How Amazon's 'Low' Prices Lead To Higher Consumer Costs

The secret to Amazon's success - and a key legal vulnerability - is Amazon's ability to use its knowledge about what third-party-vendor products are selling well on its site and then copy them under its own private label for sale at higher prices while contractually constraining the original vendor from undercutting their price, thus causing consumers to pay more. JL

Sara Morrison reports in Vox:

Amazon uses its power to harm competition and consumers, particularly with its Marketplace, where outside, or third-party, businesses can sell their products to Amazon customers alongside Amazon’s own wares. Amazon has been accused of copying popular products to sell under its own labels, using non-public seller data to inform its own decisions, and forcing sellers into agreements that essentially prohibit them from offering lower prices elsewhere. Amazon gives its own wares an unfair advantage over third-party sellers, forcing them to pay for extra services and inflate prices.

On the heels of yet another year of record sales, Amazon is dealing with a couple of unwelcome updates in the new year. The Senate Judiciary Committee has announced it will soon be marking up the American Innovation and Choice Online Act, an antitrust bill targeting Amazon and other Big Tech companies. This follows reports that the Federal Trade Commission is ramping up its years-long antitrust investigation into Amazon’s cloud computing arm, Amazon Web Services, or AWS.

It’s clearer now than ever that Amazon, which was allowed to grow mostly unhindered for more than two decades, is caught in the middle of an international effort to check Big Tech’s power.

The Senate bill, one of several bipartisan antitrust bills in Congress, would prohibit Amazon from giving its products preferential treatment, among other things. It’s the bill that would affect the company the most, and the one it has been fighting hardest against. Meanwhile, the renewed scrutiny from the FTC about alleged anti-competitive behavior from AWS, which represents a significant and largely invisible source of Amazon’s profits, could threaten Amazon’s long-term dominance in a number of industries.

 

Just because a company is successful and dominates a market (or even several markets) doesn’t mean it’s violating any antitrust laws. But Amazon’s critics say it illegally uses its power to harm competition and consumers, particularly with its Marketplace, where outside, or third-party, businesses can sell their products to Amazon customers alongside Amazon’s own wares. Amazon has been accused of copying popular products to sell under its own labels, using non-public seller data to inform its own decisions, and forcing sellers into agreements that essentially prohibit them from offering lower prices elsewhere. Amazon denies some of these allegations and says other actions are simply meant to provide the services its customers want at the best price.

Some of these complaints have been around a while, but 2022 may be the year that Amazon faces meaningful and real consequences for them. There are still caveats. State attorneys general are rumored to be looking into some of Amazon’s business practices, but only one has filed a lawsuit so far. The FTC is still waiting for the confirmation of a fifth Democratic commissioner who would break up the deadlock of two Republican and two Democratic commissioners. And while antitrust bills are making progress in Congress, Democratic lawmakers currently seem focused on other initiatives ahead of the midterm elections — elections that could give Republicans a majority in one or both houses of Congress.

Amazon isn’t the only Big Tech company that’s been targeted, but it might have more reason than anyone else to worry about the FTC in particular. One of two federal agencies that enforce antitrust laws, the FTC is now run by Lina Khan, who basically built her career on research surrounding her 2017 Yale Law Journal paper, “Amazon’s Antitrust Paradox.” The paper detailed how Amazon’s rise showed the flaws in antitrust laws and led to Khan becoming known as Amazon’s antitrust antagonist. Since her appointment to the FTC last June, it hasn’t seemed like the question is whether the agency will take on Amazon, but rather when and how. Amazon, meanwhile, has asked that Khan recuse herself from any antitrust matters involving the company.

Khan “is best suited to understand the various issues and problems with Amazon,” said Alex Harman, a competition policy advocate at Public Citizen, a consumer advocacy group. “And we are very excited that she will be able to bring a significant action against them.”

Lina Khan, a vocal Amazon critic, was appointed chair of the Federal Trade Commission last June.

 An Rong Xu/Washington Post via Getty Images

Khan has a lot to choose from. It’s hard to overstate Amazon’s role in the economy, or how many roles it has. It’s a technology company. It’s a delivery service. It’s an advertising platform. It powers about a third of the internet. It’s a movie studio and a streaming service. It’s a health care provider. It’s a surveillance machine and a data harvester. It’s one of the largest employers in the world and one of the most valuable companies. Also, it sells books.

In response to questions about whether its size and market share were too big in too many sectors, Amazon told Recode it faces “intense competition” in all of its lines of business. It says its expansion is part of a long-running strategy to make “big bets over the long term to reinvent the customer experience.”

Sarah Miller, executive director of the American Economic Liberties Project, an anti-monopoly advocacy group, sees it differently: “Amazon leverages its power in one space to take over a new space, which is core to their business practice. They have the ability to combine the competitive advantages of different aspects of their business to take over new sectors of the economy.”

While the FTC, for now, seems interested in AWS (and Amazon’s attempt to buy MGM), most of the antitrust attention we’ve seen elsewhere is focused on Amazon’s retail business and how it treats the businesses that sell products through its Marketplace platform. Critics say Amazon uses its power to give its own wares an unfair advantage over third-party sellers, and effectively forces them to pay for extra services and make agreements that could inflate prices everywhere.

“That’s where there’s a lot of obvious harms, and where you have businesses who are unhappy with how they’re being treated,” Miller said.

Consumers may be paying more and missing out on new products, companies, and innovations that a more competitive retail space would have produced. And that may be a violation of the antitrust laws we have now, or those to come.

How Amazon’s power might lead to higher prices

Many antitrust complaints about Amazon’s practices are based on its position as both a platform and a seller on that platform. This gives Amazon a great deal of power over the companies it’s competing against, as well as an incentive to favor its products over theirs. About 60 percent of Amazon’s online sales come through Marketplace. This can be a mutually beneficial relationship. Marketplace’s sellers — currently more than 2 million of them — get access to Amazon’s huge customer base, and Amazon gets a vastly expanded selection that has helped make it the first and only website many online shoppers visit.

This model brings in hundreds of billions of dollars in revenue every year for Amazon, which now has an estimated 40 percent share of the e-commerce market in the United States. The company with the second-largest e-commerce market share, Walmart, has just 7 percent. At the same time, Amazon likes to say it has but a small sliver — 1 percent — of a competitive global retail market. But that’s online and offline combined, and it includes many industries in which Amazon doesn’t sell anything at all. Amazon is also on track to edge out Walmart and become the most dominant retailer, online and off, in the United States as soon as this year.

No company has the kind of ecosystem Amazon built around its retail business beyond Marketplace. Amazon collects tons of data about its shoppers — data it uses to optimize its services and to fuel its burgeoning and increasingly lucrative advertising business. Meanwhile, Amazon Prime and its fast free shipping has not only created an intensely loyal customer base but also compelled Amazon to build up its own shipping and logistics arm, Fulfillment by Amazon, to reduce its reliance on outside services and give it more control over its sellers. Many of Amazon’s rival retailers — namely, Walmart and Target — do some or all of these things to a lesser extent, but they’re just playing catch-up.

Amazon is on track to take over from Walmart as the most dominant retailer in the US.

 Justin Sullivan/Getty Images

Smaller companies simply don’t have the scale or money to offer such services. Amazon, which has turned itself from a bookstore to an “everything store” to an everything platform, is in a class by itself.

“There are dynamics in digital that are fundamentally different,” Andrew Lipsman, principal analyst at eMarketer, told Recode. “Access to data is fundamentally different than we’ve ever had before. And all the other things that has enabled — all these digital businesses that Amazon has spun off — are underpinned by completely different economics than traditional retail economics.”

Amazon is happy to tell you how good it’s been for the small- and medium-sized businesses making money using its platform and how proposed antitrust actions could harm them. Others argue that Amazon makes even more money off of third-party sellers who have to play by Amazon’s rules because their businesses wouldn’t survive without the e-commerce giant and its customer base. And those rules, they say, aren’t always fair.

Last May, the attorney general of Washington, DC, Karl Racine, sued Amazon for antitrust violations over its treatment of Marketplace sellers. In September, he amended that lawsuit to include the wholesalers, or first-party sellers, from which Amazon buys products before selling them to its customers.

Racine told Recode that he started to wonder what the price of Amazon’s much-touted “customer obsession” was, especially after seeing accusations that Amazon copied popular products on its platform and then sold its own similar products for a lower price. (Amazon says it’s standard practice for retailers to use data about customers’ interests to help determine what to make for their own private labels.)

“I found that offensive,” Racine told Recode. “I felt like Amazon was just a copycat and burying a creative source. They were not focused only on the customer. They were also focused on their bottom line.”

The DC attorney general’s office investigated and found that “Amazon, the dominant player, seeks to maximize its profits at the expense of consumers, third-party sellers, and wholesalers,” Racine said. “It’s kept prices for goods artificially high, hampered competition, stifled innovation, and illegally tilted the playing field, all in its favor.”

Washington, DC, Attorney General Karl Racine sued Amazon for antitrust violations.

 Jahi Chikwendiu/Washington Post via Getty Images

Racine’s suit echoes some of the issues raised in other lawsuits and investigations as well as those identified in a recent report from the Institute for Local Self-Reliance, a nonprofit that advocates for locally owned businesses.

The big sticking point is that Amazon’s policies can effectively force other companies to give Amazon the lowest price for their goods. This is due to Amazon’s “fair pricing” policy, which says it can downgrade or stop sales of third-party sellers’ products if they’re priced “significantly higher” on Amazon than at other outlets. Meanwhile, wholesalers have to agree to give Amazon a certain cut of their products’ sales. But Amazon also sets the prices of those products. If it reduces them to price match another outlet, the wholesaler may end up eating the difference and even losing money. That keeps wholesalers from selling their wares to anyone else for less.

Amazon sees all this as looking out for its customers and making sure they’re getting the lowest prices. But Racine and those who have filed similar lawsuits believe sellers and wholesalers are being stopped from selling their products for lower prices in other stores. Because of this, competitors can’t offer lower prices to get an advantage over Amazon, and customers end up paying Amazon’s prices even if they don’t shop at Amazon — and paying more. Sellers and wholesalers can choose not to sell to Amazon, but few of them have the size and brand recognition needed to survive in a world where so many shoppers do most, if not all, of their online shopping on Amazon.

“That’s the power of brands: Nike is able to say, ‘You know what, Amazon? We don’t need you,’” Lipsman said. “The more commoditized your product is, the more likely you have to sell through Amazon, and you’re dependent on that channel.”

Amazon has filed a motion to dismiss the DC attorney general’s lawsuit, arguing that it’s simply making sure its customers are getting the lowest prices. The policies don’t force sellers to offer the lowest price on Amazon, Amazon says; they simply discourage them from offering higher prices on Amazon than they do elsewhere. But this hasn’t always been the case. Just a few years ago, Amazon had a price parity policy, which more explicitly said sellers couldn’t offer lower prices anywhere else. Amazon ended this practice in Europe years ago amid scrutiny there, and then did the same thing in the United States in 2019. Racine says the fair pricing policy that replaced it serves the same function and is similarly anti-competitive.

How Amazon uses its power over sellers to squeeze them for money and data

Even though one of Amazon’s selling points is its low prices, critics say those aren’t necessarily the lowest prices possible, in part due to the increasing costs to sell on Marketplace. Amazon charges sellers a referral fee, typically 15 percent, for items sold. Then it piles on optional services that many sellers feel compelled to buy if they want their businesses to survive, cutting into their margins and forcing some to raise their prices to maintain a profit.

Fulfillment by Amazon, or FBA, is one example of this. Amazon doesn’t require that its sellers use its fulfillment and shipping service, but doing so makes them eligible for Prime, and it’s exceedingly difficult to qualify for Prime if they don’t.

That recognizable Prime badge is important. There’s a higher likelihood that Amazon’s customers will buy Prime products, because the shipping is free for Prime members and because Amazon gives preference to Prime items when it assigns what’s known as the “Buy Box.” When multiple sellers offer the same product, the Buy Box winner is added to carts when customers click “buy.” More than 80 percent of an item’s sales go to the Buy Box winner, so sellers are very motivated to do everything possible to get it. That may include using FBA even if it costs them more than shipping items themselves.

Workers at one of Amazon’s many fulfillment centers prepare packages for delivery.

 Johannes Eisele/AFP via Getty Images

This practice has already gotten Amazon into trouble abroad. In December, Italy’s antitrust regulators fined Amazon about $1.3 billion for giving sellers who use FBA benefits over those who don’t. Amazon says it’s planning to appeal the decision, but more trouble could be on the way: The company is facing a similar investigation from the European Union’s European Commission, and India is also investigating Amazon for violating its antitrust laws.

Sellers have also complained about ads, which give their items better placement in search results. Reports say that Amazon has increased the number of ads, upping its revenue and pushing organic results down even further — which, in turn, compels sellers to buy ads to regain the prominent placement they used to get for free. Amazon told Recode that sellers wouldn’t use FBA or buy ads if those services didn’t add value or come at the best price, as they can always use other fulfillment services and buy ads elsewhere.

But it’s not just fees that Amazon gets from its sellers. Critics say the company uses data it collects from third-party sellers to give itself a competitive advantage. This was the subject of a “statement of objections” from the European Union, and as the DC attorney general has made clear, Amazon is notorious for creating its own versions of popular products sold by third parties. The company recently opened up some of its data to sellers, possibly in an effort to ward off some of this criticism, and says it prohibits the use of non-public data about individual sellers to develop its own products. But founder Jeff Bezos told Congress he couldn’t guarantee that policy has never been violated, and multiple press reports suggest that it has.

The company has also been accused of self-preferencing, or giving its products preferential treatment — and a competitive advantage — over those sold by third parties. This could take the form of giving its own products the Buy Box or prominent search rankings they didn’t earn. Amazon has total control over its platform, so the company can really do whatever it wants, and there isn’t much sellers can do about it.

Self-preferencing has become a catch-all term for many of Amazon’s alleged anti-competitive practices. It’s attracted the most attention from regulators so far. The company denies that it gives preference to its own items in search results and says the reports that it does are inaccurate. Many legislators aren’t buying that and have proposed bills forbidding self-preferencing, with Amazon specifically in mind.

How Amazon could be changed by new antitrust laws

Per its policies, the FTC has stayed mum on what, if anything, it’s investigating on Amazon. Congress, on the other hand, has been very public.

The House Judiciary Committee spent 16 months looking into competition and digital markets, focusing on Amazon as well as Apple, Google, and Facebook. Last year, a bipartisan and mostly bicameral group of lawmakers proposed a package of Big Tech-focused antitrust bills. The House’s bills made it through committee markup last June, but have yet to be put to a vote.

The American Innovation and Choice Online Act is the only Senate bill to be scheduled for markup so far. The House’s Ending Platform Monopolies Act, which still doesn’t have a Senate equivalent, is likely the most expansive of the bills in the antitrust package, forbidding dominant digital platforms from owning lines of business that incentivize them to give their own products and services preference over third parties. Should that bill become law, it could have a huge impact on Amazon, forcing it to split off its first-party store from its sales platform.

Amazon has fought back against the bills. It has sent emails to certain sellers and set up an informational website warning them about how the bills, if they become law, could negatively impact them. Amazon claims that it might have to shut down Marketplace or limit its ability to offer Prime services. The bills’ supporters say that companies would still be able to offer all of those services, but could finally compete on a level playing field.

“We urge Congress to consider these consequences instead of rushing through this ambiguously worded bill,” Brian Huseman, Amazon vice president of public policy, told Recode in a statement. He added that the bills should apply “to all retailers, not just one.”

While Amazon waits to see what the FTC and Congress do, its antitrust battles, real and potential, haven’t seemed to harm its bottom line. Business is good, growing, and disruptive. Amazon is even reportedly preparing to take on Shopify, a platform that helps businesses create their own online shops and has grown exponentially during the pandemic, with a similar offering that could come out as early as this year. If true (Amazon wouldn’t comment), it shows that Amazon isn’t afraid of going after potential threats even while under more scrutiny than it’s ever experienced.

That’s exactly the attitude Racine, the DC attorney general, takes issue with. “Amazon claims to be all about consumers,” he said. “What our evidence shows is that Amazon is all about more profit for Amazon, at the cost of competition and at the expense of consumers. And we’re looking forward to proving that in court.”