Even though yours truly is not an antitrust expert, one thing that expert commentators have discussed over the years is the way case law has made it increasingly difficult to pursue antitrust cases against parties who commonsensically have abused their market power. A if not the reason for appointing Lena Khan as the head of the FTC was her strong record as a scholar and critic of the weakening of antitrust enforcement. (See this paper at the University of Chicago, The Political Economy of the Decline of Antitrust Enforcement in the United States, for one take on how we got where we are). So there is understandably a great deal of excitement about the two high profile cases the FTC has launched against tech behemoths, Google and Amazon. We’ll take a very cursory look at the Amazon case since even that illustrates some of the obstacles the FTC faces.
The reason for clearing my throat is that the sort of market analysis that is a key element of this case is the sort of thing I used to do all the time in analyzing prospective acquisitions, particularly in tech.
You can find the filing here. 16 states and the District of Columbia joined the FTC as plaintiffs. California is notably absent. Most of the states also plead state law causes of action.
The 50,000 foot version of this case is that Amazon engages in coercive conduct with its third party sellers to prevent them from offering price discounts outside Amazon. There are additionally allegations that Amazon pushed the third party sellers to increase prices. Amazon then allegedly hoovered the benefit of the resulting inflated prices back to Amazon via various fees, including what were product placement fees for merchants to assure their products got a preferential position and therefore more sales. These higher prices would also benefit Amazon’s direct sales to consumers. The filing includes large sections that are almost fully redacted about a “Project Nessie” which presumably further demonstrates the nature of Amazon’s anti-competitive practices.
The factual discussion of the ways Amazon hog-tied its merchants on its platform, restricted their ability to compete with Amazon via punishments if they tried to undercut the vendor’s price on Amazon, how Amazon used design tricks to drive traffic to vendors who paid up for better placement, and sucked revenues out of these merchants via various fees, thus harvesting the benefits of its price restrictions, is very well done. I will take the liberty of hoisting from Matt Stoller’s post, where he showcases the role of supposedly free shipping:
Consumers pay for the free shipping, it’s just a hidden tax baked into the price of what you buy through an extraordinarily clever scheme put forward by Amazon. And that’s what the Federal Trade Commission and 17 states are suing over. This hidden tax is well-known in the industry….
Most people think of Amazon as a retailer who sells to retail customers. But retail end users — you and me — aren’t really the customer. We are the product. And Amazon doesn’t really sell to us; it’s a middleman who sells access to us. The actual customers of Amazon are third-party businesses that rely on Amazon’s infrastructure to get their wares to the public.
…..Once it achieved monopoly power, Amazon squeezed on price through fees to third-party sellers. As a third-party seller, you pay fees for listing on Amazon; for using Amazon’s warehouse services, known as Fulfillment by Amazon (FBA); and for advertising services. If you don’t pay, you don’t get put in a place on the site where consumers click. “Advertised products on Amazon,” reads the complaint, “are 46 times more likely to be clicked on when compared with products that are not advertised.” And these fees have all increased steadily over the years.
At this point, the price Amazon charges these third party sellers has grown to nearly 50% of its revenue. It is this money, estimated at $123 billion in total last year, that pays for “free” shipping, as well as its video service, its music service, Twitch, and everything else that comes bundled with Prime. These third-party sellers in turn raise their prices to consumers, aka you and me, and then send that money back to Amazon in the form of fees. It’s basically money laundering.
Similarly, some key sections from the filing:
413. The various elements of Amazon’s anti-discounting conduct—algorithmically punishing sellers for offering lower prices elsewhere, contractually restraining ASB sellers, and systematically disciplining rivals via its first-party anti-discounting algorithm—work together to suppress competition in both relevant markets, thereby preventing even an equally or more efficient rival from attracting a critical mass of either shoppers or sellers…
436. For example, Amazon’s anti-discounting conduct leverages both its first-party Retail and its third-party Marketplace business units to suppress competition. Amazon’s first- party anti-discounting algorithm disciplines rivals from undercutting Amazon’s prices, and Amazon punishes third-party sellers for offering lower prices on other platforms. Without the ability to attract either shoppers or sellers through lower prices, rivals are unable to gain a critical mass of customers and meaningfully compete against Amazon. At the same time, Amazon’s coercive fulfillment conduct both artificially stunts the growth of independent fulfillment providers and artificially raises the costs that sellers face when seeking to multihome. This limits seller multihoming and thereby suppresses Amazon’s rivals’ ability to compete for sellers by offering better terms and for shoppers by offering additional product selection.
Where I get concerned is the relationship of the alleged facts to the causes of action (note here I am focusing only on the FTC/Federal law section). The FTC then in its factual discussion contends that Amazon has a dominant position in the “online superstore market” and monopoly power in the “online marketplace services market.” Antitrust arguments, particularly in the merger context, often revolve around the definition of the relevant market.
For Amazon, is the “online superstore market” a sound characterization? Note that the FTC has to exclude food from its “superstore” definition. I see how this market definition makes the merchant perspective. Merchants want access to all those Amazon customers, as the case explains very well. But does this hold for consumers? And if not, how does that affect the FTC’s case? I can easily think of product categories where many if not most vendors have established successful online businesses and the norm is to be outside Amazon: dietary supplements, glass and sunglass frames, running and exercise shoes.
Back in my days of doing company valuations, sometimes of tech plays, the key issues nearly always were not if the tech did what its promoters said it did (both the company and investors would fixate on that), but if even if you assumed it, did, what were the potential competitors? Without exception, the promoters would define the market too narrowly.
Amazon will clearly contest the market definition and the Wall Street Journal, in predictably criticizing the FTC’s case, throws out the sort of factoids the FTC will have to contend with in defending its market definition:
Start with the FTC’s claim that Amazon is a monopolist. The agency does this by narrowly defining the market in which Amazon competes as “online superstores” such as Target, Walmart and eBay. But it excludes brick-and-mortar stores as well as the vast majority of online retailers. The FTC claims customers like to buy everything in one place.
Some do, but most shop around. An HRC Retail Advisory survey found that 59% of shoppers in 2018 used smartphones in stores to compare prices or search for deals. While Amazon makes up about 38% of the U.S. e-commerce market, it accounts for about 6% of all retail sales. That’s no monopoly.
A problem the FTC faces is that Amazon no doubt has monopoly-levels of market share in online sales in certain product categories. But then the FTC would be forced to fight the market definition matter on even more fronts.
It is a little disappointing that the FTC could not find a way to make a case for straight up price fixing via its prohibitions on Amazon vendors offering lower prices and its pressure on vendors to increase prices. That has the advantage of being a per se violation of antitrust law. From the Department of Justice website:
Vertical resale price maintenance, which is an agreement on price between a manufacturer and its distributors (or a distributor and its retailers), may not be prosecuted criminally, although such agreements are “per se” unlawful, because of the difficulty of distinguishing between vertical price agreements and other vertical restraints, such as exclusive territories, that are judged under the “rule of reason.”
Identifying Price-Fixing Activities: Price fixing generally involves any agreement between competitors to tamper with prices or price levels, or terms and conditions of sale (e.g., interest rates for consumer credit), for commodities or services. Generally speaking, price fixing involves an agreement by two or more competing producers of a specific commodity, or competing providers of a particular service, in a defined geographic area, to raise, set or maintain prices for their goods or services. It may take place at either the wholesale or retail level and, although it need not involve every competitor in a particular market, it usually involves most of the competitors in the particular market.
Perhaps I am missing something, since the causes of action do invoke the Sherman Act. But the factual arguments revolve around Amazon having monopoly power, and not Amazon working with online vendors to engage in price fixing. My guess is that the FTC would have had to include the third party merchants as part of a price fixing conspiracy case and it didn’t want to do that for political, practical, and apportionment of liability reasons (as in there was no clean way to exclude them; as I read the Department of Justice’s description, a vendor would have had to somehow participated in the Amazon-pressured behavior as a mistake for that to be forgiven. It does not sound like a dog that would hunt).
However, Stoller also points out that Amazon destroyed documents and that Project Nessie is so bad that the FTC treats it as a violation all of its own (although all the Project Nessie material is so heavily redacted that we have no idea what it is). So there are more shoes to drop.