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Tuesday, October 3, 2023

A New Antitrust Case Cuts to the Core of Amazon’s Identity

“I founded Amazon 26 years ago with the long-term mission of making it Earth’s most customer-centric company,” Jeff Bezos testified before the House Antitrust Subcommittee last summer. “Not every business takes this customer-first approach, but we do, and it’s our greatest strength.”

Bezos’ obsession with customer satisfaction is at the center of Amazon’s self-mythology. Every move the company makes, in this account, is designed with only one goal in mind: making the customer happy. If Amazon has become an economic juggernaut, the king of ecommerce, that’s not because of any unfair practices or sharp elbows; it’s simply because customers love it so much.

The antitrust lawsuit filed against Amazon on Tuesday directly challenges that narrative. The suit, brought by Karl Racine, the Washington, DC, attorney general, focuses on Amazon’s use of a so-called most-favored-nation clause in its contracts with third-party sellers, who account for most of the sales volume on Amazon. A most-favored-nation clause requires sellers not to offer their products at a lower price on any other website, even their own. According to the lawsuit, this harms consumers by artificially inflating prices across the entire internet, while preventing other ecommerce sites from competing against Amazon on price. “I filed this antitrust lawsuit to put an end to Amazon’s ability to control prices across the online retail market,” Racine said in a press conference announcing the case.

For a long time, Amazon openly did what DC is alleging; its “price parity provision” explicitly restricted third-party sellers from offering lower prices on other sites. It stopped in Europe in 2013, after competition authorities in the UK and Germany began investigating it. In the US, however, the provision lasted longer, until Senator Richard Blumenthal wrote a letter to antitrust agencies in 2018 suggesting Amazon was violating antitrust law. A few months later, in early 2019, Amazon dropped price parity.

But that wasn’t the end of the story. The DC lawsuit alleges that Amazon simply substituted a new policy that uses different language to accomplish the same result as the old rule. Amazon’s Marketplace Fair Pricing Policy informs third-party sellers that they can be punished or suspended for a variety of offenses, including “setting a price on a product or service that is significantly higher than recent prices offered on or off Amazon.” This rule can protect consumers when used to prevent price-gouging for scarce products, as happened with face masks in the early days of the pandemic. But it can also be used to inflate prices for items that sellers would prefer to offer more cheaply. The key phrase is “off Amazon. In other words, Amazon reserves the right to cut off sellers if they list their products more cheaply on another website—just as it did under the old price parity provision. According to the final report filed by the House Antitrust Subcommittee last year, based on testimony from third-party sellers, the new policy “has the same effect of blocking sellers from offering lower prices to consumers on other retail sites.”

The main form that this price discipline takes, according to sellers who have spoken out against Amazon either publicly or in anonymous testimony, is through manipulating access to the Buy Box—those Add to Cart and Buy Now buttons at the top right of an Amazon product listing. When you go to buy something, there are often many sellers trying to make the sale. Only one can “win the Buy Box,” meaning they’re the one who gets the sale when you click one of those buttons. Because most customers don’t scroll down to see what other sellers are offering a product, winning the Buy Box is crucial for anyone trying to make a living by selling on Amazon. As James Thomson, a former Amazon employee and a partner at Buy Box Experts, a brand consultancy for Amazon sellers, told me in 2019, “If you can’t earn the Buy Box, for all intents and purposes, you’re not going to earn the sale.”


Jason Boyce, another longtime Amazon seller turned consultant, explained to me how this works. He and his partners were excited when the last third-party seller contract they signed with Amazon, to sell sporting goods on the site, didn’t include the price parity provision. “We thought, ‘This is great! We can offer discounts on Walmart, and Sears, and wherever else,’” he said. But then something odd happened. Boyce (who spoke with House investigators as part of the antitrust inquiry) noticed that once his company lowered prices on other sites, sales on Amazon started tanking. “We went to the listing, and the Add to Cart button was gone, the Buy Now button was gone. Instead, there was a gray box labeled ‘See All Buying Options.’ You could still buy the product, but it was an extra click. Now, an extra click on Amazon is an eternity—they’re all about immediate gratification.” Moreover, his company’s ad spending plummeted, which he realized was because Amazon doesn’t show users ads for products without a Buy Box. “So what did we do? We went back and raised our prices everywhere else, and within 24 hours everything came back. Traffic improved, clicks improved, and sales came back.”

The upshot, Boyce said, is that sellers can’t lower their prices even when they’re selling on their own site or on other platforms, like Walmart.com, that don’t take as large a cut of sales or require sellers to spend as much on advertising—two costs that have increased in recent years on Amazon. (Amazon search results tend to feature paid promotions at the top, which puts pressure on sellers to pay for ads if they want customers not to have to scroll down to see them. That appears to be a key reason why Amazon has become the third-largest digital advertising company, with more than double the ad revenue of Snap, Twitter, Roku, and Pinterest combined.)

“Because of its size and strength, and because sellers can’t keep their prices low on their own channels, Amazon is literally inflating the entire online economy,” said Boyce. “It’s insane. And any seller who tries to lower their prices is going to get their sales suppressed on Amazon within a week.”

Boyce’s experience illustrates something important about most-favored-nation clauses: On their own, they aren’t illegal. The problem comes when they’re used by a company with a dominant share of the market. If a store wants to feature a certain brand on its shelves in exchange for an agreement not to sell more cheaply at a rival chain, the brand can decide whether the deal is worth it. But in the case of Amazon, according to sellers like Boyce, there is no real choice. The DC attorney general’s lawsuit points out that Amazon accounts for somewhere between 50 and 70 percent of the US online retail market, and it notes that “a staggering 74 percent [of consumers] go directly to Amazon when they are ready to buy a specific product.” It accuses Amazon of using its price policy to maintain that monopoly power by preventing rival platforms from using lower prices to eat into its market share.

In a statement emailed to reporters, Amazon did not exactly deny that it punishes sellers who offer lower prices elsewhere. Rather, it suggested that this is ultimately good for the consumer. “The DC attorney general has it exactly backward—sellers set their own prices for the products they offer in our store,” the company said. “Amazon takes pride in the fact that we offer low prices across the broadest selection, and like any store we reserve the right not to highlight offers to customers that are not priced competitively. The relief the AG seeks would force Amazon to feature higher prices to customers, oddly going against core objectives of antitrust law.”

But this logic relies on a very idiosyncratic definition of “priced competitively.” When someone goes to Amazon to buy something, they want the site to show them the best deal available on Amazon. If Jenny’s Bike Supply has the best deal on Amazon for chain locks, then it’s the best deal, regardless of whether Jenny is also selling the locks for an even better price on eBay. If Amazon makes it harder to buy the lock from Jenny in this scenario, the only thing it accomplishes is forcing customers to settle for the second-best deal. And, of course, it will probably succeed in forcing Jenny to raise prices on eBay. What it won’t do is result in lower prices on Amazon.

All of which makes the DC lawsuit a narrower and potentially more winnable case than some of the other antitrust litigation that has been brought against tech companies.

“As long as it’s actually having the same effect as a most-favored-nation, it’s a loser case for Amazon,” said Sally Hubbard, the director of enforcement strategy at the Open Markets Institute, an anti-monopoly think tank. “It’s quite straightforward that the conduct is eliminating competition and causing higher prices.” (On the other hand, the suit is so far only being brought under DC law, rather than the federal antitrust statutes, which could limit its impact.)

Hubbard predicted that Amazon would settle, since the pricing requirement isn’t absolutely essential to its business. Going to trial, as Apple is learning in its lawsuit with Epic, would invite a great deal of unwelcome publicity and attention to Amazon’s business practices. That could be more costly than any financial penalty imposed by the courts. Bezos suggested as much in his congressional testimony last year. “Customer trust is hard to win,” he explained, “and easy to lose.”

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