The court considering the Federal Trade Commission’s (FTC’s) antitrust lawsuit against Amazon scheduled an economics hearing for March 7, providing an opportunity for us to better understand the FTC’s economic thinking. A quick recap of our commentary on the case may help provide some context ahead of the hearing:
- The FTC’s market definition is arbitrary. From last year’s piece, Temu Complicates the FTC’s Antitrust Case Against Amazon:
In order to succeed with an antitrust claim of monopolization, plaintiffs must generally convince a court to accept their proposed market definition. The rest of the case hangs on this determination because it is typically impossible to find a defendant liable for monopolization without also finding that it has enough power to raise prices or restrict output without fear of competitive pressure in the given antitrust market. Accordingly, plaintiffs generally propose a relatively narrow market (thus decreasing the number of supposed competitors to the defendant) in order to win, but sometimes, their recommendation flies in the face of obvious facts and circumstances. In this instance, leaving Temu and others like it out of the definition of its proposed “online superstore” market appears to be contrary to the evidence. Even though Temu’s and Amazon’s offerings differ, and sellers often use both, they clearly compete aggressively with one another for sellers. As the WSJ article describes, ‘Temu has been splurging on advertising and is trying to scout popular Amazon brands.’ Similarly, Temu has begun featuring products from local warehouses to compete directly with Amazon’s fast-shipping commitment, while Amazon is eyeing a new storefront dedicated to bargain-priced items, an area where Temu thrives.
- Failure to consider remedies along with liability deprives us of FTC’s vision (or lack thereof) for the marketplace. As we argued in Begging the Question Again: What’s a Better Alternative than the Online Marketplace Model?:
However, the FTC’s lawsuit declines to identify a course of conduct or restructuring that would, in their view, be preferable to Amazon’s current structure and practices. This is an important factor in the lawsuit, because the allegations of anticompetitive conduct zero in on the core aspects of the marketplace model, including those that benefit the smallest companies doing business on those marketplaces. Thus, the entire premise of the lawsuit begs the question, “What conduct would be less anticompetitive than the current conduct, which demonstrably benefits competition and consumers?”
Whether liability and remedies are considered separately may seem trivial. However, the FTC wouldn’t be asking the court to separate them if it didn’t see a potential advantage. The legal standard for bifurcation requires courts to consider the extent to which legal questions overlap with questions about evidence. For example, in a simpler case where the legal question is whether an individual’s negligence caused an accident, the question of how much money that person should pay the aggrieved party is sometimes easily distinguishable from whether the defendant is negligent. In such a case, it may help alleviate potential confusion to first analyze whether the defendant was negligent and, second, debate how much money should be paid to make the plaintiff whole. This is not the case with the FTC v. Amazon. Inextricable from the question of whether a) featuring lower prices and b) committing to fast and reliable shipping is anticompetitive is what alternative would be better for consumers.
- Small businesses disproportionately suffer from outlawing Amazon’s business model. From our 2023 Issue Brief: Why App Developers Care about FTC v. Amazon:
The arithmetic is simple in this case. The natural, smaller number of high-value marketplaces on which to sell—where sellers know consumers want to shop—benefits smaller sellers more than larger sellers. While there are valid concerns with concentration in any market, at least some degree of natural concentration in the market for marketplaces—that is, online app stores or retail marketplaces—tends to benefit the smallest sellers. For sellers, having at least a couple options is essential, especially where those marketplaces have meaningful differentiation. However, their prospects begin to dwindle rapidly when they must bargain with several different marketplaces to reach the same number of high-propensity consumers they could previously reach on one marketplace or a handful of them. An artificially high number of marketplaces where consumers would not want to shop—if not for government intervention—adds costs that are disproportionately borne by smaller, younger companies. This is true whether you are a small company selling candles or a small company that makes augmented reality apps for smartphones. Both kinds of companies need to sell where consumers are, and the more transaction costs and friction the government adds with lawsuits like these, the worse off smaller companies are across industries.
- The FTC didn’t bring much probative evidence to the table to back up its claims. As we noted in Deceptive Advertising? The FTC Has Trouble Backing Up Its Claims:
Second, the FTC provided no evidence at all to plausibly support the claim that providing FBA for Prime sellers—and asking them to meet a two-day shipping window—harms competition and consumers. If the FTC described the policy accurately in its complaint, it might have to acknowledge that even though a two-day guarantee is tough to meet, the fact that FBA can is a good thing for Prime members. Viewed in a more accurate light, it is not hard to see why the FTC was unable to uncover any evidence of FBA’s and the Prime policies’ anticompetitive effects. It also illustrates how challenging the practice in court amounts to not much more than trying to prohibit something that brings consumers to the marketplace. It shouldn’t need to be said, but the introduction of a new product or service that is measurably better than those offered by rivals is procompetitive. So, the fact that not many fulfillment services are able to meet the two-day guarantee as well as FBA is also not inherently a competition concern.
- The FTC abandoned consumer welfare in its claims against Amazon, benefitting foreign adversaries in the process. As we summarized in our January 31 piece, More Than a Leg: The True Costs of Chair Khan’s White Whale Hunt:
If [curated online marketplace] management is illegal, there are some hints as to what kind of online marketplace would receive the FTC’s golden stamp of approval. The most vivid illustration materialized just last week when reports emerged that the FTC had relied on interviews with Pinduoduo-owned Temu to build its pricing claim against Amazon. Temu’s complaint to the FTC was that Amazon would not allow it to raise its prices on Amazon and still benefit from being featured. If Amazon let sellers get away with doing this, consumers would quickly get wise to the scam and look elsewhere. This would make Amazon a less attractive place to do business, especially for small businesses that want assurance that their distribution channels provide access to high-propensity consumers. But the real problem is the FTC’s lawsuit, by favoring Temu and seeking to restrict the marketplace management practices Amazon uses, sends the clear message that Temu’s model is legal—while Amazon’s model is illegal.
Whatever the economics hearing brings to light, the legal infirmities of the lawsuit cannot be ignored. Stay tuned for more insights on this case as the next steps unfold.