Mariia Kashirina
Introduction:
Amazon Inc. is an American multinational technology company ranked the fifth largest in the world by market capitalisation. It positions itself as an online marketplace and is known globally not only for its wide variety of products, quick delivery, and low prices but also for its innovative technology, efficient supply chains, and data-driven strategies. The company claims to be guided by four principles: a passion for invention, commitment to operational excellence, long-term thinking, and customer obsession rather than competitor focus.
However, when examining the company’s fourth principle, is Amazon truthfully customer-obsessed rather than competitor-focused? According to the Federal Trade Commission, it is not.
On 26 September 2023, The Federal Trade Commission, led by Chair Lina Khan alongside 17 state attorney generals, filed an antitrust lawsuit against the multinational online retail giant, claiming that the corporation is a monopolist that illegally maintains its power through a series of interconnected, unfair, and anti-competitive tactics.
Why is the FTC going after Amazon?
Under the current Chair, Lina Khan, the FTC has a more confrontational stance against the influence of big tech and augmented efforts to break the rooted monopolies held by a few leading firms in sectors like online retail and search engines.
Khan rose to prominence as a legal scholar, primarily through her influential paper in the Yale Law Journal titled “Amazon’s Antitrust Paradox”. This pivotal work focused on the concept that consumer prices were paramount in determining whether a corporation engaged in anticompetitive behavior through Amazon’s lens. This highly anticipated antitrust lawsuit has just been initiated, with Amazon at its center; the company faces accusations of persistently engaging in unlawful practices that obstruct competition, enabling it to wield monopolistic power.
According to the lawsuit, Amazon currently dominates the e-commerce sector by dictating prices, limiting the selection of products, and ensuring that its competitors are unable to gain traction with buyers and sellers. Its strategies affect an enormous portion of online retail sales, impacting numerous businesses and millions of shoppers, cementing its stronghold in the market.
The specific allegations outlined in the complaint include:
• Anti-discounting measures and manipulating other stores into increasing prices
• Forcing sellers to use Amazon’s costly fulfillment service to obtain “Prime” product eligibility
• Lowering the quality of the user experience through “defect ads”
• Manipulating search results and trapping consumers into paying for Amazon Prime
From here, we can explore Amazon’s role in the competitive market landscape.
Analysis: Amazon’s Supply Chain and Anti-Competitive Tactics
I. Amazon’s Overall Supply Chain and Fulfillment
Amazon’s supply chain process starts with bulk goods dispatched to Amazon Warehousing and Distribution (AWD) through freight and logistics services. AWD then stores products cost-effectively, ensuring quick availability at distribution centers. Strategically located warehouses, optimised internally with five storage areas each, enhance product retrieval speed, aligning supply with demand. Goods move from fulfillment centers to customers in the final step.
Fulfillment is integral to Amazon’s supply chain strategy, and with third-party sellers being responsible for more than half of all sales made on Amazon, there are two fulfillment options for sellers – Fulfillment by Amazon (FBA) and Fulfillment by Merchant (FBM). FBM allows the seller to be in charge of listing their products on Amazon and handling fulfillment aspects of the process on their own, while with FBA, Amazon takes full control of logistics and customer support while merchants only have to send their products to them.
Fulfillment by Amazon is one of the central parts of the FTC allegations, as they claim that “Amazon maintains its monopolies in both customer and seller markets by coercing sellers to use Amazon’s fulfillment service”. Amazon’s fulfillment service allows sellers to fully access Amazon’s substantial base of shoppers, making it a critical aspect of the marketplace services Amazon offers to sellers.
While it may seem that Amazon does not force the sellers to use FBA, the ones who will opt for independent fulfillment will have to split their inventory across multiple channels in order to ensure the next day delivery promised by Prime. Such a strategy artificially stunts the growth of FBM, which prevents competitors from reaching the size necessary to effectively challenge Amazon.
In addition, it is alleged that sellers who do not utilise the Prime eligibility effectively disappear from the storefront, making the product almost invisible to consumers, which decreases their sales numbers significantly.
II. Amazon Prime
According to the FTC, Amazon’s internal data reportedly indicates a significant rise in consumer spending when they commenced Amazon Prime. This surge in spending contributes substantially to Amazon’s revenue, which reached $35.22 billion in 2022 through Amazon Prime sales. Allegedly, to maintain these sales figures, Amazon is accused of employing tactics such as deceptive designs to coerce consumers into recurring subscriptions and making the cancellation process intentionally complex and lengthy, referred to internally as “Iliad Flow”, drawing parallels to Homer’s extensive epic poem. These manipulative tactics negatively impact both consumers and law-abiding businesses.
III. Algorithmic and Contractual Tactics
It is also alleged that Amazon employs its algorithms to restrict rivals from expanding in the e-commerce industry by manipulating price competition. A crucial factor for Amazon, these algorithms employ various methods to implement an anti-discounting approach and maintain the perception of offering the lowest prices in the market.
According to the FTC, Amazon employs its “Competitive Monitoring Team” to monitor the internet for price changes continually. Following that, they utilise this team to enforce new contractual duties and even harsher penalties on third-party marketplace vendors who offer cheaper pricing on other internet stores. An example of such a penalty could be the “Select Competitor – Featured Offer Disqualification” algorithm that has been used by Amazon to enforce its “expectations and policies”. This algorithm removes the seller from the “Buy Box”, where 80% of all purchases are performed, significantly undercutting vendors’ sales thus forcing them to resist offering lower prices elsewhere.
In addition, it is claimed that Amazon not only prevents the sellers on their marketplace from offering lower prices but also has manipulated other stores’ pricing algorithms into increasing prices through “Project Nessie”, the algorithm whose only purpose is to raise prices for consumers.
Project Nessie accurately predicted that there was a high chance other internet retailers would imitate Amazon’s price increases for items they were already making a profit on. It acted at the optimal moment when the probability of others replicating the price adjustment was at its highest. Through these manipulations of other stores’ prices, Project Nessie has generated over $1 billion in additional profit for Amazon from 2016 through 2018, according to their own calculations.
IV. Advertisement and search results
Additional accusations of unlawful tactics involve Amazon degrading customers’ experience by placing costly, irrelevant advertisements on their platform and skewing search results to favor Amazon’s products over those of better value.
According to the FTC complaint, Amazon CEO Jeff Bezos instructed his executives to “accept more defects” during a key meeting. “Defect Ads” are advertisements that are partially or entirely irrelevant to the customers’ search. The main idea in placing “Defect Ads” is to nudge the customers
towards higher priced items. As the space on the platform allocated to sponsored content expands, it becomes more and more challenging for buyers to find more affordable products. This complicating factor, in turn, counteracts the effect of inflated prices.
Despite the compromise between heightened ad earnings and decreased sales due to inferior search outcomes, Amazon sustains consistent double-digit growth in total sales and hasn’t experienced a substantial departure of customers to competing platforms.
The decline in user experience doesn’t just end with flawed ads. Amazon exacerbates advertisement concerns by hiding natural content under recommendation widgets like the “expert recommendation” feature, showcasing Amazon’s products ahead of others. Through manipulation of these widgets, Amazon obstructs fair competition against its own products, intentionally concealing details about competing products to artificially boost its own offerings. According to the FTC, Amazon’s ability to conduct this way without losing a significant portion of customers directly demonstrates its monopoly power.
Amazon’s response
In their statement, Amazon responds to the FTC’s allegations by saying that the lawsuit appears to be misguided and, if successful, would force Amazon to engage in practices that actually harm consumers and the many businesses that sell in their store—such as having to feature higher prices, offer slower or less reliable Prime shipping, and make Prime more expensive and less convenient.
In addition, Amazon argues that its dedication to low pricing, assistance for independent sellers, Fulfillment by Amazon (FBA), and Amazon Prime are not only pro-competitive but also beneficial to customers. They plan to fight the case while maintaining its focus on customer pleasure and innovation.
Criticism of the Allegations
The main criticism of FTC’s claim is that their allegations against Amazon are misguided. One common argument is that both sellers and consumers have the option to choose alternative platforms or avenues if they feel disadvantaged by Amazon’s practices. They can opt for competing platforms like Walmart and Target or create their own distribution networks to avoid reliance on Amazon;similarly, consumers are not compelled to shop exclusively on Amazon, as they can adjust their behaviour by seeking better prices or quality elsewhere.
However, a critical perspective arises when evaluating Amazon’s dominance in the e-commerce industry. While it may not hold the same level of dominance in the broader retail market, Amazon overwhelmingly leads the e-commerce sector with a share of 37.6%, followed by Walmart at 6.4%, Apple at 3.6%, and eBay at 3%. This context suggests that within the realm of e-commerce, the options available to both sellers and consumers are significantly limited by Amazon’s dominant market position. Hence, the argument that they have the freedom to opt for alternatives might not hold true due to Amazon’s unparalleled presence.
Another common argument refers to the FTC’s accusation of Amazon punishing sellers who offer cheaper pricing on other internet stores. In particular, Fortune argues that “sellers offering prices lower on their websites does not lead to lower prices for consumers, it just allows the sellers to shift the sale from the Amazon website to their own” and “merchants who attempt this free-riding tactic are the ones raising consumer prices on Marketplace to try to keep Amazon from making the sale”.
Although this price tactic might seem effective in preventing free riding by merchants and ensuring the lowest price to consumers, it still significantly limits competition and innovation in the marketplace. By enforcing these rules on sellers, Amazon limits the merchant’s ability to dictate their pricing strategies
and offer better prices on their websites. This, coupled with Amazon’s prioritisation of private label items over organic content through recommendation widgets, makes it difficult for sellers to compete. The price parity policy further emphasises this issue, limiting merchants’ pricing flexibility and making it harder for them to attract customers. Ultimately, these restrictions hinder consumer choice and undermine the potential benefits that healthy competition can bring, such as lower prices.
Insights from Dr. Christopher Gopal
Dr. Christopher Gopal is a well-known figure in the field of global supply chain management, logistics, and information technologies. With over four decades of experience as a supply chain and operations executive, he has spoken at various international conferences, including but not limited to HBR, IATA, OECD, and EU Conference on Concentration and Security.
Dr. Gopal has also held SVP and VP positions in supply chain and operations for major global corporations like Dell, SAIC, and Unisys, among others. He has written four books on Supply Chain & Operations, including the latest one titled “Breakthrough Supply Chains: How Companies and Nations Can Thrive in an Uncertain World”, which was published by McGraw-Hill in June 2023.
Currently, Dr. Gopal teaches “Supply Chain Management” and “Strategic Cost Management” at the Rady School of Management at the University of California, San Diego. Additionally, he is a member of the Defense Business Board (DBB), which is a Department of Defense/Pentagon Advisory Body that provides business perspective advice to the Secretary of Defense and other officials.
Exclusively for this article, Dr. Gopal shared his opinion on the most pressing topics of the FTC vs Amazon lawsuit that allows a broader understanding of the ongoing dispute:
First of all, should the Federal Trade Commission go after Amazon?
Dr. Gopal advocates for the FTC’s intervention towards Amazon. However, he believes the ongoing lawsuit should not be aimed at destroying Amazon but rather must emphasise the necessity to employ stricter regulations that would foster healthy competition and prevent monopolistic practices from being utilised. He points out the prevalent lack of enforcement of numerous antitrust rules and regulations, indicating a critical need for implementation. He believes that the FTC should actively enforce these regulations upon Amazon to ensure a fair marketplace and promote a level playing field for all businesses involved.
Given the accusations, what potential changes or adaptations might Amazon need to make in its operational strategies to comply with antitrust laws?
Dr. Gopal believes that the most crucial changes that Amazon will need to make are changes in their pricing models and fulfillment operations to comply with antitrust laws. According to him, it might be beneficial for Amazon to decouple these services from its own fulfillment network.
This means allowing suppliers who wish to sell on Amazon to utilise their own fulfillment services and giving them the freedom to opt for their preferred delivery and distribution methods.
At present, some sellers avoid using Fulfilled by Amazon (FBA) because Amazon requires them to split their inventory across various sales channels. This constraint restricts sellers and potentially hampers their ability to maximise their sales potential. Instead of imposing such restrictions, Amazon could empower vendors by providing them with greater flexibility in managing their inventory across multiple platforms.
Essentially, Amazon should function more as a platform that facilitates sales rather than imposing its fulfillment services on vendors.
In addition, he holds the view that the accusations regarding Amazon’s alleged favouritism toward their private label products within recommendation widgets, along with algorithms that seemingly exclude sellers from the “Buy Box”, requires immediate rectification. It is evident that these practices need adjustment to ensure fair competition on the platform. However, there is a possibility that Amazon might seek alternative approaches to maintain its strategic advantage despite any corrective actions taken.
How will these improvements affect operational efficiency and the company’s relationships with third-party vendors?
According to Dr. Gopal, opting for a change could notably impact efficiency, especially in relation to Amazon’s hallmark “next-day delivery”. To ensure clarity, if Amazon intends to uphold this service standard, it should be communicated clearly up front. Yet, sellers should also have the freedom to specify longer delivery times, aligning with transparency and allowing them to manage customer expectations effectively.
In terms of Amazon’s relationship with third-party vendors, transitioning from a fulfillment focused approach to a platform-oriented one will likely attract more vendors. This evolution would enable vendors to diversify their distribution, not solely relying on Amazon but exploring other e-commerce platforms. This diversification could reduce Amazon’s monopolistic tendencies and compel the company to offer more competitive terms to vendors in order to remain appealing in the market, which would ultimately benefit both vendors and the e-commerce landscape as a whole.
What is Amazon’s future? Will the FTC succeed?
Dr. Gopal anticipates a shift in Amazon’s operations post lawsuit, expecting operational enhancements in the aftermath of legal proceedings. Nevertheless, an alternate viewpoint surfaces when considering the imminent election and its potential impact on the FTC’s administration.
The prospect of a change in the FTC leadership due to the upcoming presidential election offers a new angle to the narrative. This potential shift in administration might embolden Amazon to prolong its legal battle, seeking a more sympathetic disposition from the incoming officials. Hence, the company might persist in its strategic maneuvering, buoyed by the hope of a more favorable regulatory climate.
While Dr. Gopal foresees some lawsuit outcomes in the near future, he doesn’t expect Amazon to concede entirely to the FTC’s demands. The company is likely to fortify its position leading up to the election.
Interestingly, Dr. Gopal’s conversation with Barry C. Lynn, a liberal American journalist and writer currently advising the Federal Trade Commission on the Amazon antitrust lawsuit, reveals a contrasting perspective. According to him, the FTC is confident in its ability to win on most of the allegations, indicating a strong belief in its case against Amazon.
Where from Here?
According to a former Justice Department antitrust official, George Hay, “Amazon has had years — at least since Lina Khan came to the FTC — to think about this lawsuit and how they’re going to defend against it.” Indeed, with Amazon’s lengthy preparation and the FTC’s determination, the stage is set for a protracted legal showdown. This impending battle signifies just the initial chapter in the FTC’s broader campaign to dismantle the monopolistic grip exerted by tech giants. As we await the unfolding of events, the trajectory of this struggle will undoubtedly shape the landscape of the tech industry for years to come.
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