Spinning Amazon’s Flywheel: How Amazon’s Business Model Harms Competition

Regular readers of this blog may have noticed that we’ve been writing more about Amazon. We believe competition law has not yet fully grappled with its multifaceted business model, which has the Prime membership bundle of products at its core. Damien Geradin and I are therefore pleased to share our detailed paper on Amazon’s business model, which is now freely available online.

For a long time, the prevailing consensus has been that Amazon is consumer-friendly because it drives down prices, speeds up delivery times and offers a bundle of attractive products through its Prime membership programme. This may still be superficially correct if viewed through the narrow prism of the consumer welfare standard with a focus on price. However, Amazon’s strategy is more problematic if we consider the aggregate effects of its various interlinked practices, and if we believe that the role of competition law is to protect a competitive market structure. Such a stance is closer to the approach taken in the EU than the US in recent years, but US progressives are now also seeking to evolve the enforcement of antitrust law.

Against this background, our paper has two objectives. First, it seeks to show that Amazon’s problematic conduct, although diverse in nature and covering several distinct markets, includes vertical integration and the acquisition of rivals, exclusionary conduct, and the imposition of unfair trade terms and conditions. Second, with a focus on EU and UK law, it seeks to show that these problems require a combination of ex ante intervention (legislation such as the EU’s Digital Markets Act and the UK’s forthcoming Digital Markets, Competition and Consumer Bill and tighter merger control) and ex post intervention (tighter control of abusive conduct).

The paper argues that Amazon has market power across e-commerce generally as a provider of e-commerce platform services, in many discrete product categories, and also in logistics. We then discuss a selection of Amazon’s practices.

We show that Amazon has engaged into a variety of strategies to grow its e-commerce platforms, lock sellers and customers into it, and prevent the expansion of rival platforms. In particular, we observe that Amazon has grown its e-commerce platform through a wide range of acquisitions designed not only to expand its reach, but also to eliminate potential rivals. We discuss Amazon Prime and show that it effectively locks both sellers and customers in Amazon’s e-commerce platform. Next, we discuss how Amazon has engaged in various anticompetitive strategies to prevent the expansion of rival platforms, notably through most-favoured-nation (“MFN”) clauses. We then analyse how a combination of strengthened merger control, ex post competition law intervention and ex ante regulation can address these issues.

Next, the paper discusses Amazon’s dual role as a platform and a seller (an issue that was the subject of the recent European Commission commitments decision). Amazon acts as a platform on which buyers and sellers are matched, and it also competes on the platform by selling its own products. Amazon therefore derives revenues from fees and commission paid by third-party sellers on its platform, as well as from retail sales it makes directly to consumers. It also sells related services such as advertising on the platform either through banner ads or “sponsored” results in the search rankings. It offers its Fulfilled by Amazon logistics services to third-party sellers for the storage, packaging and delivery of the products being sold. We discuss the positions of first-party sellers and third-party sellers who both rely on Amazon in different ways. Given Amazon’s market power and its strategic position in the online economy, its dual role as platform and seller raises significant risks to competition. We discuss the risks arising from Amazon’s self-preferencing and its access to its competitors’ sales data. We then discuss how competition law and ex ante regulation can address these issues.

Finally, we discuss Amazon’s imposition of unfair trading terms and conditions. Amazon has accumulated significant market power in its e-commerce platform. The lack of effective competition gives Amazon the ability to impose unfair trading terms and conditions on sellers (first-party and third-party). Complaints from sellers are widespread and to some extent vary by industry. They include obligations to pay for unwanted services, restrictions on sellers’ ability to set their own prices even on non-Amazon websites, large fees and commissions (including the increasing advertising fees), and aggressive tactics such as delisting and forcing sellers into a wholesaling relationship rather than a third-party seller relationship. We also discuss the insufficient provision of data to sellers. We then discuss how competition law and ex ante regulation can address these issues.

Overall, we believe that the competition issues raised by Amazon’s multi-faceted and quickly changing business are complex and sometimes difficult to pinpoint, but this does not mean they are not significant. Amazon straddles a large and growing proportion of e-commerce and engages in many – sometimes seemingly minor – practices that produce aggregate effects whereby consumers become gradually more locked into Amazon’s ecosystem, the freedoms and profit margins of wholesalers and third-party sellers are gradually reduced, and companies that seek to compete with discrete aspects of Amazon’s business are squeezed out. In the longer term, e-commerce will become more homogenous, less innovative and consumers will pay higher prices.

We therefore believe that the issues raised by Amazon are identifiable and there are available measures that would mitigate their worst effects. However, none of these changes will be achieved if Amazon’s business customers do not organize themselves to engage with lawmakers and regulators on both sides of the Atlantic Ocean to ensure that competition law and new digital regulations fulfil their potential to open up e-commerce to the ultimate benefit of consumers.

Together with Amanda Lewis of Cuneo Gilbert & LaDuca in Washington DC, we launched the Responsible Online Commerce Coalition (ROCC) earlier this month. This is a coalition of businesses who rely on Amazon to reach their customers. They appreciate the key role that Amazon plays in the online economy and want to ensure that they are competing on a level playing field. We hope that the ROCC and our paper will help lawmakers and regulators move forward to the next stage.

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