We all knew Amazon’s antitrust suit was coming. The writing’s on the wall for Big Tech in general, and Amazon isn’t exactly known for playing nice.
It was just a question of when the suit would be filed, who would file it, and what exactly the suit would argue.
So let’s unpack those items…
When It Was Filed: This past Tuesday, May 25.
Who Filed It: Karl Racine, the attorney general (AG) for Washington, D.C.
What It Argues: Basically, that Amazon is inflating prices across the market by preventing Amazon’s third-party sellers from competing on price elsewhere in the market.
If this sounds weird or whiny, bear with us—and remember that Amazon’s big enough to bend a lot of conventional wisdom, especially in online retail where they have overwhelming market share.
The majority of Amazon’s retail sales come from third-party sellers, i.e. people who sell stuff through the Amazon platform. Those sellers are bound by what’s called a most-favored-nation (MFN) clause, which means that a seller cannot offer their products for a lower price on any other platform. You’re allowed to sell products elsewhere, but the most-favored retailer always has to offer the best price. Even your own website can’t offer a better price.
You can probably see the tradeoffs of agreements like these…
The seller gives up a bit of pricing flexibility or profit margin in exchange for expanded sales opportunities (more exposure with a big seller).
The retailer gives the seller (or their goods) greater exposure with the assurance that they’ll have the best price for closing sales and earning their middleman’s cut.
Both parties give something up, both parties gain something, and it’s all for the benefit of the consumer.
Once there’s a dominant player, however, these sorts of MFN clauses stop being strategic win-win agreements and start becoming vicious feedback loops. Not necessarily because the language or terms change, but because gravity has a way of multiplying imbalances once they present themselves.
If the biggest platform has 10% of market share and you don’t like their MFN clause, you can probably take your business elsewhere and that’s healthy competition. But if the biggest platform has 40% market share, you might not have much choice but to sell there; the MFN is just part of the deal, and now you’re a little stuck (and bleeding margins).
By its nature, this problem is hard for consumers to observe; we can only observe Amazon’s prices while we’re on Amazon. In other words, Amazon’s prices tell us nothing about the prices we might find elsewhere on the web—nor, much less, how the “competitive free-market price” of something might have been lower without Amazon’s distortion of the market.