Higher Prices on Amazon? Another Example of the “Brussels Effect”

Aurelien Portuese September 3, 2021
September 3, 2021

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Looking for lower prices online? They may soon be harder to find. Blame it on the “Brussels effect”—the creeping influence of European-style regulation in the U.S. economy. 

Washington, D.C. Attorney General Karl Racine provided an example of the Brussels effect in action when he sued Amazon this year for preventing third-party sellers from offering their products at lower prices on other platforms. Racine argues that Amazon’s policy—known as a “most favored nation” (MFN) clause—raises prices for consumers and stifles innovation and choice in online retail. Pressing his case in the court of public opinion, he noted during a CNBC interview that he had taken queues on the issue from German and British regulators who have “raised questions” about MFN clauses in the past and have successfully pressured Amazon to stop using them in Europe. 

It happens that Racine is wrong to suggest that Europe prohibits MFN clauses. In fact, a German court recently allowed MFN clauses for the Dutch hotel reservation platform Booking.com. But the bigger issue is that Racine is also wrong on the very premise of his suit against Amazon. As the German court noted in the Booking.com case, MFN clauses increase price competition rather than decrease it. MFN clauses also incentivize platforms to invest in new innovations. Without them, consumers could free-ride by using one e-commerce platform to find products they want and then go buy them on the brand’s website, thereby removing the platform’s incentive to improve. 

It also happens that Racine’s suit contradicts the new Chair of the Federal Trade Commission, Lina Khan, who made her reputation by accusing Amazon of charging consumers “predatory prices”—i.e., prices that are artificially low. Yet Racine is now suing Amazon for artificially high prices? Those accusations cannot both be true. In fact, neither is. Amazon does not charge consumers at a loss—it is sure to leave a profit margin—nor does it charge prohibitive prices. Otherwise, consumers would shop somewhere else.

Even though AG Racine was wrong about Europe’s antitrust approach, a bigger question is why U.S. lawmakers like Racine seem so eager to follow Europe’s bad example. Following Europe’s techlash on antitrust will harm U.S. consumers by undermining innovation.

The growing influence of Europe’s regulatory approach—which Columbia law professor Anu Bradford has dubbed “the Brussels effect”—was on full display in April when the U.S. House Judiciary Committee approved a report on big tech companies, co-authored by Lina Khan, that proposed moving away from traditional U.S. antitrust laws, which conducts enforcement action against firms only when they cause harm to consumers, to embrace the European notion of “abuse of dominant position,” which also conducts enforcement when firms harm competitors. Since then, New York’s state senate has passed an antitrust bill that explicitly enshrines that notion into law. 

These are moments that surely make the architects of Europe’s ongoing techlash against U.S. digital companies proud. In recent years, they have taken steps to fine big tech companies, regulate how they compete, and target them with specially tailored taxes

Indeed, Europe heavily regulates all sorts of technological innovations—from data to algorithms and digital competition. The EU’s sprawling data privacy policy—the General Regulation Data Protection (GDPR)—is three years old, and according to its main author, it has abridged fundamental rights and led to “compliance costs explosion.” Now, with its proposed Digital Markets Act, the EU once again singles out American companies for punishment when regulating digital competition. 

These actions are partly rooted in European lawmakers’ desire to weaken the growing influence of American companies and boost the European tech sector. But the techlash has stifled innovation and hurt consumers. For instance, because Europe sanctioned Google’s Android operating system, the company decided to charge Europeans for using it. 

Where Europe has shown its determination to distinguish itself with regulation, America should continue distinguishing itself through innovation. To date, it has had its innovative companies to thank for its competitiveness; policymakers should handle that legacy with care.

Europe’s creeping influence on U.S. antitrust policy will prove to be detrimental to American innovation and consumers if it is allowed to progress further because it will penalize companies for doing the very things that make them successful innovators. For instance, they would be hindered in providing innovative products and services under European-style prohibitions on “leveraging” one’s market power to enter adjacent markets. That wouldn’t just deprive consumers of the benefits of additional innovation; it would also produce less vigorous competition, which would depress their purchasing power. 

As Democrats have introduced five antitrust bills, Congress should keep the “Brussels effect” at bay. The European techlash against Amazon and other companies has mostly materialized under the GDPR provisions, as a recent fine in Europe against Amazon illustrates. However, the European techlash on antitrust may undermine the dynamism of digital markets and will harm both consumers and innovation. Consequently, that U.S. lawmakers should not replicate this European techlash when regulating digital competition.