The Federal Trade Commission has taken Amazon to court over monopolistic practices. The trial is demonstrating just how much market power the corporate behemoth wields — and that we probably need more than meager antitrust law to rein it in.
Amazon trailers are parked at an Amazon Air gateway at Miami International Airport on September 26, 2023 in Miami, Florida. (Joe Raedle / Getty Images)
The “techlash” against Silicon Valley is in full swing, with multiple government legal actions in effect. A Department of Justice (DOJ) antitrust suit, over Google’s practice of paying Apple and other phone and browser makers for default positioning for its lucrative search engine, has gone to trial. A separate action by the same body against Google over the company’s advertising business is scheduled for next March.
Meanwhile, the Federal Trade Commission (FTC), which shares antitrust authority with the DOJ, is suing Facebook in federal court for its alleged monopolistic buying of competing social media applications, primarily Instagram and WhatsApp. And the FTC has now taken Amazon to court, claiming the corporate behemoth’s control of a marketplace it also competes in constitutes a conflict of interest, and further that Amazon’s practices exploit independent sellers on its site and raise prices across online retail.
While antitrust actions against Google and Facebook will struggle due to the companies’ free services, Amazon may be another story. Though it probably won’t be broken up, the company’s effective price hiking and startling record of naked power flexing over small sellers on the site may have it facing real penalties. But Amazon — formerly known as “relentless.com,” after all (the URL still leads to the site) — is unlikely to give up easily.
Amazon founder Jeff Bezos saw the value of a controlled market of independent sellers early in the company’s history. The first attempts to create the independent seller marketplace, the focus of the current suit, began in 1997 with the eBay-modeled Amazon Auctions, followed by zShops, virtual storefronts similar to the gigantic Amazon Marketplace of independent third-party sellers. These made little money in the early days, but Bezos insisted on keeping them available, telling executives he hoped they would grow as fast as the main retail platform. Incredibly, James Marcus, the former lead writer for Amazon’s front page, claims that Bezos’s policy was “if necessary, we should decimate the books division [the main store at the time] to make auctions work.”
This suggests that, like other successful tech billionaires including Bill Gates and Mark Zuckerberg, Bezos saw the potential network effect of his business. In any market, having more products to buy attracts more buyers. But with an onboard market of independent sellers, more buyers attract more sellers, whose inventories then attract more buyers, in the familiar positive-feedback loop that has quickly built monopolies across the tech sector, from training Google search algorithms to building social media network memberships. Bezos recognized the fantastic potential of this simple economic phenomenon, calling his controlled market the company’s “flywheel.”
Bezos has been vindicated. Today, third-party sellers are ubiquitous on Amazon’s site, including tiny companies as well as gigantic brand-name corporations, and sell 60 percent of all merchandise on the platform. But Amazon is fully in control, and as the FTC is arguing, it has used that control to squeeze the sellers and their data at every turn, suggesting the inherent conflict of interest in owning a marketplace and also competing in it. As with Apple and Google’s curated app stores, this level of control flirts with the limits of even today’s castrated antitrust law.
Double-Crossing Third Parties
From its early days, as Amazon moved beyond books into many other product categories, it was common practice for the company to use its software to monitor product prices at other retailers (like Wal-Mart and Target’s online stores) and automatically update its listings to match their prices. Able to monitor prices elsewhere online, Amazon’s growth left a great number of small enterprises in its wake, usually by copying their business models, underpricing them by making use of its monumental scale, and discarding competitors’ shriveled carcasses.
Amazon famously requires independent sellers to sign a contract agreeing not to offer their goods for sale at a lower price elsewhere online. Amazon’s ability to scrape prices online allows it to ensure compliance, and the penalties are real. Violators risk getting demoted in Amazon’s search rankings, a death sentence for many products, or facing removal of the attractive “Buy Now” or “Add to Cart” button for offending items, which are then replaced with more drab buttons requiring more clicks to complete the purchase. Because of the fickle nature of online commerce, this can result in sales tumbling by up to 75 percent.
Further, sellers offering lower prices off Amazon may be barred from having products featured in the “buy box,” the prominent slot for products recommended by the platform. And some wholesalers claim that Amazon penalizes them by lowering prices to match competitors and causing sellers’ profit margins to fall below a minimum threshold. Amazon says it is like other stores in not choosing to feature products that are not priced competitively, but its market power makes the stakes existential for small sellers.
Amazon’s complete control of its market includes total visibility, meaning a major “information asymmetry” — the economic term for a lopsided playing fields where one player knows more than others. In 2020, the Wall Street Journal dropped a bombshell revelation that Amazon used information about independent sellers to develop competing products, despite public statements and congressional testimony to the contrary. This practice of using existing dominance in one business to take over others (or compel other terms to accept unfavorable terms) is quite close to the traditional idea of monopolization, which got Microsoft into its own antitrust hot water in the 1990s.
But maybe the most alarming part of the retail giant’s corporate strategy, revealed in a redacted portion of the FTC filing, is that Amazon has developed a system to test how far it could raise prices on products and be matched by competitors. The algorithm would raise prices and monitor online rivals for a mirroring price increase; if competitors matched Amazon’s new higher price, the platform would maintain it and book the profit, and if they didn’t, the system automatically restored the original price point for the item.
Amazon claims to no longer be using the system, internally named “Project Nessie,” and although the FTC redacted its estimate of Amazon’s “excess profit” from the system, the Wall Street Journal cites a source claiming it exceeded a billion dollars.
Amazon also usually requires small sellers to use its own logistics services to qualify for fast Prime shipping. That is no small affair — Amazon’s direct sales rose 4 percent this year, while its shipping and referral fees rose 18 percent. With all these costs, plus the need for small sellers to pay Amazon for advertising, Amazon takes nearly half of the revenue of third-party sales — 45 percent, according to the Institute for Local Self-Reliance.
These companies, many of whom built their business specifically to operate on Amazon, are utterly at the platform’s mercy. Plugable, a maker of laptop docks and adaptors, was cited in 2016 by Amazon itself as an indie success story thanks to its marketplace. In summer of this year, its bestseller was removed from the platform, with Amazon saying it was due to bad reviews. But all the reviews were positive, and the listing stayed offline for days while Amazon’s own competing dock stayed up — until the Plugable product reappeared again without explanation, despite the company employing an Amazon account manager for $5,000 a month.
The Wrath of Khan
Today’s FTC head is Lina Khan, subject to seemingly endless hostile op-eds in conservative media for her arguments that antitrust law needs new teeth to constrain the power of the online giants, who so far have mostly skated past antitrust charges, as when the FTC gave up and acquitted Google of favoring its own products in its search rankings in 2013.
Khan, like most government regulators, has supported modest limitations on the power of the tech giants, curtailing their most outrageous practices and blocking further mergers. Amazon actually petitioned the FTC in 2021 to have her recused in matters involving the company, mostly due to her famous Yale Law Review paper that made a thoughtful, technocratic case for revision of antitrust law, which since the 1980s has been based on price hiking. A large 2020 congressional report came to similar conclusions as Khan.
Under current law, a company’s having great market power is not enough for a successful antitrust charge. This is thanks to the great influence of conservative economists and law theorists, above all Robert Bork, who firmly established in legal practice that mere market power is insufficient for the government to bring an antitrust case — only abuse of monopoly, or “monopolization,” is.
This is why firms like Google, as well as Microsoft itself, are more likely to face wimpy consent decrees asking them to desist from their most nakedly monopolistic practices, but are under little threat of drastic consequences like breakups. In a case now under appeal, Apple has been ordered to allow apps sold in its store to allow online sign-ups, which lets app sellers evade paying the giant 30 percent cut the company takes on most transactions in its store. Amazon appears to exercise a similar level of control over its indie storefronts as Google and Apple do over their app vendors and is likely headed for a similar consent decree.
The present suit brought by the FTC (along with seventeen states with mostly Democratic attorneys general) specifically claims that Amazon violated antitrust laws with its antidiscounting offsite policy, and for requiring use of Amazon’s logistics services for eligibility for Prime, Amazon’s fast-shipping and video-streaming membership service. The FTC also claims that the company essentially requires sellers to pay for advertising on Amazon in order for their products to be visible on the mammoth platform. In a stunning confirmation of Amazon’s monopoly power and conflicts of interest, the company now takes one out of every two bucks that sellers make on the platform.
The FTC is so far seeking an injunction prohibiting many of these abusive practices rather than a breakup. The business press noted that the company’s stock price actually rose after the filing, which suggests investors thought the case would be more dire for Amazon than the present suit. And the FTC has suffered high-profile failures in efforts to block recent acquisitions by Facebook and Microsoft, which doesn’t bode well for success in regulating Amazon.
But solutions do exist, as demonstrated by the European Union. The European Commission, the bloc’s antitrust enforcement entity, charged Amazon in 2020 over these same practices. In July of this year, Amazon agreed to abstain, for five years, from its practice of using data that isn’t publicly available to compete with third-party sellers. The company also agreed to give equal treatment to all sellers when choosing whose product to feature in the buy box, rather than giving priority to companies that use Amazon’s logistics services.
As I note in my book on Big Tech, very early in his company’s history, Bezos said, “When you are small, someone else that is bigger can always come along and take away what you have.” You might think the moral of that is to have a level playing field, but Bezos clearly took the lesson to be that you must get big yourself so you can take what others have.
More aggressive antitrust action, of the sort pursued in the EU, might curb the corporation’s worst monopolistic excesses. But ultimately, we need a socialist expropriation of petty tyrants like Bezos to bring giant platforms like Amazon under public ownership and democratic control. It’s the only way to ensure that these services on which so many of us depend promote the public good rather than private enrichment.Original post