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The Amazon paradox: Can anti-competitive practices produce consumer benefit?

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September 28, 2023 — 12.07pm

The legal action the US federal Trade Commission and 17 state attorneys-general launched against Amazon this week poses an interesting and challenging question.

How should legislators and competition policy regulators regard anti-competitive behaviours that produce consumer benefits?

It’s a question that has gained a sharp edge in the internet age, as a relatively small number of mega-tech companies have grown to dominate segments of commerce, creating near monopolies that use scale and network effects to entrench that dominance and extend it into adjacent sectors through vertical and horizontal expansions.

Amazon has a near 40 per cent share of US online retailing through its “everything store.”

Amazon has a near 40 per cent share of US online retailing through its “everything store.”Credit: AP

Policymakers around the world are trying to respond to the paradox that, despite some evidence of inherently anti-competitive practices within many of the mega-techs, they do deliver products and services consumers demonstrably like and want and they are driving innovation at an almost unprecedented rate.

The FTC is in the midst of an action against Google, alleging that it uses its dominance of search (which it protects by paying manufacturers like Apple and Samsung to make Google the default search engine on their devices) to illegally prevent competition in search and advertising.

There are echoes of that case in the action against Amazon, which has a near 40 per cent share of US online retailing through its “everything store.”

Originally, Amazon followed a conventional retail model, buying in bulk from manufacturers and on-selling the products to consumers.

There are a host of potential conflicts in the relationships between Amazon and the businesses that use its platform and services and within the rules Amazon has created around those relationships.

It grew rapidly, albeit incurring hefty losses, by effectively selling its products below its costs at a time when investors were more interested in the top-line growth of e-commerce companies than their profitability.

In 1999, however, Amazon opened its platform to third-party sellers – competitors – and subsequently made its massive logistics network available to them and, more recently, even to sellers outside its platform.

There are a host of potential conflicts in the relationships between Amazon and the businesses that use its platform and services and within the rules Amazon has created around those relationships.

The FTC, for instance, claims that by discouraging sellers from offering their products at lower prices elsewhere and policing it by downgrading their prominence on its sites and therefore throttling their ability to generate sales it is raising prices for consumers and damaging competitors. (Amazon uses its “Buy Box” to incentivise/coerce sellers by giving them, or denying them, priority and visibility on its sites).

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It also alleges that Amazon coerces sellers into using its fulfilment and delivery network by making its use a pre-condition for being eligible for the quick and free delivery it offers customers who have signed up to its Amazon Prime program. Products that use the network or place advertisements are also given greater prominence on Amazon’s sites.

These practices are obviously good for Amazon, which now generates more than 60 per cent of its retail revenue from third parties whose own revenues are though to be shared equally with Amazon. The cost to the external sellers has been rising rapidly, increasing by an estimated 30 per cent over the past three years.

None of that, however, necessarily means that Amazon’s policies and practices harm consumers, competition or economies.

Amazon itself argues that its innovations, investments and customer-centric focus have generated consumer benefit through lower prices and increased competition in an already competitive sector.

Indeed, it says that if the FTC is successful, it would force Amazon to engage in practices that actually harm consumers and the businesses that use its platform and services.

“The FTC case alleges that our practice of only highlighting competitively priced offers and our practice of matching low prices offered by other retailers somehow lead to higher prices.

“But that’s not how competition works. The FTC has it backwards and, if they are successful in this lawsuit, the result would be anti-competitive and anti-consumer because we’d have to stop many of the things we do to offer and highlight low prices – a perverse result that would be directly opposed to the goals of anti-trust law,” it said in its response to the lawsuit.

The sellers on its platforms, those who use its logistics network and the consumers who drive the sales have choices. Amazon might be an e-commerce behemoth, but it represents only a sliver of the entire retail sector and there are competitor platforms, and distribution networks, albeit none as powerful online.

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Some of Amazon’s practices might be coercive and sellers are often competing against Amazon’s own products but self-evidently the third parties believe they are benefitting by using its platforms and services.

Just as Google argues that device manufacturers use its search engine as the default on their devices because it is best-in-class, Amazon argues that it is its superior offer, not its policies, that has made it attractive to both third parties and consumers.

Should that success be handicapped to help Amazon’s competitors?

The might depend on whether Amazon, whose early success was built on subsidising prices to drive its market share, has now created an ecosystem designed to keep prices higher than they would otherwise be by effectively deterring third parties from selling at lower prices elsewhere.

Given that its retail business has been losing money in recent years – albeit largely because of its heavy investment in its fulfilment network – that’s a difficult argument to make.

The Google and Amazon cases are the biggest US anti-trust cases in decades, and they do have potential to change the behaviours and/or the regulation of them for the mega-techs.

FTC failures might also cause Congress, where there is bipartisan suspicion of the market power and practices of the major tech companies, to legislate some boundaries around those behaviours.

In Europe, the European Commission has done just that with the Digital Services Act (which primarily regulates social media content, the use of user data and user privacy) and Digital Markets Act (which regulates digital platforms with a competition policy emphasis) enacted last year, although they won’t be fully enforceable until early next year.

The digital markets legislation prohibits linking access to one of its services to purchases of others or giving preferential treatment to a platform’s own products or services or using the data gleaned from third parties to shape its own offering. It’s directly relevant to Amazon’s business model.

Regulators globally are trying to develop a co-ordinated approach to the ever-increasing market power of the mega-techs, with a lot of attention focused on the techniques they use to create walled gardens around their platforms that trap third parties and consumers within them and stifle competition.

That’s a tricky business, given that it is the innovation, investment and perceived benefits to the businesses that leverage off the platforms and to the consumers who use them that have created that market power.

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