The Amazon Effect   //   August 15, 2019

Why Washington wants to break up Amazon, explained

Amazon began as a small online bookseller. It’s grown into one of the biggest and most powerful companies in the world. Now, the United States is coming to grips with the e-commerce giant’s power and is trying to figure out if there’s a way to rein it in.

Earlier this week, Senators Richard Blumenthal and Bob Menendez sent a letter to Amazon about one of its opaque practices: Amazon’s Choice. This is the program that selects certain products on its marketplace and provides it with a special badge to encourage customers to buy it. Though Amazon’s Choice has been around for four years, it’s remained generally unclear how the company chooses which products get chosen (and sometimes, Amazon’s recommendations have led consumers to shoddy products).

“[T]he badge,” the letter wrote, “may be misleading consumers into thinking the products that receive this distinction are the best available products.” Thus, the senators asked CEO Jeff Bezos a series of questions about how the Amazon’s Choice determination is made. They ranged from, “Are sellers on Amazon able to apply, or pay, to receive the “Amazon’s Choice” badge?” to “Does Amazon take into consideration a buyer’s browsing and purchasing history to determine which products will be assigned the “Amazon’s Choice” badge in that buyer’s search results?”

In essence, the lawmakers wanted to know the mechanism in place, and whether it was creating competition issues for other sellers.

This was the latest in a string of inquiries made by high-ups in Washington. A month ago, two other senators sent a letter to the company requesting more information about the rise of fake reviews. Democratic presidential nominee Elizabeth Warren has made breaking up big tech companies like Amazon part of her battlecry. And an economist and critic named Lina Khan — who wrote a paper explaining how an antitrust case could be levied against Amazon — has both helped out at the FTC and joined the House Subcommittee on Antitrust, Commercial and Administrative Law.

But as the calls become more frequent and more specific, it’s important to understand exactly what’s being asked. In the case of Amazon, there are a few important threads to tease out.

Where did these calls begin?
Perhaps one of the loudest anti-Amazon proponents is President Donald Trump. For years, he has tweeted and said threats against the company — including claiming that Amazon was hurting the United States Postal System, and that it was hurting local retailers. Last November, Trump said point blank the government was looking at antitrust action “very seriously,” but more details weren’t disclosed.

On the other side of the aisle, Warren is the loudest and most detailed proponent for breaking up big tech. Earlier this year, she proposed sweeping legislative moves that would break up Amazon, Google and Facebook. “America’s big tech companies provide valuable products but also wield enormous power over our digital lives,” she wrote in a Medium post. “Nearly half of all e-commerce goes through Amazon.” She went on: “Amazon crushes small companies by copying the goods they sell on the Amazon Marketplace and then selling its own branded version.”

Despite the bipartisan cries, proving an antitrust is a large task. Beginning in the late 19th century, the U.S. government needed to implement rules so that a company couldn’t get so big that it eliminated competition and ultimately hurt the consumer. The problem with going after a company like Amazon is that, at first glance, its practices haven’t led to price gouging; in its attempt to become an e-commerce juggernaut, Amazon has certainly hurt other companies, not necessarily consumers. That makes for a difficult antitrust case, at least using a traditional lens. The current problem plaguing antitrust scholars is that the dominant companies — Amazon, Google, Facebook — have formed a new kind of vast market power that may be categorically different than, say, Standard Oil circa 1890.

As a result, others have taken to rethinking antitrust legislation itself. Khan, who wrote a paper entitled “Amazon’s Antitrust Paradox” set out to show that the current frameworks for analyzing monopolistic companies don’t conform with the current business paradigm. Her argument went that the platforms exhibiting monopolistic tendencies — namely, Amazon — are hurting competition in different and invisible ways. Traditionally, monopolies dominate marketplaces, which lead to short-term price effects that hurt consumers. Conversely, tech companies systematically overtake entire ancillary industries to exert economic control in novel fashions.

What are the specific complaints?
Khan’s claim is big, and one that will almost certainly have legislative ramifications for years to come. The theory is that Amazon’s market power is bigger than even its marketshare. Because Amazon isn’t just a marketplace but a data broker, more businesses rely on it to find customers. Similarly, the company has grown AWS, its cloud-storage products — making it another kind of service provider, one on which both private businesses and governments rely. What’s more, it’s built out other in-house services — like logistics — meaning companies like FedEx and UPS could likely begin to see Amazon’s very presence as a competitor.

“A lot of small businesses feel like they rely on these platform for their business to be successful, explained Charlotte Slaiman, antitrust attorney and policy counsel for competition at Public Knowledge. “How realistic is it for these businesses to leave the platform? They don’t feel like they have a choice.”

One of the most pressing concerns is what is called “most favored nation” pricing. This is essentially when a company contractually forces its clients to give it preferential pricing. Last year, lawmakers wrote a letter to Amazon about the company forcing third-party sellers to sign contracts that forbade them from selling cheaper identical items on other platforms.

“Amazon’s punishment of vendors that price their wares lower outside on Walmart, however, could be fodder for a successful antitrust case,” wrote Hal Singer, a managing director at Econ One Research, a senior fellow at the George Washington Institute of Public Policy, in an email.

Amazon seemed to wise up to this allegedly anticompetitive practice, and changed its third-party seller contracts last March. But the company is still trying to exert its pricing power in other ways. Last week, Bloomberg reported that Amazon was scanning sellers listings on other platforms and telling them to raise their prices or risk losing certain Amazon benefits like search rank.

Is antitrust the only way?
Some scholars, however, feel like many of the complaints levied against Amazon aren’t worthy of an antitrust case. “In a nutshell, antitrust is loathe to go inside of a firm and prevent it from discriminating in favor of its own applications (or in this case, wares),” wrote Singer. He was referring to the claim that Amazon is an anti-competition nightmare because it is favoring its own products on its own platform.

Antitrust scholar Dina Srinivasan agreed. “It is not clear to me what Amazon is doing that is substantively wrong under current economic theory,” she said. “What Google is doing in the digital advertising market and what Facebook is doing in the social media market are more likely to be the focus of antitrust investigations.”

As Slaiman saw it, Amazon’s anti-competitive practices can’t be boiled down to one issue; thus, there are many potential avenues to pursue. Beyond the price control, there are the issues with the fake reviews and opacity of Amazon’s Choice — which hint at the issue of the company potentially favoring some goods over others. “There are very serious problems,” she said. “It’s not clear how antitrust can solve all of these problems.”

Instead, Public Knowledge — and other lawmakers — are calling for new regulations that would be aimed directly at these tech behemoths. For instance, some are calling for a nondiscrimination standard, which would essentially prohibit a company from putting preference of its own products if it also controls the platform. For Amazon, this would mean it couldn’t preference its own items on the Marketplace. Nor could Google give preferential search results for its own products. “It’s not just making sure competition on the platform is fair,” Slaiman said, “but making sure competition on the platform is possible.”

Singer agreed. “The discrimination stuff is likely a loser from an antitrust perspective. Better to deal with that, I argue, with a non-discrimination regime that works outside of antitrust,” he wrote. Which is to say that the winning antitrust argument against Amazon may be by zeroing in on the way it controls sellers’ prices on other platforms. Conversely, if trying to crack down on the platform itself, lawmakers will likely have to seek out other laws and regulations to be successful.

Put together, there’s undoubtedly more light being shown on all the ways Amazon is potentially squeezing vendors, retail competition and consumers. Critics maintain that there are multiple problems that need to be dealt with at a fundamental level. “I definitely think the best way forward is to use all of the tools at our disposal.” said Slaiman.