Credit: Phil Murphy | Flickr
Background
In September 2023, Amazon, the e-commerce behemoth, was hit with a lawsuit that could change how we buy and sell online. The Federal Trade Commission (FTC) and 17 states sued Amazon, alleging it uses unfair tactics to stay on top, at the expense of consumers and businesses alike. The complaint says Amazon breaks the law not because it's a big company, but because it acts in ways that stop current rivals from growing and block new competitors from gaining momentum.
One striking example of Amazon’s alleged misconduct is if Amazon discovers a seller offering the same product for a lower price elsewhere, it buries that seller deep in its search results, rendering them practically invisible. Amazon also compels sellers to use its costly delivery service to qualify for "Prime" status, making it financially burdensome for them to use alternative platforms.
Another example is Amazon’s substantial increase in fees charged to sellers. These fees have grown so much that Amazon is said to take nearly half of the money a typical seller makes through its service. Sellers find themselves in a situation where, as one seller puts it, they "have nowhere else to go, and Amazon knows it."
The FTC and the states want a court to stop Amazon from using these tactics and bring competition back to the e-commerce world. However, Amazon released a brief statement claiming that the FTC has it backwards. It argues that if the lawsuit succeeds, it would force the company to adopt strategies that hurt customers and the businesses that sell on the platform, like having higher prices, slower Prime shipping, and making Prime more expensive.
Antitrust Laws
In 1890, Congress passed the first antitrust law, the Sherman Act. Then in 1914, Congress added two more antitrust laws, including the Federal Trade Commission Act (“FTCA”). These laws prevent harmful business practices, leaving it to courts to decide which cases qualify as antitrust violations. These laws have adapted with the times, but their fundamental goals of protecting competition and benefiting consumers have remained constant.
The Sherman Act makes it illegal to engage in agreements or actions that unreasonably restrict competition. For example, an agreement between competing businesses to form a partnership may restrain trade, but may not do so unreasonably. In contrast, certain arrangements such as price-fixing and market division are almost always illegal. Violating the Sherman Act can lead to severe penalties. While most cases are civil, the Sherman Act is also a criminal law, and violators may be prosecuted by the Department of Justice. Additionally, corporations can face fines of up to $100 million, and if the corporation gained more than $100 million through its unlawful actions, the fine can be doubled.
The FTCA prohibits "unfair methods of competition" and "unfair or deceptive acts or practices." Additionally, any violation of the Sherman Act also violates the FTCA, and although the FTC does not directly enforce the Sherman Act, it can initiate cases under the FTCA.
Apart from federal laws, most states have their own antitrust laws. Many of these state laws are built upon the federal laws, which is why 17 other states are also taking legal action against Amazon.
First Tactic – No Discounts
In the FTC’s 172-page complaint, they go into great detail describing Amazon’s business practices in general, including aspects of the company which they describe as “monopolistic,” such as its overall size, and the fact that Amazon takes 1 of every 2 dollars spent on the website. However, the crux of the complaint against Amazon is that two of its specific business practices cross the line of antitrust law - its restrictions on lower prices outside of Amazon’s storefront, and its coercive practices driving sellers towards using Amazon’s fulfillment services, which consist of storage, packaging, shipping, and management of returns.
First, the FTC alleges that Amazon has a practice of prohibiting sellers from selling their products for lower prices elsewhere on the internet. These sellers have the potential to undercut Amazon’s monolithic presence. According to the FTC, Amazon originally enforced its restriction on lower prices through explicit contractual requirements imposed on all sellers. Amazon only removed this clause from its contracts in Europe after European regulators began investigating this practice. The company finally got rid of the clauses in the U.S. in 2019 when a senator called for greater scrutiny of this practice. The FTC asserts that Amazon has an elaborate surveillance system monitoring products being sold online, ready to detect whether an Amazon seller has a lower price elsewhere. Then, when Amazon detects this, it punishes the seller through one or more means.
According to the FTC, there are a variety of sanctions that Amazon is able to impose. Frequently, Amazon punishes sellers by removing the “Buy Now” feature from the seller’s product pages, forcing buyers to purchase through the “Add to Cart” feature. The FTC’s complaint explains that even Amazon recognizes that this practice “tanks” the product’s sales. The exact percentage of sales made through the “Buy Now” box is redacted. Amazon can also sanction a seller’s products by simply burying them deep in the search results, rendering them virtually invisible to customers. A third tactic that Amazon punishes sellers with is entirely redacted. Finally, for particularly high-earning sellers, Amazon still retains the contractual requirement that it claimed to stop using, threatening those sellers with “total exile” from Amazon should they violate their contracts. The FTC claims that Amazon internally acknowledges that many sellers “live in constant fear” of these sanctions.
The FTC contends that this policy hurts consumers by driving up prices for products artificially. Normally, if a seller wanted to avoid paying Amazon’s take, they could create their own online storefront, and because they aren’t paying Amazon a share of the profits, they could sell the product for less money and still earn just as much profit. In order to avoid this, normally Amazon would have to offer some greater value to customers to keep them from going to third party websites. This competition is one of the founding principles of antitrust law, as competition drives down prices and increases benefits for customers. However, the anti-discounting tactic that the FTC alleges would freeze this competition by virtually eliminating sellers from Amazon if they attempt to start their own, cheaper storefront, thus making it not economically viable for sellers to slowly grow and compete with Amazon. While this dynamic is bad for sellers, it also hurts buyers by driving prices up.
Additionally, the FTC’s complaint describes how Amazon uses its own Amazon-brand products, which make up 40% of the sales on the platform, in combination with its search algorithm, as a mechanism to punish sellers from setting their prices too low on Amazon itself. Specifics on this algorithm are redacted, but according to the FTC, Amazon’s desired effect was achieved - higher prices. A further algorithm used by Amazon, codenamed internally as “Project Nessie,” is nearly completely redacted, but the FTC made it clear that it also has the effect of raising prices for consumers and extracting more money for Amazon. As the FTC alleges, with these policies in place, sellers cannot compete with Amazon either by creating third-party storefronts with lower prices or by lowering prices directly on Amazon––resulting in a stagnant market and artificially inflated prices for consumers.
Credit: Image from FTC's Complaint
Second Tactic – No Independent Fulfillment Services
The FTC also alleges that Amazon coerces sellers into exclusively using Amazon’s shipping service, Fulfillment by Amazon. According to the FTC, if a seller does not use Amazon’s fulfillment service, they lose the ability to be “Prime eligible,” a harsh consequence. In the FTC’s complaint, Amazon’s Prime subscription program is described as a “moat drawn around Amazon’s best customers.” While the exact percentages of Prime sales and Prime subscribers are redacted in the FTC’s complaint, it emphasizes that Prime eligibility is critical to reaching consumers on Amazon’s storefront. In essence, the FTC alleges that Amazon uses Prime eligibility as a way of coercing sellers into using Amazon’s fulfillment service, which keeps sellers from using independent fulfillment services and keeps sellers from easily selling on platforms other than Amazon. The FTC says that this has two effects - it keeps the market for independent fulfillment services from growing, and, due to this and the lack of other viable markets, ultimately drives prices up for consumers. In the FTC’s words, Prime is Amazon’s primary coercion tool.
The FTC reports that many of the sellers on Amazon would rather use alternative fulfillment methods to store, package, and ship customers’ orders. Additionally, sellers would prefer to “multihome,” listing their products for sale across multiple online storefronts, reducing their dependence on a single storefront and generally encouraging a more competitive market. Being able to use an independent fulfillment provider who can fulfill orders made from any storefront would greatly reduce the cost of multihoming products and make it feasible for smaller sellers to do so. Additionally, a market with prolific multihoming encourages a market of independent fulfillment providers to flourish, creating further competition and driving prices down for consumers even further. However, Amazon’s fulfillment service is tied exclusively to Amazon’s storefront. The FTC contends that Amazon coerces sellers into using its fulfillment service, preventing a market for independent fulfillment providers from developing, choking out multihoming, and driving prices up for consumers. According to the FTC, Amazon’s primary coercion tool is its Prime service.
Amazon Responds
Amazon has not yet filed its response to the complaint, and may not do so for some time. The company filed a motion on October 16 requesting that the court grant it an extension until December 8 for its response to the complaint. However, Amazon has released official statements regarding the lawsuit. Amazon’s full response statement contends the opposite of the FTC’s complaint, describing how Amazon’s business practices actually lower prices for customers and ensure faster and more reliable shipping. Amazon explained that its pricing standards exist to encourage sellers to set low, competitive prices, and that it provides tools to sellers to aid them in setting competitive prices.
Credit: Tony Webster | Flickr
Amazon’s response to the FTC’s first point is, essentially, that the FTC has it backwards, as Amazon’s pricing practices offer and highlight lower prices, not higher ones. Amazon did not address what role discouraging discounts on other platforms plays in this dynamic. Amazon’s response to the FTC’s second point is similar. The company argues that it is moving in a procompetitive direction, as it began as a platform with no third-party sellers at all, and has since opened itself to third-party sellers, allowing them to take up over 60% of the platform’s sales. As for Prime, Amazon reasons that customers wanted a simple experience, and so requiring sellers to use Amazon’s fulfillment service for full exposure to customers is a simple measure that aids all parties involved. Essentially, Amazon argued that its fulfillment service dominates due to its convenience and efficiency, rather than any monopolistic tactics.
Conclusion
Assuming a deadline extension is approved due to the case’s complexity, Amazon will have until December 8, 2023, to formally address the allegations. Given Amazon’s past responses, it might choose to cooperate with the FTC to manage the situation. In total, the FTC is seeking permanent injunctions against Amazon's unfair business practices, any damages necessary to restore fair competition and remedy Amazon's harms to competition, monetary relief to all 17 states harmed by Amazon’s business practices, and costs and fees of the suit. In a less favorable scenario, the company could face a fine ranging from $100 to $200 million and be required to make changes to its business practices. In the worst-case scenario, all of these consequences, along with possible jail sentences for individuals, could occur. Should the FTC succeed in its case, Amazon would be forced to rethink its business practices, drastically changing the landscape of e-commerce and potentially setting new industry standards for online marketplaces.
*The views expressed in this article do not represent the views of Santa Clara University.