Too big to compete?

Amazon's marketplace provides what is, in theory, a simple and revolutionary business model. Amazon gives third-party manufacturers and suppliers access to a massive worldwide online audience of buyers and, in exchange, Amazon rakes in fees and commissions from every sale. Amazon controls nearly all aspects of its marketplace, acting as a powerful intermediary between buyer and supplier or manufacturer. Often the buyer will have no communication with the supplier at all and interacts only with Amazon.

Amazon is able to succeed with this model in part because of its tremendous size. Recently, Amazon announced an increase of revenues by 37.4% to a staggering $96.15 billion. And its quarterly earnings during the pandemic have been off the charts. These earnings are driven by, among other things, a steady increase in sales on Amazon's marketplace. In the most recent quarter, Amazon reported that third-party sales accounted for 54% of all unit sales and grew faster than sales of Amazon-branded or owned products.

This all may sounds like good news, and in some ways it is. But there are significant societal costs as well. In addition to serious product safety concerns, Amazon's dominance also exacts a heavy toll from suppliers who are dependent on Amazon for customer access.

One of the consequences of Amazon's decentralized retail dominance is the proliferation of counterfeit goods and fake reviews on Amazon's marketplace. The problem is bad enough that this past January the Department of Homeland Security issued a report to the president detailing how e-commerce facilitates trafficking in counterfeit goods. And, well-known brands such as Nike and Birkenstock have ceased selling products on Amazon because of concerns over counterfeit products.

But some of the biggest losers are small and medium-sized legitimate suppliers who are unable to compete with fraudulent sellers. The fraudsters, usually located outside the reach of our courts, undercut genuine sellers in price and bombard the marketplace with bogus reviews, both positive for their own fake products, and negative for the genuine article. One study by an e-commerce monitoring group estimates that more than 40% of the 720 million Amazon reviews written since March are fake. Amazon, though, disputes this figure.

Fraudulent suppliers may even go so far as to falsely accuse legitimate suppliers of selling counterfeit goods, causing Amazon to suspend or ban the accused supplier. Indeed, a cottage legal industry has arisen just to help suspended suppliers navigate Amazon's arcane, guilty-until-proven-innocent supplier appeals process. And the internet is replete with stories of Amazon suppliers who claim to have been unfairly banned from the marketplace and had their inventory destroyed because of false complaints by suppliers or legitimate complaints by buyers who purchased counterfeit goods from fake sellers without knowing it.

Of course, this would not be such a big problem if Amazon did not essentially monopolize the world of e-commerce marketplaces. At least that's what the House Antitrust Subcommittee determined in a report issued in early October. That report, titled "Investigation of Competition in Digital Markets," looked at Amazon, Facebook, Google and Apple, and concluded, "[t]o put it simply, companies that were once scrappy, underdog startups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons."

The result of Amazon's alleged monopoly power is twofold. First, third-party suppliers are almost completely beholden to Amazon for business. Being suspended or banned by Amazon can mean ruin for smaller suppliers who rely on Amazon for all or nearly all of their customers. Thus, suppliers have no choice but to agree to whatever terms and conditions Amazon sees fit to impose, including giving Amazon the unfettered right to remove or suspend any seller or listing for any reason. This power makes suppliers fearful of doing anything to upset Amazon lest Amazon retaliate in some way. And that, in turn, makes them vulnerable to fake reviews and false claims of selling counterfeit goods; matters they are often hesitant to contest out of concern they will face unwanted consequences.

And even suppliers willing to brave Amazon's wrath must consent to mandatory arbitration clauses, which severely restrict their ability to pursue any remedies. One recent study found that from 2014 through 2019, only 163 suppliers instituted arbitration proceedings against Amazon, partly because the suppliers believed the process would not be fair.

If this isn't bad enough, the second outcome of Amazon's alleged monopoly power is perhaps even more problematic. Not only must third party suppliers contend with counterfeit sellers, they also often must compete with Amazon itself. And since Amazon owns the platform and has access to troves of sensitive commercial information about its marketplace suppliers, it is hardly a fair competition.

The House Antitrust Subcommittee's report found that "Amazon has engaged in extensive anticompetitive conduct in its treatment of third-party sellers." The issue is that "[Amazon's] control over, and reach across, its many business lines enables it to self-preference and disadvantage other competitors in ways that undermine free and fair competition." And, "Amazon's dual role as an operator of its marketplace that hosts third-party sellers, and a seller in that same marketplace, creates an inherent conflict of interest." This "incentivizes Amazon to exploit its access to competing sellers' data and information, among other anticompetitive conduct." The House report even went so far as to say the repeated violations of law by Amazon, Facebook, Google and Apple "raises questions about whether these firms view themselves as above the law, or whether they simply treat lawbreaking as a cost of business."

The House report offers several suggestions for fixing this problem, including structural changes to the platforms themselves, updating and strengthening the antitrust laws, and stepping up antitrust enforcement. Whether any of these comes to pass remains to be seen. 