The coronavirus has rendered brick-and-mortar retailers even less capable at restraining Amazon’s market power.
As the antitrust and regulatory spotlight shines bright on Amazon’s abuses during the pandemic, a report from The Wall Street Journal revealed last week that Amazon employees accessed data from individual marketplace sellers when developing products the company would create and sell under its own brand names. The report seems to contradict statements made under oath by a top Amazon lawyer, Nate Sutton, who maintained at a congressional hearing that the company never used data from sellers when creating its own products.
Hal Singer (@halsinger) is a managing director of Econ One and an adjunct professor at Georgetown’s McDonough School of Business. Shaoul Sussman (@shaoulsussman) is a Legal Fellow at the Institute for Local Self-Reliance.
On Friday, seven members of the House Judiciary Committee, four Democrats and three Republicans, sent a letter to Amazon asking CEO Jeff Bezos to testify and clarify the record. “It is vital to the Committee,” the Congressmembers wrote, “as part of its critical work investigating and understanding competition issues in the digital market, that Amazon respond to these and other critical questions concerning competition issues in digital markets.”
To counteract this Congressional pressure, Amazon’s defenders are peddling the myth that the company’s alleged exclusionary conduct—particularly as it relates to appropriating information from and then competing against independent merchants on its platform—is no different than that of the typical grocery store down the road.
There is no issue with private labels per se; other retailers have successfully launched these types of products over the years. The problem is whether the information Amazon uses to create its clone was obtained inappropriately, as intimated by the Journal story, and whether Amazon’s discriminatory control over searching for products on its dominant platform threatens innovation among independent merchants.
Here are five reasons why Amazon’s “everyone-is-doing-it” argument is specious.
1. As an incubator of new products, Amazon is permitted to capture a larger portion of the profits of branded products compared to brick-and-mortar outlets.
Amazon’s Marketplace is an exciting laboratory where new and untested products are launched daily. In contrast to the physical constraints of brick and mortar, Amazon’s shelf capacity for displaying new products is infinite. Many small brands, which would likely never get the attention of a traditional large retailer, get to sell their products directly to consumers on Marketplace. And unlike your neighborhood store, Amazon can “afford” to host these brands on its marketplace because current laws shield it from liability when experimental products end up killing or hurting Amazon.com shoppers. Most recently, the Fourth Circuit Court of Appeals held that while Amazon was not immune from lawsuits under section 230, it didn’t qualify under the law as the "seller" of the harmful product and therefore was not liable under state law for selling defective products.
Amazon gets to collect invaluable information about upstart nascent products, and it can use this information to decide which markets to invade. Amazon can develop its competing version earlier in a brand’s life cycle, and capture more of the brand’s future profits.
In contrast, brick-and-mortar outlets largely deal with more established brands that already have credentials and a recognized consumer appeal. By the time a brand appears on a retailer's shelf, it has likely been around for longer and been copied previously, which means the same profits from copying are not available to that retailer. It also means that the established brands on that retailer’s aisles can better withstand the invasion.
2. Because Amazon sells sophisticated advertising services to its merchants, it has unparalleled access to the data of sellers who launch their products into the Marketplace laboratory.
Using a seller’s proprietary data, including the amount an upstart brand must spend on advertising to generate consumer demand, Amazon can spot the next hit well before any other established brand or retailer could. This information, to which only Amazon has access, can help it determine whether the hype a specific product is generating in its Marketplace is authentic or the result of serious spending on ads. It gives Amazon a first-mover advantage, relative to other sellers on its platform, in launching a private-label product.
The data that Amazon collects from sellers is also more granular than the information that traditional retailers have on the brands they sell. For example, a brand might pay the brick-and-mortar retailer a slotting fee for better shelf placement. The retailer can then analyze whether a boost in sales was organic or attributable to the slotting fee. But this is one rather crude, up-or-down experiment.
In contrast, Amazon offers Marketplace sellers a myriad of advertising options. One program, Amazon Vine, allows brands to pay Amazon to recruit shoppers to review and rate new products, which are posted on the product’s page. If positive, they can boost the popularity of the product in Amazon’s organic search ranking algorithm.
Another program is Amazon pay-per-click, an advertising tool that allows multiple sellers to bid for keywords in a silent auction. The winner gets to display their product higher than Amazon’s organic-search results.
Comparing this type of refined information to the data that brick-and-mortar retailers collect is like comparing the data NASA scientists use to that used by medieval astronomers.
3. Because the company also stores and ships a majority of the products that sellers sell on its marketplace, Amazon learns more about the cost structure of its suppliers than do its brick-and-mortar rivals.
Amazon encourages independent merchants with carrots and sticks to use its own in-house fulfillment service to ship their customers’ orders; the stick allegedly entails tying its fulfillment service to preferential access to Amazon’s platform. In contrast, a big-box outlet or a grocery store can never learn as much about a brand’s costs or margins.
Knowing more about a brand’s cost structure allows Amazon to choose which brands to invade and to better develop its private-label product. Sellers with successful products are often invited by Amazon to move some of their products or launch new ones under the AmazonBasics brand umbrella. Amazon can leverage data before other brands make a similar offer to the upstart. These opportunities to copy—and protect oneself from invasion from would-be copiers—are not available to rival sellers on Amazon’s platform, as competitors can only guess at the brand’s costs.
Jeff Bezos’ famous mantra is “Your margin is my opportunity.” Given its superior information, gleaned from both its advertising and fulfillment roles, Amazon can largely choose what type of relationship it wants to have with the brands that sell on Amazon. If the data reveals it’s profitable to force a brand to become a seller, Amazon can stop buying directly from the brand. If data shows it’s profitable to buy directly from the brand, Amazon can exercise a little known provision in its terms of service and force brands to start selling directly to Amazon.
4. Certain exclusionary strategies are only available to Amazon due to its size and control of its search algorithm.
Although there is scant concrete data, it is estimated that Amazon controls roughly half of all U.S. e-commerce. Even this might understate Amazon’s actual share, to the extent they include products (in the denominator of the share calculation) not sold by Amazon. A study conducted by Stephen Kraus at Digital Insights last year found that Amazon averages a 74 percent share of digital transactions in the US in product categories that are sold through the platform. In categories such as consumer electronics the study estimated that Amazon market share was about 80–85 percent. On the other side of the spectrum, Amazon captured only around 35 percent of the online market for women’s clothing. Within the products it actually distributes, Amazon at times controls over 90 percent of e-commerce sales. To the extent that an e-commerce channel for those products constitutes a relevant antitrust market, Amazon can be said to monopolize that channel under antitrust law. This market power, and concomitant ability to foreclose rival distributors, is unique to Amazon. A recent ProPublica story outlined how Amazon is able to lock up merchants by the effective threat of downgrading them in search if the merchant’s inventory falls below a certain threshold. Amazon’s ability to steer searches to its own wares, via control of its search algorithm, is yet another exclusionary lever not available to brick-and-mortar outlets.
5. Because Amazon is a dominant platform, Amazon’s self-preferencing and alleged stealing of proprietary information from merchants has the potential to generate anticompetitive effects.
It is no defense in an antitrust court to claim, as Amazon’s defenders do in public forums, that “others are doing it.” Setting aside the unique exclusionary strategies available to Amazon (described above), smaller distribution rivals might copy certain strategies of Amazon or have even gotten there first (e.g., private labels). But anticompetitive effects require the combination of exclusionary conduct and market power. Without the second ingredient, exclusionary conduct is often deemed innocuous.
It’s time to dispense with the notion that Amazon behaves just like every other retailer. Amazon’s market power is vast and only growing during the pandemic. Regulators need to be clear-eyed about the unique advantages enjoyed by Amazon when designing protections for independent merchants. Contrary to what is becoming a zombie myth, Amazon is not your father’s grocery store.
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