HomeBudget & Tax NewsAmazon Sued by Federal Trade Commission (Commentary)

Amazon Sued by Federal Trade Commission (Commentary)

Amazon sued by Federal Trade Commission and 17 state AGs for its market dominance, and could make your packages more expensive.

The U.S. Federal Trade Commission (FTC) and 17 states sued Amazon last week [September 26], accusing the $1.3 trillion tech giant, online retailer and digital marketplace of illegally using monopoly power to hurt competitors, consumers and sellers through various anti-competitive practices. This landmark lawsuit contends that Amazon’s tactics enable it to deter competitors and sellers from reducing prices, compromise the quality of goods, impose excessive charges on sellers, impede innovation and obstruct fair competition from rivals inside and outside its marketplace.

The lawsuit is the culmination of a saga that began in 2016. That year, current FTC Chair Lina Khan—then a law student—published a Yale Law Journal article accusing Amazon of predatory pricing and other tactics that lowered costs for consumers in the short term, but were designed ultimately to shut out challenges from rival sellers and marketplaces. (As others have noted, the article was based on spurious evidence.)

As in the FTC’s current lawsuit, Khan argued that depriving its competitors of the scale necessary to challenge its monopoly would allow Amazon to hurt the millions of customers who used its marketplace to shop and compare products. She contended that Amazon could raise prices and provide less than ideal service without the risk of losing customers to rival marketplaces or sellers, who were forced to deal with Amazon’s platform and shipping and logistics service under exploitative terms.

According to John Newman, deputy director of the FTC’s Bureau of Competition, the filing of this new lawsuit against Amazon has “the potential to do so much good for so many people.” Unfortunately, the exact opposite is likely to be the case.

Strangling the Integrated Ecosystem of Services

The problem with the lawsuit isn’t just that it’s likely to waste taxpayer resources on claims and theories of consumer harm that will be difficult to prove in court, as has been the case with a string of recent losses for the FTC. It’s that many of the practices the FTC is singling out as anti-competitive are the very ones that benefit consumers and retailers by enabling the features they seek in a digital marketplace. These include the one-stop aggregation of competitively priced products from a range of sellers, a reputable and efficient logistics division that relies on large product volumes to keep costs down, and a huge pool of users whose feedback and shopping patterns help refine seller offerings.

The bottom line is that Amazon is a highly efficient, vertically integrated entity whose foray into overlapping business lines—offering a digital marketplace for retailers, its own competing retail products for customers, and a homegrown logistics division for both customers and retailers—creates synergies that have generated immense value for consumers.

Retailers and consumers don’t choose Amazon over its competitors because of the value of its individual services, but because of the value of the integrated ecosystem of those services. Punishing it for the very practices that allow it to reach that scale won’t foster competition by allowing others to do the same. It will simply destroy that value and those features while discouraging competitors from replicating them—the opposite of the FTC’s purported mandate to foster competition and protect consumers.

The FTC’s Claims … and the Real Facts

Let’s consider the practices in question. The FTC first asserts that Amazon’s “anti-discounting measures … punish sellers and deter other online retailers from offering prices lower than Amazon, keeping prices higher for products across the internet.” This claim refers to price parity clauses (PPCs), which require retailers using Amazon’s marketplace platform to offer a price equivalent to or better than the price of their products on any other physical or online platform, including their own websites and stores. If they don’t comply, then their product listing is deprived of the “buy box” feature that speeds up purchasing. Approximately 82% of sales on Amazon Marketplace go through the “buy box.”

Though the FTC argues that PPCs are analogous to “price-fixing” clauses, this isn’t the case. Sellers can charge whatever price they choose on any platform, and they can sell without a “buy box” listing on Amazon if they aren’t offering the best price there. PPCs benefit consumers directly by guaranteeing that they’re receiving the best possible price for the product in one place, reducing time and resources spent in perusing multiple websites, and allowing for instant, reliable comparisons between products from different competitors. This convenience makes Amazon attractive to consumers, which in turn attracts retailers who want to reach more of those consumers in one place.

Although it is theoretically possible that retailers respond to PPCs by keeping their product prices higher everywhere other than Amazon to retain Amazon’s “buy box” feature, it’s equally plausible that these clauses deter many retailers from charging higher prices on Amazon in a bid to funnel customers to their own websites, since they’d no longer be required to offer their best possible price on Amazon. This would constitute “free-riding” off the Amazon platform, reducing the incentive to invest in developing the platform and its features that retailers and their customers rely upon. The FTC would face an uphill battle to prove this theory, as they’d likely need empirical data.

The FTC’s next claim refers to Amazon’s Fulfillment by Amazon (FBA), a service that allows retailers to use Amazon’s shipping and logistics services to handle shipping, storage and delivery of their products. The FTC writes that “conditioning sellers’ ability to obtain [Amazon] ‘Prime’ eligibility for their products—a virtual necessity for doing business on Amazon—on sellers using Amazon’s costly fulfillment service … has made it substantially more expensive for sellers on Amazon to also offer their products on other platforms.”

Contrary to the FTC’s claim that this reduces competition by illegally tying its Prime eligibility product to its FBA product, the two effectively function as one integrated product. The reliability and reputation of Amazon’s delivery service creates value for Prime customers that encourages them to become members, while delivering value to retailers who want their products to reach customers.

Tying Prime eligibility to FBA to attract more customers and retailers increases shipping volumes, creating vast economies of scale that lower the delivery, shipping and handling costs of each product. This has allowed Amazon to invest in hiring 400,000 drivers; purchasing 40,000 semi-trucks, 30,000 vans and 70 planes; and opening a $1.5 billion Kentucky-based air hub. Where it relies on third-party shipping and delivery companies such as FedEx and USPS, the large shipping volumes allow it to negotiate discounts of over 70%, directly benefiting consumers.

Forcing Amazon to “untie” Prime eligibility and FBA would hurt consumers and retailers by making shipping, handling and delivery more expensive and less efficient. Through punishing the very practice that benefits consumers, this would reduce rather than promote competition. In any case, this claim may be a moot point as Amazon already plans to expand Prime eligibility to sellers who want to handle their own shipping, provided that they meet certain price and reliability benchmarks.

The FTC’s other major complaints hinge on forms of advertising, self-preferencing and fees. They contend that Amazon’s display of sponsored results after search queries, a standard practice for popular search engines like Google, degrades the quality of results, frustrating shoppers and retailers. Misleading or deceptive advertising is already illegal under consumer law, and any policing of nondeceptive advertising is likely to violate the First Amendment, as the ads constitute protected commercial speech.

As for self-preferencing, or reserving favorable space for Amazon’s own products in search results, this is no different from supermarkets placing their home brand products on eye-level shelf space. The FTC suggests that Amazon harms consumers by promoting its own products that are of lower quality. But consumers are free to choose alternatives.

Research also finds
 that platforms that offer products from both the owner-operator and third-party sellers only prefer the owner-operator’s products over those of third-party sellers where the expected margin from selling them exceeds the expected commission gains from third-party sales, or when consumers tend to leave the platform and purchase directly from third-party sellers after discovering their products on the platform.

In other words, the decision to self-preference is tied to consumer preferences. As Geoffrey Manne notes, “those that give preference to inferior products end up hurting the attractiveness to users of the platform, weakening themselves to competition from rivals.” Another study found that over 60% of sales on Amazon are of products for which Amazon itself does not have an offering, and that Amazon entered into competition with retailers for only about 8% of sales over the study period. Offering a competing product to those of the retailers on its own platform only benefits Amazon’s customers.

In its final claim, the FTC asserts that the fees Amazon charges retailers, including for advertising, are excessive and end up being passed on to consumers through higher costs. This is difficult to prove, since charging higher fees would likely result in consumers and retailers alike leaving Amazon in droves. To the degree that Amazon can charge higher fees than other online marketplaces, this is likely due to the unique advantages it offers, including reliable delivery and best price comparisons among products—features that might be degraded by subjecting the platform to price regulation. Antitrust courts won’t punish firms for gaining the market power to set higher prices by providing better products that people are willing to pay for.

The FTC also faces a big hurdle in arguing that Amazon should be subject to price regulation because it is an “essential facility” that online sellers must deal with to build a viable business The convenience and large customer base of the platform isn’t sufficient to make that case, and the “essential facilities” doctrine has itself fallen out of favor in U.S. courts.

The case against Amazon is rooted in theories about large companies that control the certain platforms using their power to entrench themselves and exploit their customers after burdening and shutting out competitors. Practices like charging fees, producing and preferencing one’s own products over competitors, and tying some platform features to others may seem intuitively self-serving, but they’re also intrinsic to making the Amazon ecosystem what it is.

The ultimate question is whether consumers are left worse off under the current system than under the alternative. If Amazon’s cost-effective shipping, product curation, best price guarantees and large customer base have given it the scale and efficiency to head off challenges from any rivals, then destroying what’s necessary to achieve those features can only hurt consumers—even if some retailers aren’t happy about price parity clauses or Amazon’s fees or self-preferencing.

Rival marketplaces won’t be able to replicate Amazon’s success as they’d likely have to resort to the same kind of strategies that got Amazon in the antitrust doghouse. The winners would be bureaucrats seeking a moral victory. The rest of us would likely pay more and wait longer for our packages.

Originally published by the Mercatus Center at George Mason University. Republished with permission.

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Satya Marar and Rishab Sardana
Satya Marar and Rishab Sardana
Satya Marar is a Washington DC-based lawyer, economist and antitrust policy fellow at the Mercatus Center at George Mason University. Rishab Sardana is an MA Fellow at the Mercatus Center pursuing a Master's in Economics at George Mason University.


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