Even though yours truly is not an antitrust expert, one thing that expert commentators have discussed over the years is the way case law has made it increasingly difficult to pursue antitrust cases against parties who commonsensically have abused their market power. A if not the reason for appointing Lena Khan as the head of the FTC was her strong record as a scholar and critic of the weakening of antitrust enforcement. (See this paper at the University of Chicago, The Political Economy of the Decline of Antitrust Enforcement in the United States, for one take on how we got where we are). So there is understandably a great deal of excitement about the two high profile cases the FTC has launched against tech behemoths, Google and Amazon. We’ll take a very cursory look at the Amazon case since even that illustrates some of the obstacles the FTC faces.
The reason for clearing my throat is that the sort of market analysis that is a key element of this case is the sort of thing I used to do all the time in analyzing prospective acquisitions, particularly in tech.
You can find the filing here. 16 states and the District of Columbia joined the FTC as plaintiffs. California is notably absent. Most of the states also plead state law causes of action.
The 50,000 foot version of this case is that Amazon engages in coercive conduct with its third party sellers to prevent them from offering price discounts outside Amazon. There are additionally allegations that Amazon pushed the third party sellers to increase prices. Amazon then allegedly hoovered the benefit of the resulting inflated prices back to Amazon via various fees, including what were product placement fees for merchants to assure their products got a preferential position and therefore more sales. These higher prices would also benefit Amazon’s direct sales to consumers. The filing includes large sections that are almost fully redacted about a “Project Nessie” which presumably further demonstrates the nature of Amazon’s anti-competitive practices.
The factual discussion of the ways Amazon hog-tied its merchants on its platform, restricted their ability to compete with Amazon via punishments if they tried to undercut the vendor’s price on Amazon, how Amazon used design tricks to drive traffic to vendors who paid up for better placement, and sucked revenues out of these merchants via various fees, thus harvesting the benefits of its price restrictions, is very well done. I will take the liberty of hoisting from Matt Stoller’s post, where he showcases the role of supposedly free shipping:
Consumers pay for the free shipping, it’s just a hidden tax baked into the price of what you buy through an extraordinarily clever scheme put forward by Amazon. And that’s what the Federal Trade Commission and 17 states are suing over. This hidden tax is well-known in the industry….
Most people think of Amazon as a retailer who sells to retail customers. But retail end users — you and me — aren’t really the customer. We are the product. And Amazon doesn’t really sell to us; it’s a middleman who sells access to us. The actual customers of Amazon are third-party businesses that rely on Amazon’s infrastructure to get their wares to the public.
…..Once it achieved monopoly power, Amazon squeezed on price through fees to third-party sellers. As a third-party seller, you pay fees for listing on Amazon; for using Amazon’s warehouse services, known as Fulfillment by Amazon (FBA); and for advertising services. If you don’t pay, you don’t get put in a place on the site where consumers click. “Advertised products on Amazon,” reads the complaint, “are 46 times more likely to be clicked on when compared with products that are not advertised.” And these fees have all increased steadily over the years.
At this point, the price Amazon charges these third party sellers has grown to nearly 50% of its revenue. It is this money, estimated at $123 billion in total last year, that pays for “free” shipping, as well as its video service, its music service, Twitch, and everything else that comes bundled with Prime. These third-party sellers in turn raise their prices to consumers, aka you and me, and then send that money back to Amazon in the form of fees. It’s basically money laundering.
Similarly, some key sections from the filing:
413. The various elements of Amazon’s anti-discounting conduct—algorithmically punishing sellers for offering lower prices elsewhere, contractually restraining ASB sellers, and systematically disciplining rivals via its first-party anti-discounting algorithm—work together to suppress competition in both relevant markets, thereby preventing even an equally or more efficient rival from attracting a critical mass of either shoppers or sellers…
436. For example, Amazon’s anti-discounting conduct leverages both its first-party Retail and its third-party Marketplace business units to suppress competition. Amazon’s first- party anti-discounting algorithm disciplines rivals from undercutting Amazon’s prices, and Amazon punishes third-party sellers for offering lower prices on other platforms. Without the ability to attract either shoppers or sellers through lower prices, rivals are unable to gain a critical mass of customers and meaningfully compete against Amazon. At the same time, Amazon’s coercive fulfillment conduct both artificially stunts the growth of independent fulfillment providers and artificially raises the costs that sellers face when seeking to multihome. This limits seller multihoming and thereby suppresses Amazon’s rivals’ ability to compete for sellers by offering better terms and for shoppers by offering additional product selection.
Where I get concerned is the relationship of the alleged facts to the causes of action (note here I am focusing only on the FTC/Federal law section). The FTC then in its factual discussion contends that Amazon has a dominant position in the “online superstore market” and monopoly power in the “online marketplace services market.” Antitrust arguments, particularly in the merger context, often revolve around the definition of the relevant market.
For Amazon, is the “online superstore market” a sound characterization? Note that the FTC has to exclude food from its “superstore” definition. I see how this market definition makes the merchant perspective. Merchants want access to all those Amazon customers, as the case explains very well. But does this hold for consumers? And if not, how does that affect the FTC’s case? I can easily think of product categories where many if not most vendors have established successful online businesses and the norm is to be outside Amazon: dietary supplements, glass and sunglass frames, running and exercise shoes.
Back in my days of doing company valuations, sometimes of tech plays, the key issues nearly always were not if the tech did what its promoters said it did (both the company and investors would fixate on that), but if even if you assumed it, did, what were the potential competitors? Without exception, the promoters would define the market too narrowly.
Amazon will clearly contest the market definition and the Wall Street Journal, in predictably criticizing the FTC’s case, throws out the sort of factoids the FTC will have to contend with in defending its market definition:
Start with the FTC’s claim that Amazon is a monopolist. The agency does this by narrowly defining the market in which Amazon competes as “online superstores” such as Target, Walmart and eBay. But it excludes brick-and-mortar stores as well as the vast majority of online retailers. The FTC claims customers like to buy everything in one place.
Some do, but most shop around. An HRC Retail Advisory survey found that 59% of shoppers in 2018 used smartphones in stores to compare prices or search for deals. While Amazon makes up about 38% of the U.S. e-commerce market, it accounts for about 6% of all retail sales. That’s no monopoly.
A problem the FTC faces is that Amazon no doubt has monopoly-levels of market share in online sales in certain product categories. But then the FTC would be forced to fight the market definition matter on even more fronts.
It is a little disappointing that the FTC could not find a way to make a case for straight up price fixing via its prohibitions on Amazon vendors offering lower prices and its pressure on vendors to increase prices. That has the advantage of being a per se violation of antitrust law. From the Department of Justice website:
Vertical resale price maintenance, which is an agreement on price between a manufacturer and its distributors (or a distributor and its retailers), may not be prosecuted criminally, although such agreements are “per se” unlawful, because of the difficulty of distinguishing between vertical price agreements and other vertical restraints, such as exclusive territories, that are judged under the “rule of reason.”
Identifying Price-Fixing Activities: Price fixing generally involves any agreement between competitors to tamper with prices or price levels, or terms and conditions of sale (e.g., interest rates for consumer credit), for commodities or services. Generally speaking, price fixing involves an agreement by two or more competing producers of a specific commodity, or competing providers of a particular service, in a defined geographic area, to raise, set or maintain prices for their goods or services. It may take place at either the wholesale or retail level and, although it need not involve every competitor in a particular market, it usually involves most of the competitors in the particular market.
Perhaps I am missing something, since the causes of action do invoke the Sherman Act. But the factual arguments revolve around Amazon having monopoly power, and not Amazon working with online vendors to engage in price fixing. My guess is that the FTC would have had to include the third party merchants as part of a price fixing conspiracy case and it didn’t want to do that for political, practical, and apportionment of liability reasons (as in there was no clean way to exclude them; as I read the Department of Justice’s description, a vendor would have had to somehow participated in the Amazon-pressured behavior as a mistake for that to be forgiven. It does not sound like a dog that would hunt).
However, Stoller also points out that Amazon destroyed documents and that Project Nessie is so bad that the FTC treats it as a violation all of its own (although all the Project Nessie material is so heavily redacted that we have no idea what it is). So there are more shoes to drop.
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My biggest issue with Amazon even more than the monopolistic behavior described above:
Amazon captures searches for well known products that aren’t on Amazon and then funnels that demand to counterfeit/knock offs that are almost always direct-from-China with no QA at all and abuses some fly by night LLC so there is nothing to get when consumers pay the price. This is selling lead to babies in some cases because grandma searched for a specific toy but was pushed to a look alike with 1000 5 star reviews written offshore or by bots made sold by Toyisnice LLC or whatever.
Which is precisely why my book is NOT available on Amazon. Add to this, the fact that Amazon killed the Slim family’s favorite bookstore — it was undercut right outta business — and you might understand my undying hatred of this company.
Amazon is becoming AliExpress with a better search engine. It always cracks me up when they kvetch about fake user reviews because if they didn’t allow fly by night Chinese dropshippers on their platform, they wouldn’t have a a fraction of that problem.
Last week I experienced yet another dimension of Amazon’s monopoly: its monopoly on search. Ironically, I was shopping for athletic shoes. Using DuckDuckGo, which uses Google search, I searched my specific brand and model. I got hits from Amazon, from Amazon Canada, from Zappos owned by Amazon, and from various fake consumer rating sites that funneled the visitor only to Amazon.
It’s a well-known fact that most search engine users never go beyond Page 1. I waded several pages in, and I found precisely three non-Amazon vendors for my shoe, and only one of those dared to venture below Amazon’s price. They got my business, but few consumers have the time or stubborness to go to such lengths.
This also makes me wonder if Amazon and Google have the same kind of unholy alliance that Apple and Google are now proven to have. Formerly, I could exclude Amazon hits in my searches through a simple trick: ending my search with a space, followed by “-Amazon”. Suddenly, a few months ago, that trick stopped working. Hmmm.
Duckduckgo claim to be independent from Google – ‘We also do not source any of our search results from Google’
I tried a search for a pair of running shoes (I am in the UK), using duckduckgo on Firefox using WIn10, only one result was from Amazon, the others were the usual UK, retailers such as John Lewis, Harvey Nichols and of course the running shoe makers own website.
https://duckduckgo.github.io/duckduckgo-help-pages/misconceptions/is-duckduckgo-owned-by-google/
Amazon hosts a ton of servers and many businesses (and charities) use their “cloud” platforms and I wonder if these could be compromised to direct traffic to Amazon. There are also a ton of websites with product reviews that get kickbacks from Amazon purchases when people click on the review link to look at the price or to buy.
If putting the minus sign next to a search term no longer works I would look into using an alternative search engine such as qwant.com.
I wonder if this alternative way to search about athletic shoes might work. It seems haphazard and would involve an awful lot of url diving and also looking very closely at the images themselves to try seeing what brand the shoes are. But here goes.
I went into Yahoo’s ( http://www.alltheweb.com ) site and used their image aggregator function. I got a whole bunch of images. One could click through the images one by one and see what brand the shoe is.
https://images.search.yahoo.com/search/images;_ylt=AwrigehJSBZlqLAGUUNXNyoA;_ylu=Y29sbwNiZjEEcG9zAzMEdnRpZAMEc2VjA3Nj?p=athletic+shoes+image&fr=sfp
One would then have the relevant shoe-company names to put in AS shoe company names and see if their company website will come up. I’m sure it will eventually. Or one could click on any relevant-seeming url for an interesting athletic shoe image and go diving that url and hope for the best.
Maybe that way will work better than normal verbalized searching.
Maybe the ” first page is all AmaGoogleZon crap” is a Darwin Filter for those who will not go beyond page one.. . . unless a successful suit can bust that sh*t up.
I am surprised that there is not more of a focus on the fact that Amazon is a nexus of several components:
1) A market place platform (think eBay minus the auction bidding)
2) A seller on their own market place platform (thus privileged)
3) Creates and sells their own products on their own platform based on data that only they have by owning the platform
4) Runs an advertising business on their own platform (also privileged, especially because they don’t pay the advertising fees that other sellers do).
5) A warehouse, logistics and delivery business
6) And uses data from all of the above to their own advantage
The conflicts of interest in the above is astounding.
A company should not be allowed to control a market place and also sell products completing with the sellers in the market place. You can do one but not both.
Cleanest solution is is split the company up: market place, products, advertising, warehousing/logistics/delivery, and cloud computing.
You didn’t mention the cloud platform that they also own (AWS – Amazon Web Services), which just happens to be the most popular cloud platform in the world, so they get a sweetheart deal (and conflict of interest) on running their entire massive and convoluted website as well, that no other retailer has or would have.
See:
https://fourweekmba.com/is-amazon-profitable-without-aws/
I shop frequently on Amazon, if for nothing else, the selection that’s not available at the local stores. The next reason is free shipping, really don’t care who pays for it, and the free return. Quality is another consideration, mainly purchasing brand name products, for example just purchased a Schwinn bike for 150-250 bucks cheaper at Amazon than anyone else, be that online, or local. In addition, I do shop local/online stores, like Home Depot, Lowe’s, Target, Neweggs, etc., depending on the need. The type of service offered, free shipping for example, does come into the picture, if and when the sought after item is exactly the same.
So, no, I don’t care about the “vertical market that locks in the price of a product”. It’s been in place for the local stores for long time, had at least one and possibly more than one resellers, who increases the cost of the item in question. These resellers also split up the markets between themselves and fix the price. Just look at the US drug/medication pricing in the US…
In the book The Everything Store it says that early Bezos spent a lot of time analyzing Walmart’s business practices and often imitating them. Walmart also pummels its suppliers in the name of “always low prices” benefit to its customers and of course to itself. And that benefit is in many ways legitimate as far as it goes. Some of us here have always argued–living out here in discount store land–that Walmart won its dominant position by simply being better at it than Kmart and the others.
And Amazon does have competitors or would be competitors including most especially Walmart itself which is increasingly trying to “go digital” and has its own online marketplace for both items in Walmart warehouses and third parties. So far Amazon after years of refining its methods is better at this than Walmart.com but the latter is improving. And if Walmart ever does truly challenge Amazon they have some significant advantages including food sales which they conduct online and with customer pickup now at the stores.
All of which is to say, yes, Kahn has a hill to climb,.
I can no longer find links, but I recall reading some years ago that Walmart would approach the specialty manufacturer of a well-made product sold in the US (even if actually assembled in China or Mexico) — imagine something like ABC Tool Company’s hammer drill model xyz123, a high quality tool prized by contractors for its durability and superior performance — and propose, “we’ll carry the model xyz123, but only if you cut what we pay 20% below what other retailers are paying. Otherwise we’ll push your competition’s equivalent product, and push the xyz123 off its perch. With our clout, make no mistake: we can and will do it.” The only way ABC Tool could produce the xyz123 at that price and make any profit is to cut corners. So ABC Tool would produce an xyz123 specifically for Walmart, same model number, identical box and packaging and thus otherwise indistinguishable, but lower quality components. And over time, only repeat buyers of the (Walmart-only) xyz123 would start noticing that its failure rate had significantly increased. The xyz123’s reputation would eventually decline, and ABC Tool would discontinue it, replace it with a new model, and the cycle would begin anew.
Enshittification. Perhaps this story is old hat to NC vets, I don’t know. But I try to avoid big box stores and Amazon wherever possible, which these days is well nigh impossible.
All the platforms have the ‘can’t sell it for less elsewhere’ language in their non negotiable user agreements, so the way to get around that is to make that illegal.
I can already see how this is going to go. Amazon is barely profitable (while sporting a PE > 100) will be the argument and ‘only sells 6% of all retail goods ‘, as per the venal Wall Street Journal, therefore is not a monopolist, while ignoring the internal pump and dump related to Prime.
https://ilsr.org/amazons-toll-road/ At that link, a PDF of the full report is available and this is where the following comes from.
Describing this as a flywheel lays bare mechanical ineptitude. What it actually describes is a run away engine at full throttle, the flywheel is along for the ride and when it’s limits are exceeded, blows up. With 400 economists toiling for Bezos, none had the guts to go whoa, we are building too many warehouses and they overshot by six dozen satanic mills that had to be cancelled or stopped.
Yves S: A if not the reason for appointing Lena Kahn as the head of the FTC
Lina Khan.
Let’s spell the lady’s name right and give her her proper antecedents — her background is Brit-Pakistani.
Sorry, I have name dyslexia. Fixing.
I think I remember that back during the Clinton Administration the relevant parts of the Justice Department pursued an anti-trust case of some kind against Microsoft. I think I remember that when the Junior Bush Administration came in, the Justice Department either dropped the suit, or settled with Microsoft for a wink, a nudge, and a handshake, or something like that. So it appeared at that time that there was indeed a dime’s worth of difference between the two parties in terms of what approach their President would have their Justice Department take to anti-trust.
So now, in our own day, we have an anti-trust suit by Justice against Amazon under a Democratic Administration. If we decide to replace it with a Republican Administration, that suit will be dropped in line with the Republican Party’s pro-trust anti-enforcement viewpoint in contrast to the anti-trust pro-enforcement viewpoint on display in this case from this Democratic Administration. Again, a dime’s worth of difference between the two parties is on display.
Also, I read very recently that the Biden FCC has decided to re-instate the Net Neutrality rules which the Trump FCC de-instated. If we re-elect a Republican Administration, that incoming Republican FCC will re-de-instate those Net Neutrality rules, showing yet another dime’s worth of difference between the two parties.
That’s thirty cents worth of difference between the two parties. When we get to just one month before the election and we see that the Democratic Administration still wants to get America into a nuclear Democrat war with Russia, then voting for a Republican Administration is a matter of brute survival. Because nuclear war yes-or-no is a bigger difference than 30 cents worth of difference on other issues.
But if the Democratic Party has decided to find and take an off ramp away from its currently-sought nuclear Democrat war with Russia for electoral reasons, then that other 30 cents worth of difference between the two parties might be enough to matter. Or it might not.
In any event , choose wisely.