FTC Faces Tough Road in Antitrust Suit vs. Amazon, Say ITIF Panelists

Commenting on whether Amazon has a monopoly market in the online superstore market as alleged by the FTC, Hovenkamp said market power “attaches to products, not to firms.” He referenced the monopoly Microsoft has with its operating system but not with its Bing search engine, which has 3% market share. “The real question is, can you group all these noncompeting products together into a single one for determining market power?” he said. “Brown Shoe held that you could, provided that shares of all the individual products -- in that case, men’s, women’s and children’s shoes -- were more or less the same,” which is “clearly not the case in Amazon,” he said.

Amazon’s market share for the 12 million products it sells ranges from the low-60% range for e-books down to under 4% for tires, with 20% share of toasters, Hovenkamp said. Amazon’s market share in different categories is “all over the place,” he said. From the customer’s perspective, “the question is, how many alternatives are there” on Amazon?

Hovenkamp challenged the FTC’s definition of Amazon’s monopoly power in the online marketplace. “Everything in it looks incredibly easy to duplicate,” he said, citing the ability for sellers to set prices, to maintain product pages or display customer reviews. “If anybody can do those things and at fairly low cost, then that doesn’t sound to me like the grouping of sales is capable of being monopolized.”

On how easy it would be for a successful brick-and-mortar retailer with a large customer base to open an online marketplace to compete with Amazon, Kathleen Bradish, American Antitrust Institute acting president, said the FTC’s case is “about the barriers to entry.” On the surface, it may seem anyone with enough resources could create an online marketplace, but the barriers to entry described in the case, in part created by Amazon, indicate it's “not that easy to replicate," she said.

The FTC’s central allegation is that Amazon’s two restraints -- its price parity provision and a requirement that merchants use Fulfillment by Amazon (FBA) to gain access to Prime benefits -- “raise the merchant’s costs of selling on rival platforms,” said Steven Salop, Georgetown University Law Center professor emeritus. The restraints also raise the retail prices charged on those platforms, he said. Amazon then “collects its monopoly profits on Amazon merchant sales by charging high FBA fees” and other fees including “pay to play advertising,” Salop said. “As a result, there’s harm on both sides of this two-sided market,” he said: Consumers are harmed by the “high prices,” and merchants are harmed by Amazon’s fees, the higher costs of selling on rival platforms and lower sales on rival platforms from barriers to entry, he said.

On the FTC’s claim that Amazon’s anti-discounting practices stifle price competition, which participants referred to as a “most-favored-nation (MFN)” provision, Bradish said those clauses have been challenged in the U.S. and Europe because they require a seller not to offer a product at a lower price on another platform. “Sellers using Amazon can’t discount to other online platforms,” she said. The effects can be pro- and anti-competitive, “but the difference between the two can sometimes be very hard to tell."

On the pro-competitive side, MFNs “discourage free riding and encourage investment,” she said. On the anti-competitive side, there are concerns about MFNs when the entity imposing the MFN policy “is very large, very important,” or there are a number of MFNs in a particular market that leads to “price control,” she said. That makes it difficult for a seller using the platform to discount to anyone else because “they owe so much discount to, in this case, Amazon.” Customers, then, don’t get the benefit of the “selective discounting,” she said. That also makes it difficult for new entry because a seller “can’t attract new business by having lower prices than Amazon.” MFNs have “the potential for adverse effects for both consumers and for other potential platforms who would compete" on fees and service with Amazon, she said.

Salop's understanding is that Amazon’s algorithms “scrape all the relevant websites,” and if it discovers that a merchant’s product is being sold at a lower price elsewhere, it contacts the merchant and says, “You’ve got to lower the price to us or you’ve got to raise the price to them.” Faced with that choice, “the merchant raises the price on the other platform” or withdraws its product from that platform, he said. “If the merchant is selling to someone who’s reselling, and the reseller is charging a lower price, Amazon holds the merchant responsible for that lower price and says, ‘Shape up or ship out,’” he said.

It’s widely accepted that MFNs can have anticompetitive consequences, said Bilal Sayyed, TechFreedom senior competition counsel, but the problem for plaintiffs is they can also have pro-competitive benefits. How the court structures the inquiry will “matter a lot here,” he said. Monopolization cases have rules of thumb for evaluating whether certain conduct by a monopolist is illegal -- which includes loyalty programs and other discounting practices -- and other criteria such as “predatory pricing,” he said. In many cases, courts either “pretend to apply a cost-benefits test,” or if the defendant supplies a justification, it wins, he said.

In the Amazon case, the FTC’s likelihood of success, “which is low on just about any framework the courts use,” is if it tries to balance the effects, said Sayyed. That will be “very difficult,” either across individual products or bundles of products,” he said, citing the “complex” merger analysis in the FTC’s case to block Staples’ buy of Office Depot in 2016. “Imagine how somebody might put together a basket or bundle of Amazon-sold products, either first-party or third-party,” and show “a negative effect or a positive effect,” he said. The FTC “has hurt itself here by bringing in a very broad case,” involving “a single company, alleging that they have seized control” of much of the online retail economy, he said. “This is a huge case: I don’t see how they’re going to manage it effectively, including the presentation of evidence of effects.”

Salop called the FTC’s Amazon suit a “fairly conventional raising rivals’ costs case.” Merchants need to use FBA to qualify for Amazon Prime eligibility, he said. Merchants comply because of the large customer base involved, “so it amounts to a de facto requirement that you use FBA,” even if it’s not a contractual arrangement, he said. For merchants who use FBA, that requirement “raises their costs, and it raises the prices they charge in selling to rival platforms,” he said. The higher costs are passed on to consumers, he said.

The complaint indicates there are sellers who are willing to say Amazon’s practices have an adverse effect on them and they’re afraid to go with another fulfillment company because of Amazon's pull, said Bradish. “To have these potential witnesses” cited in the complaint “may make all the difference if they can really get these folks on the stand, if they can get them to testify to the ways in which it has changed their behavior.”

On whether consumers want an “unbundled Prime” service, Sayyed said the FTC will need to “think very hard” about the benefits of Amazon delivering products “quickly” and “safely,” which he called a “core reputational issue” for the company. “That is a very powerful reason for them to want their third-party sellers to use their service,” he said. The idea that parties would use the Amazon platform to sell product but then give the merchandise to a third party that might not deliver the same fulfillment and delivery standards, "really strikes me as very dangerous ground for the agency to hang a case on.”