’ to the economy resulting from diminished competition will be larger.”
Small businesses have instant access to more customers and tools because of the scale of online marketplaces.
A survey of 350 small businesses found small businesses see revenue growth from selling on the Amazon platform but don’t rely on Amazon alone for their online sales, as reported by Axios. “In fact, 81% of the firms selling on Amazon use more than one digital sales channel, and sellers make more than half (54%) of their revenue from offline sales.”
It’s not just one or two platforms: small businesses today can choose from over 100 online retail channels to sell their products. According to a recent Channeladvisor report: “A few years ago, sellers had a handful of onlines sales channels to choose from. Then came the explosion of e-commerce marketplaces, and the options available to consumers suddenly expanded far beyond the likes of Amazon.
— Online shoppers now have more than 100 retail channels to choose from and 35% of shoppers are spending more time than ever on non-Amazon marketplaces.
— The number of sellers on Walmart’s online marketplace has doubled to more than 50,000 since July 2019.
— Wish had more than 1 million sellers selling on its marketplace and 300 million active users around the world, as of August 2020.
— Poshmark has 70 million users, Vinted has 34 million, Depop has 21 million, and Mercari has 15 million as of 2021. All of these marketplaces make it incredibly easy to start a small business and make your listings pop.
Small businesses and Amazon benefit from one another’s success, writes the Wall Street Journal Editorial Board. “Amazon has prospered in part by becoming a marketplace for small business, not by excluding it. Some 1.7 million small and medium-sized businesses sell via Amazon, and the company says more than 200,000 had more than $100,000 in sales in 2019.”
Efforts to break up marketplaces based on lines of business are shortsighted and would make small businesses worse off.
Rather than being unique to online channels, NetChoice’s Carl Szabo points out that many major retailers, from grocery to apparel, supplement their inventory with private labels. “Today, we expect every store we walk into to have both their own branded products. Costco has Kirkland. Safeway has O Organics. Even CVS has its own line of Band-Aids. And most consumers like having these generic brands as options because they’re cheaper, force prices down of name brands, and can even push companies to improve their quality.”
Implementing a so-called “Glass-Steagall for the internet” to separate out private-label selling does not make sense: there is no analogy between tech sectors and banking, which Glass-Steagall was designed for, highlights Alec Stapp of the Progressive Policy Institute. “Tech companies don’t have explicit government guarantees (FDIC) or implicit government guarantees (Fannie Mae and Freddie Mac). Tech companies don’t create money (banks create the majority of the money in our economy in the form of bank deposits). And while tech companies create a lot of value for consumers, they’re not systemically important in the same way financial institutions are. If one Big Tech company fails, it will not bring the economy crashing down with it.”
Breaking up innovative tech companies would make small businesses worse off, eliminating “the gains that many small businesses have enjoyed for nearly a decade,” reminds Jake Ward, President of the Connected Commerce Council. “Forcibly breaking apart digital platforms will eliminate the gains that many small businesses have enjoyed for nearly a decade. The competition debate cannot just be about the ‘big’ in Big Tech, as these platforms’ size and scale are precisely what enables them to provide small businesses with high-quality tools and services at affordable prices. The debate about Big Tech must include Main Street and the millions of small businesses that are the backbone of our economy and will drive our economic recovery.”