Scale, Reputation and Other Key Barriers to Entry Protecting Amazon's Monopoly by@linakhantakesamazon
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Scale, Reputation and Other Key Barriers to Entry Protecting Amazon's Monopoly

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Amazon's stronghold in the online superstore market is fortified by substantial barriers to entry. These include the imperative of scale, bolstered by network effects, user-generated reviews, and access to valuable shopper data. Reputational barriers form as online superstores build trust and loyalty among their customers over time. Additionally, shoppers face significant switching costs, given the personalization and routine they develop while shopping with a particular superstore. Amazon's involvement in illegal practices exacerbates these barriers, making it exceedingly costly and complex for potential rivals to enter and compete in the online superstore market.
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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 18 of 80.

3. Amazon's dominant position in the online superstore market is protected by significant barriers to entry

176. Significant barriers limit entry into the online superstore market including scale economies and network effects, reputational barriers, and shopper switching costs. Feedback loops between online superstores and the online marketplace services market also contribute to a unique barrier to entry, as discussed in Part V.C, below.

177. Scale is a critical factor for success in the online superstore market. Amazon itself has touted its scale as a key differentiator from medium-sized or single-category online stores. Mr. Bezos wrote that "[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 “difficult . . . for single-category e-commerce companies to achieve the scale necessary to succeed.” According to Mr. Bezos, “build[ing] an important and lasting company . . . in e-commerce” simply “isn’t going to work in small volumes.” Economies of scale are a barrier to entry in this market that new firms must overcome in order to enter and compete.

178. The online superstore market is also characterized by network effects, where the value of the service increases as more people use it. Network effects are not intrinsically harmful, but they can present barriers to entry and to competition, reinforcing market power and insulating incumbents.

179. One aspect of the importance of scale and related network effects in the online superstore market stems from user-generated reviews. For example, as Amazon’s shopper base has grown, so too has the number of product ratings and reviews available on its store, a feedback loop that further draws in new shoppers by enabling them to quickly learn more about unfamiliar products or sellers. In other words, by leaving helpful ratings and reviews, Amazon’s shoppers themselves provide immense value to future Amazon shoppers. Amazon benefits from this self-reinforcing dynamic, which would be difficult and expensive for new entrants to reproduce.

180. Another source of network effects in the online superstore market is access to valuable shopper data, which allows online superstores to tailor and personalize shopping experiences. For example, Amazon records information about the items a shopper searches for, views, places in their cart, and pays for, and the mechanism the shopper uses to pay. This type of data allows an online superstore to streamline a shopping experience and target specific products to certain customers. As with other network effects, the more scale an online superstore gains, the more powerful this effect becomes. Prospective entrants would have to acquire a sufficient shopper base to obtain enough data to offer this level of personalization.

181. The online superstore market also exhibits reputational barriers to entry. Reputational barriers to entry arise when entrants need to establish trust among customers to compete meaningfully against incumbents. Because online superstores allow and encourage repeat purchasing, they are able to develop positive reputations with shoppers that a prospective entrant starting from scratch would need to cultivate.

182. Switching costs also are a barrier to entry in the online superstore market. Mr. Bezos recognized this dynamic and its implications in a speech in 1998, stating that “switching costs long-term . . . should actually be higher in the online world than in the physical world” because “[i]n the online world, businesses have the opportunity to develop very deep relationships with customers, both through accepting preferences of customers and then observing their purchase behavior over time, so that you can get that individualized knowledge of the customer and use that individualized knowledge of the customer to accelerate their discovery process.” For example, Amazon retains shoppers’ payment, shipping, and order history information. Switching to a new online superstore would require reentering payment and shipping information and forgoing the benefits of viewing past order history. Shoppers also develop routines while shopping at online superstores that can be difficult to break, particularly given the additional costs of gaining familiarity with the format, features, and policies of a different store.

183. Finally, as described in detail below in Part VI, Amazon engages in an illegal course of conduct that raises barriers to entry and competition, making it artificially and substantially more costly and time-consuming for would-be competitors to enter the online superstore market.

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