The Federal Trade Commission (FTC) has issued what has been anticipated for a while: a lawsuit filed against Amazon. Part of this lawsuit is accusing Amazon of being a monopoly. As I pointed out last week, Amazon is not a monopoly. In 2017, FTC chair Lina Khan wrote an academic paper with Yale on Amazon's tactics. Even after skimming this academic paper, it is clear as day that Khan is Captain Ahab and Amazon is her white whale. It does not shock me that this lawsuit is Khan's attempt to have her fifteen minutes of fame or as "her time to shine."
Aside from accusing Amazon of having monopolistic power, one of the FTC's major accusations has to do with third-party sellers. From Khan's viewpoint, Amazon is problematic because using its Prime Badge to extract unfair conditions from third-party sellers (especially price-parity clauses), entrench its power in the retail market, and work its way into other markets. What I would like to explore today are three practices that are the focus of the FTC complaint: the "Buy Box", "Fulfilled by Amazon," and self-preferencing. I would then like to figure out whether they cause harm to third-party sellers, and if so, to what extent.
Does the "Buy Box" Harm Third-Party Sellers?
Amazon's "Buy Box" is a segment of its website that features top-ranked products. In order to qualify as a "Buy Box" seller, a seller's product has to generally be the lowest price. If a seller offers the same good at lower prices on other platforms, Amazon penalizes that producer in two ways. First, the producer no longer qualifies for "Buy Box." Second, their product ends up lower is the search results. Amazon still allows the producer on their platform, but not with the added benefits that come with "Buy Box."
The FTC is arguing that these third-party sellers are aggrieved because it ends up being more difficult to sell on Amazon without "Buy Box" status. If the FTC had their way, it would mean forcing Amazon do undermine its own business. How so?
Amazon's platform would become an advertising platform and third-party sellers could simply sell the product on their website. What Amazon's price parity policy does is disincentivize free-riding while doing its utmost to keeping prices low. This is part of what Amazon needs to do in order to maintain the combination of first- and third-party sellers, a feature that improves the platform's appeal to customers. Rather than be anticompetitive, economic research from the International Center for Law and Economics suggests that these price-parity clauses have the potential to be pro-competitive.
What About "Fulfilled by Amazon?"
Amazon provides a centralized distribution system with packaging, shipping, and storage known as "Fulfilled by Amazon." One of Amazon's practices is that it prioritizes sellers who use "Fulfilled by Amazon" over those who do not. Third-party sellers pay a price to be on "Fulfilled by Amazon." These prices range from 8 to 45 percent for each item, although most sellers pay 15 percent.
What do third-party sellers gain in return? The benefit of paying such a price is to have access to the 200 million Amazon Prime members and the revenue that comes along with the sales, as well as two-day shipping. If third-party sellers think Amazon's prices are excessive, they are welcome to take their business to a competing site (e.g., Wal-Mart), a social media marketplace, independent websites, or sell exclusively at their own stores. It would also mean that their products would not receive the same exposure, which translates into increased marketing costs for the third-party sellers.
The FTC thinks that if third-party sellers could participate in Prime without the fulfillment services, they could provide comparable services (FTC, p. 107). The issue is that Amazon tried that pre-COVID with a service called "Seller Fulfilled Prime." How did that turn out? Fewer than 16 percent of sellers were able to make good on the two-day promise. Delayed shipping and angry customers do not exactly make for a solvent business model. Business should have deference on how they produce and deliver their products. Prioritizing timely delivery should not be demonized, but rather deemed praiseworthy.
Amazon's Self-Preferencing Practices
A tertiary accusation in the FTC complaint is that Amazon sets its search results in a way that it biases its products over third-party products. Forget that such a practice is a form of commercial speech afforded by the First Amendment (Central Hudson v. Public Svn. Comm'n, 1980). This practice of self-referencing is a common business practice among multiple sectors. Take supermarkets as an example. They give their brands placement, even as they sell other brands in the same store. Alternatively, they charge third-party brands extra to be sold side-by-side the first-party brand. This practice has been widely accepted as competitive, and Amazon is no different.
Postscript
We want the market to be tough on sellers, especially in comparison to consumers. As Washington Post columnist Megan McArdle puts it, "The relentless race to sell better, cheaper, faster has driven two centuries of prosperity. To merit getting involved, the government needs to show that sellers are being disadvantaged in some illegitimate way that's broadly bad for society."
There is a burden placed on sellers. Depending on what is being sold and a seller's costs of operation, one could argue that Amazon's fees and contractual obligations are too onerous. Others could argue that access to a wider audience are worth the cost. The tradeoff between the cost of selling on Amazon's platform and the benefits is a decision each seller should make on their own. Each seller should determine whether or not it is good business acumen to sell on Amazon's platform or take their business elsewhere.
As the think-tank R Street points out, Amazon's practices that are accused of being anticompetitive are actually widespread competitive conduct in the retail industry, whether that is product self-referencing, sponsored product placement, or pricing agreements. The burden on the FTC is to prove that a) Amazon is forcing third-party sellers on "Buy Box" and "Fulfilled by Amazon," and b) third-party sellers have no other options.
Aside from vilifying commonly accepted business practices, such a conundrum comes with an irony. If the FTC were to succeed, Amazon's best recourse very well might be to disallow non-Prime members to be on Amazon or even remove all third-party sellers from its platform. After all, if there are no third-party sellers, then there are no conflicts of interest or self-preference. Such a move neither helps Amazon nor third-party sellers. It would also give an upper hand to Target and Wal-Mart, the latter of which has a special irony given how much the political Left vilified Wal-Mart a decade ago. The FTC has no business picking winners and losers, and it has no business trying to break up Amazon without actual proof of causing considerable and measurable harm.
As we will see in the next Part covering consumer harms and benefits, the FTC's complaint is oblivious to the possibility that Amazon actually provides consumer benefit.
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