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Don’t Bite the Hand That Feeds You: Amazon’s Self-Preferencing Paradox

Don’t Bite the Hand That Feeds You: Amazon’s Self-Preferencing Paradox

May 2, 2022

Don’t bite the hand that feeds you. This idiom conveys the idea that it is unwise to do harm to those on which you depend lest they withdraw their support. Contrary to a popular narrative, the hand feeding Amazon right now is not Amazon Web Services (AWS), Amazon’s cloud computing division. Rather, it is Amazon’s thriving third-party seller ecosystem. Third-party sales now compromise nearly 60 percent of sales on Amazon—up from just three percent when Amazon Marketplace launched in 2000.

Amazon earns revenue from third-party sales directly through commissions but also indirectly through the provision of fulfillment and shipping services and through advertising. In 2014, the revenue Amazon earned from third-party sellers was less than 20 percent of the revenue Amazon earned from first-party sales (i.e., vendor and private label sales). Last year, the revenue Amazon collected from third-party sellers, excluding advertising, was nearly 50 percent of Amazon’s first-party revenue. Between 2019 and 2021, revenue from third-party sellers, excluding advertising, nearly doubled while the rate of growth of first-party revenue was just under 60 percent.

The explosive growth of Amazon’s third-party seller ecosystem has caught the attention of Amazon critics. The Institute for Local Self Reliance argues that Amazon is “exploiting its position as a gatekeeper to impose increasingly steep tolls” on third-party sellers and claims the share of third-party sales Amazon keeps as revenue for itself has increased from 19 percent in 2014 to 34 percent today. The House Judiciary Committee report on competition in digital markets notes that “Amazon’s treatment of [third-party] sellers indicates that it sees them as a source of profit, rather than partners.” In December 2021, District of Columbia Attorney General Karl A. Racine testified before the U.S. Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth arguing that Amazon seeks to “maximize profits at the expense of consumers, third-party sellers, and wholesalers.” However, the lawsuit launched by AG Racine based on this claim has recently been rejected by the DC Superior Court Judge Hiram Puig-Lugo.

The Progressives’ argument against Amazon’s self-preferencing suffers from a major contradiction: They accuse Amazon of generating profit out of the services the platform provides to third-party sellers and, at the same time, criticize Amazon for discriminating against third-party sellers by preferencing its first-party products on its website. According to Open Markets Institute, “Amazon is picking the winners and losers of commerce—and the winner is Amazon.” The Institute for Local Self Reliance likens Amazon to a Roman Emperor and the third-party seller ecosystem as “a Roman arena, where, like gladiators, [third-party sellers] are subject to the arbitrary whims of a self-serving Emperor.”

The contradiction here is obvious. If third-party sellers are such an important source of revenue, as Amazon’s own accounting data and Amazon critics suggest, why would Amazon risk this lucrative revenue stream by preferencing its own products over those of third-party sellers? As a rational, profit-maximizing firm, the answer is they wouldn’t. If Amazon’s offers are not a good match for a consumer’s search or are not a good value, consumers can and will look elsewhere. Despite claims to the contrary, Amazon has e-commerce competitors, and those competitors are growing. Take Walmart as an example. In the three years prior to the pandemic, the average quarterly growth rate for Walmart’s e-commerce business was over 40 percent. At current e-commerce growth rates, Walmart will overtake Amazon in just four years. If Amazon does not show consumers products they want to buy, it risks losing them to competitors like Walmart.

And sellers have choices too. If Amazon limits the ability of third-party sellers to grow by not surfacing their products to consumers, they will look for growth opportunities elsewhere. While Walmart’s third-party seller marketplace is still quite small, nearly 40 percent of Amazon sellers are considering selling on Walmart. Sellers can also bypass platforms and sell directly to consumers through companies like Shopify which saw the number of merchants using its services increase by 64 percent between 2019 and 2020.

And yet, Congress is currently considering a bill that brings forward the Progressives’ contradiction. The American Innovation and Choice Online Act (AICOA), which was voted out of the Senate Judiciary Committee in January, would prohibit firms like Amazon, because of their size and industry in which they operate, from “favoring their own products or services, disadvantaging rivals or discriminating among businesses that use their platforms.” The AICOA ignores Amazon’s own interest in preserving the vitality of its third-party seller ecosystem. Amazon would not risk this important revenue source just to sell another pack of Amazon Basics batteries. Amazon knows well enough not to bite the hand that feeds it. (AICOA also ignores the fact that most large retailers, including grocery stores and pharmacies, have and favor their own products).

The AICOA is not needed “to ensure small businesses and entrepreneurs still have the opportunity to succeed in the digital marketplace.” Amazon’s third-party sellers are thriving. The AICOA will only harm consumers, reduce innovation, and limit economic growth. Senators should refrain from bringing the AICOA up for a vote.

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