Making the Case for Amazon

MAKING THE CASE FOR AMAZON

Kaylynn Noethlich*

“The Case Against Amazon” is a familiar phrase that dominates headlines and underpins popular political platforms.[i] Yet, not long ago, and arguably still today, Amazon was the poster child of consumer benefits – consistently bringing more products at lower prices through innovative delivery methods to consumers across the globe. Above all else, Amazon’s marketplace gave consumers unprecedented choice. Today, consumers are frequently presented with over 10,000 options when ordering a product — spanning across brands, prices, and colors — when previously they had to choose from the select few a store carried.[ii]

Despite the benefits consumers continue to enjoy from using Amazon’s marketplace, antitrust authorities in the U.S. and the E.U. have publicly opened investigations into the company.[iii] Both countries’ authorities traditionally use the “consumer welfare” standard when evaluating the competitive harm in a marketplace — meaning the focus is on the ultimate harm and loss of welfare to consumers, not competitors.[iv] Thus, the announcement of an investigation into Amazon immediately raised the question — are consumers really being harmed?

According to the European Commission (E.C.), its investigation targets the standard agreements between Amazon and marketplace sellers with a focus on whether Amazon misuses third-party seller data from its marketplace to negatively impact competition.[v] Essentially, the E.C. alleges that Amazon collects large quantities of data on its marketplace enabling it to predict which products are in high demand. Because Amazon is both a retailer (it sells its own products on the marketplace) and the owner of the marketplace, Amazon has the ability to use its data analysis to create products that perform well, sell them at a lower price, and ultimately drive out any competitors.[vi] Unlike the E.C., U.S. antitrust authorities do not publicly reveal reasons for their investigations. However, experts contend that the U.S. Federal Trade Commission is investigating under a similar theory.[vii]

Although politicians, investigators, and reporters appear united in making the case against Amazon, this article makes the case for Amazon.[viii]

Amazon does not have the requisite monopoly power.

Both the U.S. and the E.U. have laws preventing the abuse of a dominant position in a given marketplace. In order to have a “dominant position” in a market, a company typically must comprise at least 30% – 40% of the relevant market and have monopolistic power that is “durable rather than fleeting.”[ix]

There are many alternative sources for the products that Amazon sells, for instance Walmart. Indeed, Walmart’s lower prices and wider range of products was once viewed as the end of small business.[x] Although public perception often paints Amazon as the biggest retailer player today, Walmart is still more than double Amazon’s size as a general retailer.[xi] Numerous other retailers dwarf Amazon in discrete product categories in which Amazon competes. Even on its own marketplace, Amazon has been surpassed by third-party retailers which account for approximately 58% of Amazon’s retail unit sales.[xii]

Although it can be argued Amazon’s position in particular retail categories, such as books, music, and videos, meets the level of monopolistic power, Amazon operating as a general retailer on its marketplace alongside third-party retailers does not.[xiii]

Amazon is not raising rivals’ costs by denying access to an “essential facility.”

Amazon operates as an open marketplace to large and small retailers alike. Amazon developed a standard pricing model to access its marketplace — for low volume sellers Amazon receives $0.99 for each product sold and professional sellers pay $39.99 a month, both responsible for any selling fees.[xiv] Amazon allows third-party retailers to compete in various product categories, some requiring approval (such as refurbished products), not singling out product markets Amazon most successfully competes in.[xv] The exception to this rule includes: (1) items often counterfeited; (2) items easily stolen from retail stores; (3) brands that do not want the perceived value decreased; and (4) brands sold exclusively elsewhere.[xvi] Additionally, when a seller (or rival) is removed, Amazon provides the seller 30-days-notice for removing the seller along with a formal reason explaining the removal.[xvii]

Moreover, 80% of Amazon merchants also sell their products through other channels, including Walmart, retailer owned websites, eBay, Jet, and other brick-and-mortar stores.[xviii] Amazon represents only a single platform among a multitude available to professional sellers, not a singular controlled essential facility.

Even if Amazon did deny access to an “essential facility” they do not have power over price.

Amazon offers private label products within its marketplace at a lower price, as many retailers often do.[xix] Grocery stores typically carry store-branded products, similar to how pharmacies carry generic medication identical to popular brands. Offering private label products to match branded products is not a new phenomenon. Moreover, offering private label products at lower prices and with better shelf placement is commonplace.[xx]

To make a convincing argument that Amazon has power over price one would need to promulgate the specious theory that private-label products have power over branded-product pricing. Private label products typically peg prices to a non-public percentage of branded products (e.g., CVS selling its private-label goods at a 30% mark-down compared to branded drugs). Because companies rarely advertise their private-label products and have complete control over shelf-placement, it allows them to sell these products at a lower price than branded products. Additionally, consumers will often fall into the categories of “price sensitive” or “non-price sensitive” and “brand sensitive” or “non-brand sensitive.” These categories allow both brands and private-label products to successfully sell at different price points.[xxi] This is Amazon’s marketplace strategy.

Even if none of the above is true, Amazon offers immense benefits to consumers and there is no harm.

U.S. and E.U. antitrust laws diverge on this point. If Amazon possesses a “dominant position” in the E.U., it has a “special responsibility” to “ensure that its conduct does not distort competition.”[xxii] Meaning, if any of the above is true, then Amazon’s consumer benefits likely will not offset its special responsibility in the marketplace because of distortions to competition through increased costs to rivals.[xxiii]

Although no “special responsibility” exists in U.S. antitrust law, a dominant player merely has a duty not to abuse their dominant position, which results in a determinant to the competitive marketplace and ultimately consumers. Pinpointing the ultimate harm to consumers proves difficult because Amazon provides its customers with a wide array of choice, quality, prices, and innovative delivery methods. Concluding Amazon violated antitrust laws would likely require antitrust authorities to look beyond the traditional consumer welfare standard and create uncertainty moving forward for companies facing antitrust scrutiny.

 

____________________________________________________________________________________________

* J.D. Candidate, May 2020, American University Washington College of Law; B.B.A., Economics, 2017, Drake University. Kaylynn Noethlich previously worked at the Department of Justice Antitrust Division and the Federal Trade Commission as a legal intern, in addition to Freshfields Bruckhaus Deringer as a summer associate in their Antitrust & Competition group in London and D.C.

[i] See generally Simon Van Dorpe, The Case Against Amazon, POLITICO (Mar. 4, 2019, 1:14 AM CET), https://www.politico.eu/article/amazon-europe-competition-giveth-and-amazon-taketh-away/ (discussing the EC’s investigation in Amazon’s agreements with retailers); Jack Kelly, Senator Elizabeth Warren Says ‘It’s Time To Break Up Amazon, Google And Facebook’— And Facebook CEO Mark Zuckerberg Fights Back, Forbes (Oct. 2, 2019, 10:43 AM), https://www.forbes.com/sites/jackkelly/2019/10/02/senator-elizabeth-warren-says-its-time-to-break-up-amazon-google-and-facebook-and-facebook-ceo-mark-zuckerberg-fights-back/#456a1cef6791 (highlighting presidential candidate Elizabeth Warren’s position on “big tech”); Madeleine Joung, Google, Amazon, Facebook and Apple Could Face Antitrust Investigations. How Do Those Work?, Time: Politics (June 5, 2019), https://time.com/5601245/google-amazon-facebook-apple-antitrust/ (comparing today’s antitrust investigations to the 2000 Microsoft era cases); see also Lina M. Khan, Amazon’s Antitrust Paradox, 126 Yale L. J. 710 (2016) (arguing the current antitrust framework is unequipped to handle the competition challenges in the modern economy).

[ii] See, e.g., Search Results from Amazon for a “Suitcase,” Amazon Italy, http://www.amazon.it (type in general search bar “suitcase”; then look to the left of the page above the products listings to see the number of search results); Search Results from Amazon for a “Suitcase,” Amazon United States, http://www.amazon.com (type in general search bar “carry-on suitcase”; then look to the left of the page above the products listings to see the number of search results).

[iii] Eur. Comm’n Press Release IP/19/4291, Antitrust: Commission opens investigation into possible anti-competitive conduct of Amazon (July 17, 2019), https://europa.eu/rapid/press-release_IP-19-4291_en.htm.

[iv] See Svend Albæk, Consumer Welfare in EU Competition Policy, in Aims and Values in Competition Policy 67, 68 (Ulla Neergaard & Christian Bergqvist eds., 2013), https://ec.europa.eu/dgs/competition/economist/consumer_welfare_2013_en.pdf (“Vice-President Almunia said in a speech shortly after he was nominated commissioner in charge of competition policy that ‘[a]ll of us here today know very well what our ultimate objective is: Competition policy is a tool at the service of consumers. Consumer welfare is at the heart of our policy and its achievement drives our priorities and guides our decisions.”); Russell Pittman, Consumer Surplus as the Appropriate Standard for Antitrust Enforcement, Economic Analysis Group Discussion Paper, June 2017, https://www.justice.gov/sites/default/files/atr/legacy/2007/09/28/225696.pdf.

[v] Eur. Comm’n Press Release IP/19/4291, Antitrust: Commission opens investigation into possible anti-competitive conduct of Amazon (July 17, 2019), https://europa.eu/rapid/press-release_IP-19-4291_en.htm.

[vi] Hypothetical example: Amazon sees a spike in demand for Swell water bottles. It then creates a nearly identical version of the water bottle and sells it under a private label brand at a much lower price, hoping consumers switch from Swell water bottles and start buying Amazon’s private label product.

[vii] Samuel R. Miller, Is Amazon Violating the Antitrust Laws?, Verdict: Justia (July 25, 2019), https://verdict.justia.com/2019/07/25/is-amazon-violating-the-antitrust-laws.

[viii] Although there are several theories of harm surrounding multiple Amazon practices, this article will only focus on the allegations of Amazon’s misuse of third-party retailer data.

[ix] U.S. Dep’t of Justice, Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act, at 5 (2008), https://www.justice.gov/sites/default/files/atr/legacy/2008/09/12/236681_chapter1.pdf (“Section 2 of the Sherman Act makes it unlawful for any person to “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations . . . .”); Eur. Comm’n, Competition: Antitrust Procedures in Abuse of Dominance (July 2013), https://ec.europa.eu/competition/publications/factsheets/antitrust_procedures_102_en.pdf (“Article 102 of the Treaty on the Functioning of the European Union (TFEU) prohibits abusive conduct by companies that have a dominant position on a particular market.”).

[x] Kate Taylor, Walmart Destroyed Retail, Bus. Insider (Aug. 15, 2016, 10:25 PM), https://www.businessinsider.com/walmart-destroyed-retail-2016-8?IR=T.

[xi] See Amazon vs Walmart – Revenues and Profits Comparison 1999-2018, MGM Research (2018), https://mgmresearch.com/amazon-vs-walmart-revenues-and-profits-comparison-1999-2018/ (reporting $514 billion in revenue for Walmart and $233 billion for Amazon in 2018).

[xii] Andrew Martins, Amazon Announces Changes for Third-Party Sellers in Response to EU Oversight Threat, Bus News Daily: Tech. (July 17, 2019, 1:05 PM), https://www.businessnewsdaily.com/15212-amazon-changes-for-third-party-sellers.html.

[xiii] See Matt Day & Jackie Gu, The Enormous Numbers Behind Amazon’s Market Reach, Bloomberg (Mar. 27, 2019), https://www.bloomberg.com/graphics/2019-amazon-reach-across-markets/ (reporting Amazon’s e-commerce market share in the category of “books, music, video” is 80%); see also Marc Bain, Amazon’s unruly third-party marketplace now sells more stuff than Amazon itself, Quartz: Letters from Bezos (Apr. 19, 2018), https://qz.com/1256651/amazon-marketplace-sold-more-stuff-than-amazon-itself-in-2017/ (noting more than half of the products sold on Amazon’s marketplace are now third-party retailers).

[xiv] Sell on Amazon: Benefits, Amazon Services (last visited Oct. 25, 2019) https://services.amazon.com/selling/benefits.html.

[xv] Sell on Amazon: Categories, Amazon Services (last visited Oct. 25, 2019), https://services.amazon.com/services/soa-approval-category.html.

[xvi] The Known Brands That Are Not Allowed to be Sold by Amazon Third Party Sellers, The Selling Family (last visited Oct. 20, 2019), https://thesellingfamily.com/the-known-brands-that-are-not-allowed-to-be-sold-by-amazon-third-party-sellers/.

[xvii] Andrew Martins, Amazon Announces Changes for Third-Party Sellers in Response to EU Oversight Threat, Bus News Daily: Tech. (July 17, 2019, 1:05 PM), https://www.businessnewsdaily.com/15212-amazon-changes-for-third-party-sellers.html.

[xviii] Rani Molla & Jason Del Rey, A Fifth of Professional Amazon Merchants Sell More Than $1 Million a Year – Double The Share from Last Year, Vox: Recode (May 23, 2018, 4:02 PM), https://www.vox.com/2018/5/23/17380088/amazon-sellers-survey-third-party-marketplace-walmart-ebay.

[xix] Simon Van Dorpe, The Case Against Amazon, POLITICO (Mar. 4, 2019, 1:14 AM CET), https://www.politico.eu/article/amazon-europe-competition-giveth-and-amazon-taketh-away/.

[xx] Private Label Manufacturers Association International Council, World of Private Label: Industry News (2019), https://www.plmainternational.com/industry-news/private-label-today (outlining the growth of market share for private-label products).

[xxi] John Quelch & David Harding, Brands Versus Private Labels: Fighting to Win, Harv. Bus. Rev.: Marketing (Jan. 1996), https://hbr.org/1996/01/brands-versus-private-labels-fighting-to-win (claiming manufacturers of brand-name products can temper any challenge posed by private-label goods).

 [xxii] Eur. Comm’n, Competition: Antitrust Procedures in Abuse of Dominance (July 2013), https://ec.europa.eu/competition/publications/factsheets/antitrust_procedures_102_en.pdf (“Article 102 of the Treaty on the Functioning of the European Union (TFEU) prohibits abusive conduct by companies that have a dominant position on a particular market.”).

[xxiii] Id.

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