Platform and Power: A Case Study on Amazon

Author: Marvin Cheung

Publication date: 5 January 2021

“Amazon is set to clear $258.22 billion in US retail sales in 2018, according to eMarketer’s figures, which will work out to 49.1 percent of all online retail spend in the country, and 5 percent of all retail sales.”[1] New figures submitted to the recent congressional investigation estimates that Amazon “controls about 65% to 70% of all U.S. online marketplace sales [in 2019]”[2].

While most of us are familiar with Amazon’s current position as a leader of ecommerce and its early beginnings as an ebook-store, few remember how Amazon’s first six years of operations until 2000 resulted in millions of dollars of continuous losses[3]. In fact, Amazon was unprofitable for 14 years after its IPO in 1997[4].

Since before the dotcom bubble in the late 1990s, investors have overlooked startups’ profitability and poured money into companies they hope would one day become profitable[5]. DotCom companies typically employ a “Get Big Fast” strategy, which involves throwing exorbitant amounts of money in marketing and branding while selling products at a loss to attract customers[6]. Startup founders, Venture Capitalists “VCs”, and Investors hope the customer acquisition costs will eventually decrease and the startup will become profitable, mostly owing to network effects[7], but that is rarely the case. An estimated $1.7 trillion by late 2000, and 200,000 jobs between 2001 and early 2004 were lost as a result of the DotCom bubble[8]. These assumptions, however, continue to upend traditional expectations of profitability and decrease investor pressure. To date, public technology companies such as Uber, Lyft, Pinterest, Snap, Zillow, Slack are still not profitable[9]. Amazon and its investors’ willingness to forego profits enabled the company to continue investing heavily in growth[10].

As it turns out, the line between “predatory pricing” and “loss leading” (to promote sales of other products) is not defined by the law but is understood to be based on intensity and intent[11]. Khan, a New Brandeisian[12] who served as counsel to the U.S. House Judiciary Committee’s Subcommittee on Antitrust, Commercial, and Administrative Law, has published about this extensively before she led the congressional investigation into Big Tech[13]. She argues that “both the government and Judge Cote missed the anticompetitive implications of Amazon’s below-cost pricing”[14], with reference to Amazon’s loss leading $9.99 pricing strategy for bestselling e-book titles around 2007, due to the leverage it afforded the company. Amazon’s low-cost bestselling titles coupled with its below manufacturing cost Kindle device[15] helped Amazon create an ecosystem whereby success in one industry would reinforce the other[16].

By 2015, Amazon controlled 65% of the e-book market, Sony closed its US Reader Store, and Barnes & Noble’s funding for its e-book reading device Nook was cut by 74%[17]. “In the e-book market, Amazon was reported in February 2017 to account for around 88% of total annual unit sales.”[18]

As Khan points out, Amazon launched a targeted pricing campaign in 2009 to undercut Quidsi’s portfolio company Diapers.com after the company’s founders declined Amazon’s acquisition inquiry[19]. It then cut its prices for baby products by up to 30% and used pricing bots to track and match the price of products on Diapers.com[20]. In 2010, through the Amazon Mom program, users were offered a year’s worth of Prime Membership, and those who signed up for monthly deliveries of baby products were given an additional 30% discount[21]. Quidsi executives “calculated that Amazon was on track to lose $100 million over three months in the diaper category alone”[22], but the internal documents discovered from the latest Congressional Investigation published in 2020 revealed that “Amazon was willing to bleed over $200 million in losses on diapers in one month”[23].

Ultimately, after Quidsi entered into a preliminary agreement with Amazon, they were not able to let the deal expire and negotiate with Walmart, who offered an additional $60 million. This was “out of fear” that Amazon would “drive diaper prices to zero” during their negotiations with Walmart, thereby decimating the value of Diapers.com. Amazon identified Diapers.com as its “largest and fastest growing competitor in the on-line diaper and baby care space”[24] at the time, prices for baby products on Amazon has increased between 2011 and 2014 since acquiring the key rival[25]. In 2017, Diapers.com was shut down by Amazon[26]. The acquisition intimidated future competitors [27]. This pricing strategy is legal under the current consumer welfare oriented antitrust law from around the 1970s, where the “antitrust doctrine views low consumer prices, alone, to be evidence of sound competition” [28].

“The Federal Trade Commission scrutinized the acquisition for four and a half months, going beyond the standard review to the second-request phase, where companies must provide more information about a transaction. The deal raised a host of red flags, such as the elimination of a major player in a competitive category, according to an FTC official familiar with the review. The merger was eventually approved, in part because it did not result in a monopoly. Costco Wholesale, Target, and plenty of other companies sold diapers online and off.”[29]

There are other practices, that Khan argue should be considered anti-competitive. For example, Amazon’s use of self-preferential algorithms to launch its delivery service Fulfilment-by-Amazon “FBA” should be considered a conflict of interest[30]. In 2006, Amazon launched FBA and routed many of the packages through delivery companies such as UPS and FedEx, where it secured an estimated 70% discount[31]. This caused a “waterbed effect” where the delivery companies had to compensate for the discount offered to Amazon by increasing the cost of services to its own customers, thereby locking themselves in a vicious cycle[32]. While vertical expansion “is not vulnerable to legal challenges”[33], rules can be implemented “to prevent discrimination, favouritism, and self-preferencing” [34]. 

Khan argues that Amazon’s position as both a marketplace operator and seller should also be considered a conflict of interest[35].

“As one merchant observed, ‘You can’t really be a high-volume seller online without being on Amazon, but sellers are very aware of the fact that Amazon is also their primary competitor.’[36] […] Specifically, reporting suggests that ‘Amazon uses sales data from outside merchants to make purchasing decisions in order to undercut them on price’ and give its own items ‘featured placement under a given search.’[37] […] As it now rolls out more AmazonBasics products, it is clear that the company has used ‘insights gleaned from its vast Web store to build a private-label juggernaut that now includes more than 3,000 products.’” [38]

Other problems such as bullying of vendors, forced arbitration, increasing seller’s fees, randomly locking seller’s accounts, appropriation of third-party seller data, preventing competitors from advertising on the platform, prioritizing the sales of products in its warehouses during Covid-19 etc. have been highlighted in the Congressional Investigation report[39], but the ramifications of these problems have been more challenging to quantify.

In response to the conflicts of interest challenge, the Subcommittee on Antitrust, Commercial, and Administrative Law of the Committee recommended structural separations to “prohibit a dominant intermediary from operating in markets that place the intermediary in competition with the firms dependent on its infrastructure” [40], which will limit the attractiveness of the Platform as a Service (PAAS) business model. Structural separations would be applied on a market-wide basis, unlike policing anticompetitive conduct, which is done on an ad hoc basis[41]; though it is important to note that the current proposal only targets “dominant intermediaries”.

The Subcommittee further recommends placing line of business restrictions to “limit the markets in which a dominant firm can engage” [42]. This recommendation draws upon The Bank Holding Company Act of 1956[43], arguing that certain dominant platforms have become critical intermediaries and infrastructure for the economy[44]. As Khan points out, this would limit the business risks these dominant platforms are exposed to and increase their soundness, while simultaneously limiting the possibility of anticompetitive behaviour[45].

Among the twenty or so recommendations, another recommendation to note includes the establishment of non-discrimination rules. “Non-discrimination rules would require dominant platforms to offer equal terms for equal service and would apply to price as well as to terms of access.” [46] This has traditionally been applied to network intermediaries such as railroads, through the 1887 Interstate Commerce Act, and cable operators, through the Cable Act of 1992[47]. As for challenges to Big Tech’s data advantage, new data privacy regulations are generally more effective.

[1] “Amazon’s Share of the US e-Commerce Market Is Now 49%, or 5% of All Retail Spend,” TechCrunch (blog), accessed December 19, 2020, https://social.techcrunch.com/2018/07/13/amazons-share-of-the-us-e-commerce-market-is-now-49-or-5-of-all-retail-spend/.

[2] Submission from Top Shelf Brands, to H. Comm. on the Judiciary, 26 (Oct. 26, 2019) (on file with Comm.) (citing DIG. COMMERCE 360, 2019 ONLINE MARKETPLACES REPORT).

[3] Lina M. Khan, “Amazon’s Antitrust Paradox,” The Yale Law Journal 126, no. 3 (January 2017), https://www.yalelawjournal.org/note/amazons-antitrust-paradox.

[4] “6 Famous Public Companies That Still Aren’t Profitable,” US News & World Report, accessed December 19, 2020, https://money.usnews.com/investing/stock-market-news/slideshows/famous-public-companies-that-still-arent-profitable.

[5] Adam Hayes, “What Ever Happened to the Dotcom Bubble?,” Investopedia, accessed December 19, 2020, https://www.investopedia.com/terms/d/dotcom-bubble.asp.

[6] “A Revealing Look at the Dot-Com Bubble of 2000 — and How It Shapes Our Lives Today,” Ideas.Ted.Com (blog), December 4, 2018, https://ideas.ted.com/an-eye-opening-look-at-the-dot-com-bubble-of-2000-and-how-it-shapes-our-lives-today/.

[7] D’Arcy Coolican and Li Jin, “The Dynamics of Network Effects,” Andreessen Horowitz, December 14, 2018, https://a16z.com/2018/12/13/network-effects-dynamics-in-practice/.

[8] “A Revealing Look at the Dot-Com Bubble of 2000 — and How It Shapes Our Lives Today,” Ideas.Ted.Com (blog), December 4, 2018, https://ideas.ted.com/an-eye-opening-look-at-the-dot-com-bubble-of-2000-and-how-it-shapes-our-lives-today/.

[9] “6 Famous Public Companies That Still Aren’t Profitable,” US News & World Report, accessed December 19, 2020, https://money.usnews.com/investing/stock-market-news/slideshows/famous-public-companies-that-still-arent-profitable.

[10] Lina M. Khan, “Amazon’s Antitrust Paradox,” The Yale Law Journal 126, no. 3 (January 2017), https://www.yalelawjournal.org/note/amazons-antitrust-paradox.

[11] John B. Kirkwood, Collusion To Control a Powerful Customer: Amazon, E-Books, and Antitrust Policy, 69 U. Miami L. Rev. 1, 38-39 (2014).

[12] Lina Khan, “The New Brandeis Movement: America’s Antimonopoly Debate,” Journal of European Competition Law & Practice 9, no. 3 (March 1, 2018): 131–32, https://doi.org/10.1093/jeclap/lpy020.

[13] Lina Khan, “Lina Khan, Bio,” Lina Khan, accessed December 19, 2020, http://www.linamkhan.com/bio-1.

[14] Lina M. Khan, “Amazon’s Antitrust Paradox,” The Yale Law Journal 126, no. 3 (January 2017), https://www.yalelawjournal.org/note/amazons-antitrust-paradox.

[15] Eric Savitz, Amazon Selling Kindle Fire Below Cost, Analyst Contends, Forbes (Sept. 30, 2011, 5:40 PM), http://www.forbes.com/sites/ericsavitz/2011/09/30/amazon-selling-kindle‌-fire-below-cost-analyst-contends

[16] Lina M. Khan, “Amazon’s Antitrust Paradox,” The Yale Law Journal 126, no. 3 (January 2017), https://www.yalelawjournal.org/note/amazons-antitrust-paradox.

[17] Ibid.

[18] Dig. Competition Expert Panel Report at 30

[19] Brad Stone, The Everything Store (2013); George Packer, Cheap Words, New Yorker (Feb. 17, 2014), http://www.newyorker.com/magazine/2014/02/17/cheap-words

[20] Brad Stone, The Everything Store (2013); George Packer, Cheap Words, New Yorker (Feb. 17, 2014), http://www.newyorker.com/magazine/2014/02/17/cheap-words

[21] Ibid.

[22] Brad Tuttle, It’s Target Versus Amazon in the Battle for Moms, Time (Sept. 26, 2013), http://business.time.com/2013/09/26/its-target-versus-amazon-in-the-battle-for-moms

[23] Production of Amazon, to H. Comm. on the Judiciary, AMAZON-HJC-00057007 (Apr. 5. 2010) (on file with Comm.). 

[24] Production of Amazon, to H. Comm. on the Judiciary, AMAZON-HJC-00142833 (May 12, 2009) (on file with Comm.). 

[25] Lina M. Khan, “Amazon’s Antitrust Paradox,” The Yale Law Journal 126, no. 3 (January 2017), https://www.yalelawjournal.org/note/amazons-antitrust-paradox.

[26] Jason Del Rey, Why Amazon’s Explanation for Shutting Down Diapers.com and Quidsi Stunned Employees. VOX: RECORDE (Apr. 2. 2017), https://www.vox.com/2017/4/2/15153844/amazon-quidsi-shutdown-explanation-profits

[27] Lina M. Khan, “Amazon’s Antitrust Paradox,” The Yale Law Journal 126, no. 3 (January 2017), https://www.yalelawjournal.org/note/amazons-antitrust-paradox.

[28] Ibid.

[29] Brad Stone, The Secrets of Bezos: How Amazon Became the Everything Store, BLOOMBERG (Oct. 10, 2013, 5:57 AM), http://www.bloomberg.com/news/articles/2013-10-10/jeff-bezos-and-the-age-of-amazon-excerpt-from-the-everything-store-by-brad-stone

[30] Lina M. Khan, “Amazon’s Antitrust Paradox,” The Yale Law Journal 126, no. 3 (January 2017), https://www.yalelawjournal.org/note/amazons-antitrust-paradox.

[31] Stephanie Clifford & Claire Cain Miller, Wal-Mart Says ‘Try This On’: Free Shipping, N.Y. Times (Nov. 11, 2010), http://www.nytimes.com/2010/11/11/business/11shipping.html

[32] Lina M. Khan, “Amazon’s Antitrust Paradox,” The Yale Law Journal 126, no. 3 (January 2017), https://www.yalelawjournal.org/note/amazons-antitrust-paradox.

[33] Investopedia, “What Are the Legal Barriers to Vertical Integration?,” Investopedia, accessed December 20, 2020, https://www.investopedia.com/ask/answers/012615/what-are-legal-barriers-vertical-integration.asp.

[34] Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary, “Investigation of Competition in Digital Markets,” 2020.

[35] Lina M. Khan, “Amazon’s Antitrust Paradox,” The Yale Law Journal 126, no. 3 (January 2017), https://www.yalelawjournal.org/note/amazons-antitrust-paradox.

[36] Angus Loten & Adam Janofsky, Sellers Need Amazon, but at What Cost?, Wall St. J. (Jan. 14, 2015, 6:30 PM), http://www.wsj.com/articles/sellers-need-amazon-but-at-what -cost-1421278220

[37] Greg Bensinger, Competing with Amazon on Amazon, Wall St. J. (June 27, 2012, 6:15 PM), http://www.wsj.com/articles/SB10001424052702304441404577482902055882264

[38] Lina M. Khan, “Amazon’s Antitrust Paradox,” The Yale Law Journal 126, no. 3 (January 2017), https://www.yalelawjournal.org/note/amazons-antitrust-paradox.

[39] Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary, “Investigation of Competition in Digital Markets,” 2020.

[40] Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary, “Investigation of Competition in Digital Markets,” 2020.

[41] Ibid.

[42] Ibid.

[43] Ibid.

[44] Lina M. Khan, “Amazon’s Antitrust Paradox,” The Yale Law Journal 126, no. 3 (January 2017), https://www.yalelawjournal.org/note/amazons-antitrust-paradox.

[45] Ibid.

[46] Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary, “Investigation of Competition in Digital Markets,” 2020.

[47] Ibid.

Marvin Cheung, Head of Research and Strategy, Board Member, Unbuilt Labs