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Taking Stock of Phase One of the FTC’s Case Against Amazon

Taking Stock of Phase One of the FTC’s Case Against Amazon

From the moment Lina Khan was sworn in as chair of the Federal Trade Commission, it was a foregone conclusion that the FTC would bring an antitrust case against Amazon. After all, she came to the FTC having written what her compatriots in the Neo-Brandeisian movement regard as the definitive treatise on Amazon’s monopolistic practices. Now, as the dust settles on phase one of the case that has indeed come to pass, there is an opportunity to reflect on the substantive details of the FTC’s claim against Amazon as we look forward to the rebuttal the company will likely file sometime before December 8th.

The FTC’s complaint alleges Amazon has engaged in anticompetitive practices to maintain supposed monopoly positions in two markets: the online superstore market and the online marketplace services market. The complaint charges that Amazon artificially inflated rivals’ prices to prevent price competition, as well as forced sellers to use its fulfillment services—all to maintain its purported monopoly power. The FTC has targeted these and another practice as standalone violations of Section 5 of the FTC Act.

Having now issued the less redacted version of the FTC’s complaint—which became available last week—the most striking allegations from a legal and policy perspective remain focused on Amazon’s monopoly power in the online superstore market; its pricing practices, including Project Nessie; and its logistics services called Fulfillment by Amazon (FBA). In response to these allegations, Amazon defended its practices while rebutting the complaint’s market definition in a recently published article on its website.

ITIF held an expert panel discussion recently to pick through these issues. The panelists included Kathleen Bradish, Acting President of the American Antitrust Institute; Herbert Hovenkamp, James G. Dinan University Professor at the University of Pennsylvania Carey Law School; Steven Salop, Professor Emeritus at Georgetown University Law Center; and Bilal Sayyed, Senior Competition Counsel at Tech Freedom. Joe Coniglio, Director of Antitrust & Innovation Policy at ITIF served as a moderator.

The panel began by discussing the challenges with the FTC’s online superstore market definition. Starting off, Hovenkamp explained that grouping products together is typically only allowed in cases where products are more or less the same, which is clearly not the case here. He continued that an exception to this rule is when individual products can be “clustered” together, but courts have generally rejected this approach in the case of retail, where products can be obtained separately. Sayyed added that the FTC’s definition could prove to be too narrow, as it does not include offline retail or online direct-to-consumer alternatives in the market—despite that they may ultimately be found to significantly constrain pricing.

By contrast, for Salop, the FTC’s online superstore market may stand a chance in court if Amazon’s behavior is analyzed as evidence of harm on both sides of the market. Bradish added that for both the online superstore and online marketplace markets—the latter of which Hovenkamp argues has a better chance in court—Amazon’s scale from network effects could be difficult to replicate and may thus help to solidify its market position.

The panelists next addressed Amazon’s alleged anti-discounting practices, which Bradish remarked can be understood as a de facto most favored nation (MFN) policy acting as a form of price control that hurts both sellers, who face higher fees, as well as rivals, who face a dampened ability to compete because sellers won’t be able to offer discounts on their platforms. Salop continued that Amazon appears to impose its policies using algorithms to discover lower prices from other platforms and then force merchants to equalize prices, withdraw its product, or face consequences from Amazon.

Hovenkamp maintained that MFN claims typically only work on a product-specific basis and that market shares need to be high for anticompetitive harm to result. However, not only are Amazon’s market shares for the products it sells relatively low (except potentially for eBooks), but no court has found a policy like Amazon’s to be anti-competitive. The panel also identified how Amazon’s alleged anti-discounting practices benefit consumers. As Bradish made clear, Amazon’s conduct can be beneficial by discouraging customers from free-riding on a platform or service’s investments, which lowers the incentives for Amazon to invest in quality and service.

Turning to Amazon’s fulfillment services (FBA), Salop suggested that the FTC’s theory fell within the bounds of conventional exclusionary conduct analysis. He explained that while not a contractual tie, Amazon’s practices seem to amount to a de facto requirement to use FBA for merchants who want to qualify for Prime eligibility and the Buy Box, as both services attract large numbers of customers. To gain power over price, Amazon uses FBA requirements to raise the costs of merchants which, in turn, forces them to raise the prices they charge on rival platforms in light of what he also characterized as the de facto MFN—buttressing Amazon’s position.

Amazon can also offer pro-competitive justifications for its fulfillment practices. As Sayyed explained, Amazon needs to maintain its strong reputation for quality, specifically that the products it offers will be delivered quickly and safely to the customer. And the best way to maintain this trusted status is for Amazon to offer its own fulfillment services and incentivize third-party sellers to use that service. As a result, for Sayyed, Amazon has reason to prevent merchants from potentially free-riding off its brand and then looking for alternative cheaper prices or lower quality services, which hurts Amazon’s image with consumers.

The panelists also discussed the FTC’s standalone Section 5 claims. First, Sayyed highlighted that the FTC brought the case to the district court rather than its administrative system, which he explained would give the courts and not the FTC the first chance to articulate why Section 5 should apply here, even if their monopolization claims fail. Second, Hovenkamp mused that the FTC will face a heavier burden proving a Section 5 violation compared to, for example, a Section 1 violation. Indeed, he suggested that Amazon’s practices appeared to be carried out by means of licensing agreements or other contracts that, as a result, could have potentially allowed the FTC to bring its case under Section 1 of the Sherman Act, which has a reduced market power requirement.

The panel concluded with a broader discussion of the implications of the case for the neo-Brandeisian movement. Sayyed critiqued that the size and scope of the case will limit its efficacy and ability to serve as a model for pushing the neo-Brandeisian agenda forward. Bradish took a different view and indicated that the FTC’s complaint contained a lot of material that could support its Section 5 claims, especially for a judge with a mind to avoid extensive private actions. Salop emphasized that the FTC’s case is well within the modern framework for exclusionary conduct as opposed to a neo-Brandeisian case which, for Hovenkamp, the FTC would not have been able to win.

For now, all we can do is wait for the next phase of the case to commence. How Amazon answers the FTC’s argument about its pricing practices, logistics program, and monopoly power will be key—not just for Amazon, but for the next phase of U.S. antitrust law and enforcement.

Watch the event recording.

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