On 09/14th, the California government announced an antitrust lawsuit against Amazon. That New York Times sums up the heart of this action admirably, namely a complaint about Amazon’s handling of the many third-party sellers who offer their goods for sale on the Amazon website:
The lawsuit mainly focuses on the way Amazon penalizes sellers for offering products at lower prices on other sites. When Amazon discovers a product that is listed cheaper on a competitor’s website, it often removes important buttons like “buy now” and “add to cart” from a product listing page.
These buttons are a major revenue driver for businesses selling on Amazon, and losing one can quickly hurt their business.
This creates a dilemma for marketplace sellers. Sometimes they can offer products at lower prices on sites other than Amazon because the cost of using those sites can be lower. But because Amazon is by far the largest online retailer, sellers would rather raise their prices on other sites than risk losing their sales on Amazon, the complaint said, citing interviews with sellers, competitors and industry consultants.
“Without fundamental price competition, without different online sites trying to outdo each other with lower prices, prices artificially stabilize at higher levels than they would in a competitive market,” the complaint reads.
On the surface, Amazon’s policy on dealing with third-party sellers selling on its site appears to be anti-competitive indeed. If Amazon were not so responsive to third-party retailers who list their goods on other websites at prices lower than those retailers charge for those items on Amazon’s website, retailers would be more likely to lower the prices they charge on other websites . Average prices would appear to be lower and consumers would therefore be better served.
But as almost always in economics, what is seen does not reveal all or even the most important part of the relevant reality.
To get a fuller and clearer picture of this reality, ask: Given that Amazon no doubt discourages third-party merchants who use its site from selling their wares on other sites at lower prices, why do these merchants still list their wares? on Amazon’s side? The mere existence of the problem California is complaining about means Amazon’s platform isn’t the only one available to these merchants. So the problem, obviously, isn’t that Amazon has a literal monopoly on the market for online platforms that merchants can use. In practice, retailers have and use the opportunity to use platforms in addition to Amazon.
These other platforms open to traders are not owned by fly-by-night operations. One is owned and operated by Target and another by Walmart.
So the state of California’s lawsuit against Amazon boils down to the following: Amazon has made its platform so attractive to third-party merchants that many of them willingly pay a premium to continue using the Amazon platform. This premium is paid to Amazon by these merchants when they agree not to lower the prices they charge for goods offered for sale on non-Amazon sites.
What exactly is Amazon offering to third parties in return for paying this bounty? I don’t know as I’m not a third party. But I do know that Amazon offers some of value, because otherwise third-party sellers would not agree to the terms required by Amazon or would not care if Amazon reduced the visibility of their offers on its platform.
Perhaps Amazon’s platform outperforms other platforms in drawing consumers’ attention to third-party offerings. Perhaps Amazon’s platform provides better product descriptions or more reliable customer reviews. Or maybe Amazon offers consumers an unusually easy, secure, or fast way to pay for their purchases. But whatever the correct answer, the fact that Amazon offers some uniquely valuable services (or services) to third parties is validated by third parties’ willingness to pay a premium for using the Amazon platform.
If California is successful in its antitrust lawsuit, we cannot predict the immediate impact on the cost consumers would incur when purchasing goods online from third-party retailers, other than to say that such impact will not be positive.
On the one hand, if Amazon’s superior platform performance is due to a feature that Amazon needs to maintain on a regular basis, then successful use of antitrust law to challenge Amazon’s commercial dealings with third-party sellers is unlikely to result in improved consumer welfare. Under these circumstances, since Amazon is no longer able to generate a return to compensate for the efforts it must regularly expend to continue providing its differentially superior service, Amazon will refrain from whatever it is doing to maintain its superior efficiency. And as Amazon’s superior efficiency is damaged by antitrust laws, online retailing itself will become less competitive and less efficient. The cost to consumers of purchasing goods online from third-party retailers could increase almost immediately, even if the list prices of those goods remain the same or even decrease.
On the other hand, if Amazon’s superior platform performance is due to an irreversible characteristic of that platform, then this will result in a government ban on Amazon’s efforts to discourage merchants from lowering prices on other platforms in the short term in falling consumer goods prices without compromising the quality of service that merchants and consumers receive through their continued use of the Amazon platform. But this improvement in consumer welfare would indeed be short-lived.
Whatever the reason behind the permanence of the variously superior service now available on the Amazon platform created from Amazon. Neither luck nor goblins gave the company this competitive advantage. The superiority of the Amazon platform is the result of entrepreneurial creativity, risk-taking and hard work. And the differential returns Amazon is now getting from successfully preventing third-party retailers from selling their wares on competing platforms at lower prices is the corporate profit Amazon is making earned as a result of this entrepreneurial achievement.
Attempts to prevent Amazon from achieving this corporate profit will discourage not only Amazon but also other companies and entrepreneurs from experimenting with different better ways to create value for customers. And even if California successfully uses these antitrust measures to drive down today’s prices of goods sold online by third-party retailers, consumers will find tomorrow’s prices and quality worse because online retail platforms and platform capabilities don’t evolve as quickly and Improving as quickly as they would have improved had the California government’s ploy failed.
Since it began in the US in 1889, antitrust law has often been fueled by the hubris of intellectuals and government officials who fail to realize that what the late economics Nobel laureate Oliver Williamson called “the economic institutions of capitalism” are in fact amazingly creative, nuanced and complex. These intellectuals and officials arrogantly assume that any contractual clause or organizational arrangement that they cannot immediately understand as conducive to competition is therefore a treacherous exercise of monopoly power, or an attempt to secure such power. Such is the case in California’s recent antitrust attack on Amazon. Yet just a bit of sober reflection on the facts of this case makes it clear that interfering with third-party merchants’ contractual arrangements with Amazon may even make consumers worse off in the short term, and will certainly make consumers worse off over time.