Spotlight: FTC Sues Amazon Over Alleged Monopoly Practices

Amazon is in a legal mess. FTC sues the e-commerce giant for anticompetitive practices.

Welcome to CrossDock Spotlight,

In this inaugural issue, we present you with an in-depth analysis of the FTC’s antitrust lawsuit against Amazon:

Antitrust Showdown: FTC Sues Amazon Over Alleged Monopoly Practices

The Federal Trade Commission has filed an antitrust lawsuit against Amazon, alleging it operates as an unlawful monopoly. If the FTC succeeds, this lawsuit can potentially break up the company. 

The story so far

On September 26, the Federal Trade Commission and 17 state attorneys general filed the long-awaited lawsuit against Amazon, accusing the online retail giant of stopping rivals and sellers from lowering prices, degrading quality for shoppers, overcharging sellers, stifling innovation, and preventing rivals from fairly competing against Amazon.

In response to the lawsuit, Amazon, in an official statement, claimed the lawsuit was "misguided," adding that the lawsuit "reveals the Commission's fundamental misunderstanding of retail."

Amazon’s power and influence 

Before we delve into the nitty-gritty of the lawsuit, we need to first understand Amazon’s influence in the e-commerce market. In her famous 2017 Yale law article, the current FTC chair, Lina Khan, called Amazon a titan of 21st-century commerce, and it is no overstatement.

With a market share of 37.8%, Amazon indisputably reigns in the e-commerce world. And the key driving force behind Amazon's e-commerce dominance is its vast ecosystem of third-party sellers, comprising primarily small and medium-sized businesses, who contribute more than 60% of Amazon's sales

On the surface, this seems like a harmonious state of affairs, so why does the FTC raise concerns about a potential monopoly? The answer lies in the FTC's contention that Amazon engages in anti-competitive practices in two key markets: the online market that serves shoppers and the market for online marketplace services purchased by sellers.

Anti-competitive practices 

A substantial portion of the lawsuit revolves around how Amazon effectively compels third-party sellers using its marketplace platform to conform to certain practices, punishing sellers and deterring other online retailers from offering prices lower than Amazon and ultimately keeping costs higher for products across the internet. In fact, up until 2019, Amazon imposed explicit contractual requirements barring all sellers from offering their goods for lower prices anywhere else, according to the lawsuit.  

Furthermore, the lawsuit states that Amazon’s sophisticated web crawler constantly scrolls the internet to look for places where the seller lists the same product at a lower price. If found, Amazon punishes the seller by knocking these sellers out of the all-important Buy Box. Nearly a whopping 90% of Amazon sales occur through the Buy Box, and that’s something no business wants to miss out on. 

Amazon also penalizes sellers by suspending, deactivating, and sometimes burying the discounting sellers in their search results. This primarily affects brands with a presence on multiple marketplaces, along with their own website. However, FBA-only sellers engaged in wholesale or retail arbitrage do not get impacted by such practices. 

It’s worth noting that sellers often lack control over the pricing factors. For instance, when a seller lists products on both Amazon and other online sales channels, and if they initiate a site-wide discount on other sales channels, the merchant may be penalized by Amazon, even though it's not their fault.

Amazon Seller App Marketplace

The anti-competitive practices of Amazon are not just restricted to the e-commerce marketplace but extend to other product offerings, too. A case in point is Amazon’s Selling Partner Appstore, a platform to find Amazon-approved third-party apps for merchants. 

Amazon has very opaque policies on the category of apps that can get approved on the marketplace, and they reject publishing requests without adequate explanation and vague reasons. For example, apps have been rejected just because a similar app already exists in the marketplace. Such reasons reek of anti-competitive behavior, where someone decides how many apps can compete in a particular category.

Amazon Ads and Fulfillment by Amazon (FBA) 

Over the years, Amazon has steadily built an advertising business competing with Google and Facebook. In 2022, Amazon’s global ad revenue reached $38 billion, nearly double the 2020 results. 

The lawsuit claims that Amazon has raised the number of ads in search results, making sellers believe they must pay for ads for their products to be visible to potential customers. These ads have been enormously lucrative for Amazon, but shoppers face less relevant results and are steered toward more expensive products, while sellers face an additional set of fees.

Another paid third-party seller service in the eye of the storm is FBA, where Amazon takes care of the entire order fulfillment process. According to FTC, Amazon further extends its monopolistic practices by linking a seller's Prime eligibility to the use of Amazon's order fulfillment service. However, in 2015 Amazon did offer an alternative program where sellers can own their fulfillment process while having the coveted Prime badge. 

But, due to a “dip in quality of service,” enrollment in the program was closed. In short, this means that to reach 180 million Prime users in the US, Amazon indirectly ensured their expensive FBA was the only option. These two services – Amazon Ads and FBA –  have ensured a dramatic increase in the percentage cut Amazon takes out of seller revenues, also known as Amazon's take rate.  

Amazon’s response

Amazon has criticized the FTC's lawsuit, asserting that it would lead to practices detrimental to consumers and businesses. Amazon argues that highlighting competitive prices and matching lower offers from rivals promotes lower prices, fostering healthy competition. 

The company contends that it would have to cease practices that support lower prices if the lawsuit succeeded, contrary to antitrust goals. Amazon also refutes allegations of coercing sellers to use their Fulfilment by Amazon (FBA) service, stating that it's optional and generally more cost-effective than other third-party logistics providers. 

Repercussions and future of Amazon 

Lawsuits are not new for Amazon; in June this year, the Amazon-owned video surveillance product company, Ring, agreed to a $5.8 million settlement in response to allegations from the Federal Trade Commission (FTC). However, according to experts, this landmark monopoly lawsuit by the FTC could be the toughest legal battle in its 30-year history. 

The antitrust lawsuit led to a 4.5% drop in Amazon stock on the week it was filed. Furthermore, the lawsuit caused Amazon's market cap to decline by $55 billion and resulted in Jeff Bezos' estimated wealth dropping by $5.2 billion, according to Business Insider. 

And if FTC ultimately wins the lawsuit, there could be structural changes in Amazon and even a company breakup. When questioned about whether the FTC plans to pursue this avenue, Khan did not provide a clear answer and instead emphasized that the agency's primary focus is establishing liability in the case.

Thank you for reading, we’ll see you in the next edition!

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