paint-brush
Lina Khan-Led FTC and 17 U.S. States Sue Amazon Over Alleged Monopoly Tactics by@linakhantakesamazon

Lina Khan-Led FTC and 17 U.S. States Sue Amazon Over Alleged Monopoly Tactics

tldt arrow

Too Long; Didn't Read

The FTC and 17 states, including New York and Connecticut, are jointly filing a lawsuit against Amazon.com, Inc. The suit alleges that Amazon's monopolistic practices have restricted competition in online retail and harmed both customers and businesses. The case focuses on Amazon's anti-discounting tactics, coercive order fulfillment requirements, and other strategies that stifle competition and maintain its dominance. The plaintiffs seek to dismantle Amazon's monopoly power and restore a competitive marketplace.
featured image - Lina Khan-Led FTC and 17 U.S. States Sue Amazon Over Alleged Monopoly Tactics
Lina Khan (Finally) Sues Amazon HackerNoon profile picture

FTC v. Amazon Court Filing, retrieved on Sep 26, 2023, is part of HackerNoon’s Legal PDF Series. You can jump to any part in this filing here. This is part 1 of 80.

NATURE OF THE CASE

Plaintiffs Federal Trade Commission ("FTC") and the states of New York, Connecticut, Pennsylvania, Delaware, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Oregon, Rhode Island, and Wisconsin, by and through their respective Attorneys General (together, the "State Plaintiffs," and collectively with the FTC, "Plaintiffs"), petition this Court pursuant to Section 13(b) of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. § 53(b); 15 U.S.C. § 26; and applicable state laws for equitable relief against Defendant Amazon.com, Inc. ("Amazon") to undo and prevent its unfair methods of competition in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a); Section 2 of the She1man Act, 15 U.S.C. § 2; and state competition and consumer protection laws.


  1. The early days of online trade were bursting with possibility. Competition flourished. A newly connected nation saw a wide-open frontier where anyone with a good idea would have a fair shot at success.


  2. Today, however, this wide-open frontier has been enclosed. A single company, Amazon, has seized control over much of the online retail economy.


  1. Amazon is a monopolist. It exploits its monopolies in ways that enrich Amazon but harm its customers: both the tens of millions of American households who regularly shop on Amazon's online superstore and the hundreds of thousands of businesses who rely on Amazon to reach them.


  1. For example, Amazon has hiked so steeply the fees it charges sellers that it now reportedly takes close to half of every dollar from the typical seller that uses Amazon's fulfillment service. Amazon recognizes that sellers find "that it has become more difficult over time to be profitable on Amazon" due to Amazon's (redacted) But as one seller explains, "we have nowhere else to go and Amazon knows it." Amazon has also (redacted) through a (redacted) operation called "Project Nessie." (redacted) Amazon's Project Nessie has already (redacted) from American households.


  1. In addition to overcharging its customers, Amazon is degrading the services it (redacted) provides them. Amazon’s online storefront once prioritized relevant, organic search results. (Redacted) Amazon shifted gears so that it now litters its storefront with pay-to-play advertisements. Amazon executives internally acknowledge this creates (redacted) by making it (redacted). This practices, too, harms both sellers and shoppers alike. Most sellers must now pay for advertising to reach Amazon’s massive base of online shoppers, while shoppers consequently face less relevant search results and are steered toward more expensive products. Notably, Amazon has increase not only the number of advertisements it shows, but also (redacted) because Amazon can extract billions of dollars through increased advertising despite worsening its service for customers.


  1. In a competitive world, Amazon's decision to raise prices and degrade services would create an opening for rivals and potential rivals to attract business, gain momentum, and grow. But Amazon has engaged in an unlawful monopolistic strategy to close off that possibility.


  1. This case is about illegal course of exclusionary conduct Amazon deploys to block competition, stunt rivals’ growth, and cement its dominance. The elements of this strategy are mutually reinforcing. Amazon uses a set of anti-discounting tactics to prevent rivals from growing by offering lower prices, and it uses coercive tactics involving its order fulfillment service to prevent rivals from gaining the scale they need to meaningfully compete. Amazon deploys this interconnected strategy to block off every major of competition-including price, product selection, quality, and innovation- in the relevant markets for online superstores and online marketplace services.


  1. Amazon’s course of conduct has unlawfully entrenched its monopoly position in both relevant markets. According to an industry source, Amazon now captures more sales than the next fifteen largest U>S. online retail firms combined. Yet Amazon has violated the law not by being big, but by how it uses its scale and scope to stifle competition.


  1. A critical mass of customers is key to powering what Amazon calls its “flywheel.” By providing sellers access to significant shopper traffic, Amazon is able to attract more sellers onto its platform. Those sellers’ selection and variety of products, in turn, attract additional shoppers. More shoppers yield more customer-generated product ratings, reviews, and valuable consumer data for Amazon to use. All of this enables Amazon to benefit from the accelerated growth and momentum that network effects and scale economies can fuel.


10. The biggest threat to Amazon’s monopoly power would be for a rival to attract its own critical mass of dedicated customers. Competitors able to build a sizable base of either shoppers or sellers could spin up their own “flywheels,” overcome barriers to entry and expansion, and achieve the scale needed to compete effectively in the relevant markets. As Mr. Bezos once wrote, “[o]nline selling (relative to traditional retailing) is a scale business characterized by high fixed costs and relatively low variable costs. This makes it difficult to be a medium-sized e-commerce company,” and it is “difficult . . . for single-category e-commerce companies to achieve the scale necessary to succeed.” In order to “build an important and lasting company . . . online in e-commerce,” Mr. Bezos explained, “you have to have a scale business,” because “[t]his kind of business isn’t going to work in small volumes.”


11. Having gained its own critical mass of both shoppers and sellers, Amazon set out to deny both current and would-be rivals the ability to do the same.


12. Amazon uses its vast power, size, and control over multiple business units to implement an interrelated and exclusionary course of conduct. Each element of this overarching strategy aims at the same goal: to keep rivals from gaining the scale needed to compete effectively against Amazon. And each element amplifies the force of the rest, in a self-reinforcing cycle of dominance and harm.


13. One set of tactics stifles the ability of rivals to attract shoppers by offering lower prices. Amazon deploys a sophisticated surveillance network of web crawlers that constantly monitor the internet, searching for discounts that might threaten Amazon’s empire. When Amazon detects elsewhere online a product that is cheaper than a seller’s offer for the same product on Amazon, Amazon punishes that seller. It does so to prevent rivals from gaining business by offering shoppers or sellers lower prices.


14. Originally, Amazon imposed explicit contractual requirements barring all sellers from offering their goods for lower prices anywhere else. After European regulators began investigating, Amazon got rid of these requirements in Europe. After a U.S. senator called for antitrust scrutiny, Amazon did the same in the United States in 2019.


15. Amazon recognized that dropping an explicit contractual requirement while continuing to use other anti-discounting tactics would appear “not only trivial but a trick and an attempt to garner goodwill with policymakers amid increasing competition concerns.”


16. But Amazon has done just that. It continues to use—and add—other anti-discounting tactics to discipline sellers who offer lower-priced goods elsewhere. The sanctions Amazon levies on sellers vary. For example, Amazon knocks these sellers out of the all-important “Buy Box,” the display from which a shopper can “Add to Cart” or “Buy Now” an Amazon-selected offer for a product. Nearly (redacted)% of Amazon sales are made through the Buy Box and, as Amazon internally recognizes, eliminating a seller from the Buy Box causes that seller’s sales to “tank.“ another form of punishment is to bury discounting sellers so far down in Amazon’s search results that they become effectively invisible. Still another is (redacted). For especially important sellers. Amazon keeps in place a targeted version of the contractual requirement it supposedly stopped using in 2019. If caught offering lower prices elsewhere online, these sellers face the ultimate threat: not just banishment from the Buy Box, but total exile from Amazon's Marketplace. As Amazon internally admits, these tactics have a (redacted) and many sellers "live in constant fear" of them.


  1. Moreover, Amazon's one-two punch of seller punishments and high seller fees often forces sellers to use their inflated Amazon prices as a price floor everywhere else. As a result, Amazon's conduct causes online shoppers to face artificially higher prices even when shopping somewhere other than Amazon. Amazon's punitive regime distorts basic market signals: one of the ways sellers respond to Amazon's fee hikes is by increasing their own prices off Amazon. An executive from another online retailer sums up this perverse dynamic: Amazon's anti-discounting conduct (redacted) Amazon's illegal tactics mean that when Amazon raises its fees, others-competitors, sellers, and shoppers- suffer the harms.


18. Amazon's tactics suppress rival online superstores' ability to compete for shoppers by offering lower prices, thereby depriving American households of more affordable options. Amazon's conduct also suppresses rival online marketplace service providers' ability to compete for sellers by offering lower fees because sellers cannot pass along those savings to shoppers in the form of lower product prices.


19. These various anti-discounting tactics constrain sellers operating on Amazon's third-party business unit, through which sellers set their own product prices. But Amazon also operates an enormous first-patty aim, which accounted for 40% of its overall unit sales in the second quarter of 2023, as shown in Figure 1. Using its direct control over these prices, Amazon created another anti-discounting tool to weaponize its first-party arm in its campaign against competition.


Figure 1. Source: Amazon Q2 2023 Earnings Call.


  1. Amazon has implemented an algorithm for the express purpose of deterring other online stores from offering lower prices. (Redacted). Rather than trying to compete, Amazon uses (redacted) Ultimately, this conduct is meant to deterrivals from attempting to compete on price altogether-competition that could bring lower prices to tens of millions of American households. As a result of this conduct, Amazon predicted, "prices will go up." (redacted) Amazon's prediction has borne out and the algorithm has worked just as (redacted) envisioned: suppressing price competition by disciplining rival retailers who dare to discount.


  1. Amazon's various anti-discounting tactics upend the normal give-and-take process of competition. Even rivals that offer lower-cost marketplace services struggle to attract sellers and watch as sellers hike prices on their storefronts due to fear of Amazon's penalties. Many sellers raise their prices off Amazon to avoid punishment. Others never try discounting in the first place; fear of retribution by Amazon drives them to preemptively set higher prices everywhere. Still others simply stop---or never start-selling anywhere other than Amazon to avoid any possibility of Amazon's sanctions.


  1. By taming price cutters into price followers, Amazon freezes price competition and deprives American shoppers of lower prices.


  2. Alongside these anti-discounting tactics, Amazon also goes a step further and (redacted) Amazon created a (redacted) algorithm internally codenamed “Project Nessie“ (redacted) Amazon has deemed Project Nessie (redacted): it has generated more than (redacted) in excess profit for Amazon. (Redacted)


  1. Amazon deploys yet another tactic as pair of its monopolistic course of conduct. Amazon conditions sellers' ability to be "Prime eligible" on their use of Amazon's order fulfillment service. As with Amazon's anti-discounting tactics, this coercive conduct forecloses Amazon's rivals from drawing a critical mass of sellers or shoppers-thereby depriving them of the scale needed to compete effectively online.


  1. Amazon makes Prime eligibility critical for sellers to fully reach Amazon's enormous base of shoppers. In 2021, more than (redacted)% of all units sold on Amazon in the United States were Prime eligible.


  1. Prime eligibility is critical for sellers in part because of the enormous reach of Amazon's Prime subscription program. According to public reports, Mr. Bezos told Amazon executives that Prime was created in 2005 to "draw a moat around [Amazon's] best customers." Prime now blankets more than (redacted)% of all U.S. households, with its reach extending as far as (redacted)% in some zip codes.


  2. Amazon requires sellers who want their products to be Prime eligible to use Amazon's fulfillment service, Fulfillment by Amazon ("FBA"), even though many sellers would rather use an alternative fulfillment method to store and package customer orders.


  3. Many sellers would also prefer to "multihome," simultaneously offering their goods across multiple online sales channels. Multihoming can be an especially critical mechanism of competition in online markets, enabling rivals to overcome the barriers to entry and expansion that scale economies and network effects can create. Multihoming is one way that sellers can reduce their dependence on a single sales channel.


  4. Sellers could multihome more cheaply and easily by using an independent fulfillment provider- a provider not tied to any one marketplace-to fulfill orders across multiple marketplaces. Permitting independent fulfillment providers to compete for any order-on or off Amazon- would enable them to gain scale and lower their costs to sellers. That, in tum, would make independent providers even more attractive to sellers seeking a single, universal provider. All of this would make it easier for sellers to offer items across a variety of outlets, fostering competition and reducing sellers' dependence on Amazon.


  5. But by coercively conditioning access to an enormous base of shoppers on sellers' use of FBA, Amazon forecloses that world.


  6. Amazon caught a glimpse of this alternative universe when it temporarily relaxed its coercive conduct. As Amazon recognized, this decision was immediately popular with both shoppers and sellers. But internally, (redacted) that would threaten Amazon's monopoly power. An Amazon executive explained (redacted)


  7. To combat this competitive threat, Amazon resumed its coercive fulfillment conduct: today, virtually all sellers must use Amazon's proprietary FBA service to fully reach Amazon's eno1mous base of U.S. shoppers


  1. Each element of Amazon's monopolistic strategy works to keep its rivals and potential rivals from growing, gaining momentum, and achieving the scale necessary to meaningfully compete against Amazon. The cumulative impact of Amazon's unlawful conduct is greater than the harm caused by any particular element. Each aspect of Amazon's strategy amplifies the exclusionary effects of the others, further insulating Amazon from meaningful competition and further widening the gulf between Amazon and everyone else.


  1. Together, this self-reinforcing course of conduct blocks every important avenue of competition. With its monopoly power cemented, Amazon is now extracting monopoly profits without denting- and instead while growing-its monopoly power. Amazon has consistently hiked the prices it charges sellers, as shown in Figure 2.


(This is Redacted) - Figure 2. Source: Amazon Internal Documents.


  1. Amazon's price hikes in the form of pay-to-play advertisements have been enormously lucrative, leading its revenues from U.S. ad sales to skyrocket from (redacted) in 2015 to (redacted) in 2021. Amazon took in (redacted) in revenue from U.S. Marketplace seller fees in 2021 alone. Strikingly, these seller fees now account for over (redacted)% of Amazon’s total profits. Sellers pay. Shoppers get lower-quality search results for higher-priced products. Only Amazon wins.


  1. In a market free from anticompetitive restraints, Amazon's choice to exploit its monopoly power would create openings for rivals to enter, grow, and meaningfully compete. Rival online marketplaces could draw sellers by offering them lower fees or better terms, and sellers could pass along those lower costs to American shoppers in the form of lower prices. Rival online superstores, meanwhile, could draw shoppers by offering better prices, greater selection, or a superior shopping experience. But Amazon's illegal course of conduct shields Amazon from the competitive checks it would face in a free enterprise system.


  1. Amazon's illegal monopolistic strategy is paying off for Amazon, but at great cost to tens of millions of American households and hm1dreds of thousands of sellers.


  1. Left unchecked, Amazon will continue its illegal course of conduct to maintain its monopoly power. That conduct will include-but will not necessarily be limited to- the schemes it uses today. As Mr. Bezos has said, "on matters of vision we are stubborn and relentless," but"[o]n the details, we at Amazon are always flexible."


  1. Plaintiffs bring this lawsuit despite Amazon's extensive efforts to impede the government's investigation and hide information about its internal operations. Amazon executives systematically and intentionally (redacted) of the Signal messaging app. Amazon prejudicially (redacted) despite Plaintiffs' instructing Amazon not to do so.


  1. Plaintiffs now ask this Court to put an end to Amazon's illegal course of conduct, pry loose Amazon's monopolistic control, deny Amazon the fruits of its unlawful practices, and restore the lost promise of competition.



Continue Reading Here.


About HackerNoon Legal PDF Series: We bring you the most important technical and insightful public domain court case filings.


This court case 2:23-cv-01495 retrieved on October 2, 2023, from ftc.gov is part of the public domain. The court-created documents are works of the federal government, and under copyright law, are automatically placed in the public domain and may be shared without legal restriction.