As Amazon investigation advances, novel theories anticipated

A complaint against Amazon could be based on novel legal theories and resemble the Facebook case in its breadth, as the Federal Trade Commission looks at whether Amazon’s market dominance is limiting rivals’ ability to compete.

Given that Lina Khan oversees the FTC and wrote a seminal paper titled “Amazon’s Antitrust Paradox,” delving into her past work during the House Judiciary Antitrust Subcommittee investigation offers leads for the focus of an inquiry. The full committee on July 19 issued its 450-page bipartisan report on the state of competition in the digital economy after seven congressional hearings examined the dominance of Amazon, Apple, Facebook and Google.

The report included newly released internal Amazon documents that the panel said demonstrate how Amazon “abuses its dominance over e-commerce to coerce third-party sellers to purchase other services from Amazon, such as fulfillment and distribution.”

In 2020, the Antitrust Subcommittee issued its minority report after culling through 24,299 documents, including internal emails among Amazon’s senior executives, memoranda and presentations. The “Investigation of Competition in Digital Markets” raised issues about predatory pricing, third-party seller data, patterns of illegal maintenance of monopoly power, and Amazon’s dominance over warehouses and logistics.

Now the FTC’s Democratic majority paves the way for a complaint against Amazon that may be bold and potentially based on a new or novel theory of law or harm. If it follows the House Judiciary Committee’s blueprint, it will assert every plausible theory of harm under antitrust law even those unlikely to survive in court. The complaint is likely to be as wide-ranging as the Facebook case that caused the social media giant to employ a handful of prestigious law firms for defense.

Khan and Jonathan Kanter, her counterpart at the Justice Department, repeatedly have said the threat of failure in court isn’t a reason to avoid proceeding with antitrust cases. “I think we also need to consider the cost of not acting,” Khan said in December 2021.

So far, the resource-strapped FTC hasn’t adopted novel theories of harm as an add-on harm or mentioned them in deals that were settled, despite saying they could emerge.

In March, Amazon said it closed its acquisition of MGM movie studio when the FTC’s review of the deal expired without a challenge.

“The FTC does not comment on any particular matters. However, we reiterate that the Commission does not approve transactions and may challenge a deal at any time if it determines that it violates the law,” the agency said in a March statement.

FTC staff, speaking about potential new theories of harm, have said those theories could emerge in cases involving mergers that lead to lower wages for workers. They also said novel theories could apply to conglomerate effects; excessive aggregation of data; exclusionary practices such as predatory bundling; monopsony; cross-market effects; and the impact of investment firms on incentives to compete.

A novel theory, for example, would assert that killer acquisitions are all part of a pattern of illegal maintenance of monopoly power.

A wide-ranging complaint would be a departure from most of the FTC’s complaints during Khan’s tenure. Up to now, the FTC has mostly targeted horizontal mergers alleging they would lead to more concentration and less competition, and vertical deals that create competition concerns such as through data sharing and the loss of innovation.

The FTC could further rely on more traditional theories but stretch them. Impacts on third-party sellers are traditional antitrust turf. Going beyond a strict consumer welfare standard would be new territory.

Predatory pricing

Thomas DiLorenzo, an economics professor at Loyola University Maryland, calls predatory pricing “the Rodney Dangerfield of economic theory,” a disfavored theory under current law. Predatory pricing is setting prices low in a way that is harmful to competition.

Predatory pricing using illegal maintenance of monopoly power would be a novel theory.

If the FTC follows the subcommittee’s investigatory trail, it is expected to espouse such a new interpretation of predatory pricing. The congressional investigation gave the FTC its conclusion:

“Amazon has adopted a predatory-pricing strategy across multiple business lines at various stages in the company’s history,” the subcommittee report said.

Amazon’s internal documents showed “Diapers.com ‘keep[s] the pressure on pricing on us’ and provided extremely high customer service levels, which — prior to the merger — had forced Amazon to up its game. Amazon executives took swift and predatory action in response to this competitive threat,” the subcommittee’s report said. Diapers.com went out of business.

In November, the FTC told Amazon and other retailers to provide data “to help study causes of empty shelves and sky-high prices” in a statement on supply chain disruptions.

“Amazon has also imposed barriers to entry for other voice-enabled device manufacturers through predatory pricing of Alexa-enabled devices, and through its dominance as a leading distribution channel for smart home devices,” the full committee’s report said.

Last year, Karl Racine, attorney general for the District of Columbia, sued Amazon alleging it encourages higher-than-necessary consumer prices through policies that guarantee the online retailer a minimum profit on each item sold, while discouraging merchants from offering their products at lower prices elsewhere.

European investigations

The FTC is likely to piggyback on the focus of European investigations. If so, it would study how Amazon collects and uses third-party seller data and whether that gives Amazon an unfair advantage in relation to business decisions made by its retail arm. UK officials are looking at how Amazon sets criteria for allocating suppliers to be the preferred choice in the “Buy Box” displayed on Amazon’s product pages. Another area of concern is how Amazon sets eligibility criteria for selling under its Prime Label.

A former Amazon third-party seller, Jason Boyce, explained to the Antitrust Subcommittee “that Amazon uses ‘Buy Box Suppression,’ where Amazon will remove a seller’s ability to win the Buy Box, as a way to penalize sellers that offer products at a lower price on competing sites.”

Boyce, CEO of Avenue7Media, told the panel “Amazon prohibiting sellers from offering lower prices on other online retail platforms clearly hurts consumers if the only way for sellers to regain their listing on Amazon is to raise their prices on other platforms or remove their listings all together, therefore limiting competition.”

On his company’s website, Boyce says “Most sellers don’t just fail to grow on Amazon; they leave demoralized and hurting.”

The UK’s Competition and Markets Authority is investigating Amazon over claims that its practices affecting sellers are anticompetitive and could result in a worse deal for customers. A European Commission probe examines similar concerns.

The Wall Street Journal reported July 15 that Amazon discussed reducing the number of items it sells under its own brands. But voluntary remedies discussed so far have proved unsatisfying to the FTC.

Monopsony

Whether the FTC scrutinizes Amazon in connection with warehouse or logistics markets in an antitrust case or a standalone case is also in question, if the FTC uses the congressional investigation as a guide. Monopsony is a market structure in which a single buyer controls the market as the primary purchaser of goods and services offered by many would-be sellers.

A July 2020 letter from the International Brotherhood of Teamsters, Communication Workers of America, United Food & Commercial Workers International Union and Change to Win said if seller reports are true, “Amazon’s hold over sellers effectively took food from the shelves of neighborhood grocery stores … and moved it to Amazon’s own warehouses, where it earned fees for Amazon.”

Earlier, the unions pointed to research in Mercer County, New Jersey; Lexington County, South Carolina; and Chesterfield County, Virginia, saying the opening of Amazon warehouses resulted in steep declines in wages for warehouse workers. In Mercer County, Amazon opened a warehouse in June 2014 that employs about 3,500 workers, or about half of all the county’s warehouse workers. A $51,478 average annual salary for warehouse work in Mercer in 2013 fell to $37,546 in 2018, the unions’ research showed.

“Amazon represents a clear and present danger to American workers and our economy. Every day, we are witnessing a company that is engaging in brutal practices,” said Marc Perrone, UFCW International president, in a statement.

Subcommittee staff heard concerns that Amazon used its power as a large buyer to pressure suppliers into prioritizing Amazon over other retail customers such as independent grocers. The National Grocers Association’s interview with the subcommittee in May 2020 raised “concerns that Amazon and some Big Box retailers may have used their buyer power over suppliers during the pandemic to secure inventory at the expense of smaller businesses.”

Amazon settlement

Amazon already has tangled with the FTC. It settled allegations in 2021 of using misleading earnings claims to solicit consumers to deliver packages on its Amazon Flex platform. After offering drivers between $18 and $25 per hour and 100 percent of tips, Amazon pocketed roughly $60 million in tips from more than 140,000 drivers, the FTC alleged. Amazon agreed to turn over the full amount of withheld tips.

Amazon didn’t immediately respond to a request for comment for this story.