Wednesday, September 27, 2023

The difficulty with Monopolization or Abuse of Dominance Cases: FTC vs. Amazon

FTC has brought a monopolization or abuse of dominance case against Amazon.  The main difficulty with these cases is that for every anticompetitive mechanism (or claim), like raising rivals' costs, there is a also pro-competitive one (or justification), like elimination of double markups, more easily understood as incentive alignment.  Explaining or estimating the indirect anticompetitive effects is not only more difficult and circuitous, but to infer the causal effects of Amazon's behavior, one needs a counterfactual or relief if the FTC wins their case.  However, the FTC will be reluctant to spell this out as it would make their case falsifiable. 

First Define the Market:  To win a monopolization case, the FTC has to define the "relevant market" more narrowly than total retail where Amazon has a 10% share, and more narrowly than online retail where Amazon has a 38% share:

For Amazon to look dominant, the FTC had to invent new terms such as the online superstore market that serves shoppers and the online marketplace services purchased by sellers. [CITE: Reason]

Assessment:  These markets may seem gerrymandered and may be hard to defend.

Abuse of Monopoly Power: Once the FTC defines the markets in which Amazon has a monopoly position, the FTC has to show that Amazon's business practices harm competition, but: 

  • Amazon offers consumers low prices, and an alternative to brick & mortar stores.
  • Amazon's infinite shelf space gives 3P sellers from all over the world an easy way to sell to consumers from all over the world.
  • Amazon's online marketplace has induced competition from rival online sellers, like WalMart and Shopify.

Claim 1:  Amazon is making third party (3P) sellers pay for unnecessary services, like FBA, (Fulfillment By Amazon) [CITE: NBC]

Assessment:  The obvious justification for FBA is that it ensures high quality service (fast, reliable, one or two-day service, with great customer service on returns and refunds).  In addition, sellers can fulfill their own orders.  

Claim 2 Self-Preferencing:  "Pushing Amazon's own products [1P] when it knows others [3P or 'third-party'] are better quality" [CITE: NBC]

Assessment:  If true, does Amazon have the incentive to self preference?:

  • the success of Amazon's marketplace depends on a having a wide selection of low-priced 3P products; 
  • Amazon earns a commission on 3P products sold on its platform, so disadvantaging 3P products would carry an opportunity cost; and
  • Amazon started out as 100% 1P but opened its marketplace up to 3P sellers because it was profitable.  What has changed?

    Claim 3: Amazon buries search results from 3P sellers who sell for less on other platforms.  [CITE: NBC]

    Assessment:  If true, the obvious justification is that Amazon wants to protect the reputation of its marketplace as having the lowest prices.  This intra-brand restraint makes Amazon's marketplace more attractive, which increases inter-brand competition, with other retailers.

    • Willem H. Boshoff, Luke M. Froeb, Wihan Marais, Roan J. Minnie, Steven Tschantz. Bargaining Competition and Vertical Mergers: The Problem of Model Selection, Review of Industrial Organization (forthcoming). 
    • Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Antitrust Policy as a Problem of Inference, International Journal of Industrial Organization, 23 (2005) 639–664. SSRN 
    TRUTH IN BLOGGING: I sometimes consult for Amazon.

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