(Bloomberg) -- In a letter sent to federal lawmakers, an online merchant has accused Amazon.com Inc. of forcing him and other sellers to use the company’s expensive logistics services, which in turn forces them to raise prices for consumers.
The 62-page document, reviewed by Bloomberg, lays out an antitrust case that emphasizes harm to consumers—the traditional basis for such cases in the U.S. Until now, antitrust experts have suggested that Amazon was not vulnerable to such an argument and that regulators would need to find another way to restrain the company’s growing market power.
The complaint, based on an analysis of thousands of Amazon transactions over several years involving more than 100 products, turns all of that thinking on its head. It accuses Amazon of “tying” its marketplace and logistics services together, an antitrust violation in which a company uses dominance in one market to give itself an advantage in another market where it’s less established. The letter refers to previous Supreme Court rulings on tying, including one against Kodak in 1992 that said the photocopier manufacturer violated antitrust laws by forcing customers who bought its machines to also use its parts and repair services.
“When it comes to Amazon’s dealings with third-party merchants, some of the conduct actually does lend itself to antitrust scrutiny,” said Hal Singer, an antitrust expert and Georgetown University adjunct professor retained by the merchant to work on the analysis. “If you can connect the conduct to some measureable harm, in this case increased prices, that gets you into the antitrust ballpark.”Amazon, in an emailed statement, disputed many of the merchants’ allegations, saying its logistics prices are competitive and its sellers aren’t penalized for using other delivery options. “Amazon has invested tens of billions of dollars in developing a world-class fulfillment network and we offer that network to sellers at highly competitive fees when compared to other options available to sellers. In fact, our research shows other comparable options available to sellers are approximately 50-80% more expensive” than Amazon services, the company said.The accusations are potentially a significant development in various government inquiries into Amazon’s business practices. The House Judiciary Committee’s antitrust panel hosted a hearing in July during which chairman David Cicilline, a Rhode Island Democrat, grilled an Amazon attorney about its practices. As part of that investigation, the committee sent surveys to customers of big tech platforms, asking about the state of competition in digital markets and the adequacy of existing enforcement.The merchant, who received that survey, says he can’t pursue an antitrust case himself because he agreed to binding arbitration when he began selling products on Amazon. But he hopes the Federal Trade Commission, which is already interviewing merchants, will investigate or that a logistics company will file suit, alleging it is losing business due to Amazon's practices. The merchant, who said he has paid Amazon tens of millions of dollars in fees in recent years, requested anonymity out of fear of losing business.A spokesman for the House Judiciary’s antitrust committee declined to comment.
The merchant’s letter says Amazon raised logistics fees by 20% over the past four years until they cost as much as 35% more than competing services. The merchant claims Amazon pushed him to continue using its logistics or risk being suspended from selling on its platform or seeing his products marginalized on the site. He says using Amazon’s service forced him to boost prices by as much as 12% on more than 100 products he’s been selling on Amazon for years.
The allegations directly challenge Amazon’s own testimony that search algorithms determining which products are most prominently displayed are designed to best serve customers, not favor Amazon. The merchant alleges he could offer the same products on Amazon at lower prices and with faster, more reliable delivery if he could handle logistics himself without being penalized for late deliveries. Merchants using Amazon’s logistics services don’t face penalties for delivery mishaps, which is why many choose to use it even when better options are available, the letter states.Amazon operates an online marketplace, essentially a digital mall where merchants can sell products. Its website attracts 210 million unique visitors each month in the U.S., mostly shoppers looking for products, making it extremely valuable for anyone looking to sell things online. More than half of all goods sold on Amazon come from independent merchants who pay Amazon a commission on each sale. Amazon controls more than 70% of all online marketplace sales in the U.S., more than triple its closest online marketplace competitor EBay Inc., according to Digital Commerce 360.How regulators define Amazon’s market is a key step in any antitrust investigation. Amazon maintains it should be considered in the broadest possible terms, a retailer that attracts about 4 percent of spending in the U.S. The allegations propose narrowly defining Amazon as the dominant online marketplace with few competitors, which makes its merchant customers more susceptible to its demands.The letter alleges Amazon uses its marketplace to push its logistics services called Fulfillment by Amazon. Merchants ship their products to Amazon warehouses around the country and pay the online giant fees for storage, packing and delivery. Amazon has been expanding its logistics operations to handle everything from storing products to shipping them to customers’ homes. Its online store where U.S. shoppers will spend $221 billion this year, according to EMarketer Inc., gives it a big platform from which to build its logistics business. If Amazon can use its marketplace might to build up its logistics business, it wins an advantage over rival services offered by UPS, FedEx and smaller logistics providers.Amazon, in its emailed statement, said “Fulfillment by Amazon is a service that our sellers love—they tell us FBA saves them time, money and the hassle of packing and shipping boxes so they can instead focus on growing their business, creating new products, and even spending more time with their families. They tell us they choose FBA because it gives them peace of mind knowing that shipping logistics and customer service are taken care of 24/7, year-round.”
The merchant’s complaint is by no means a sure thing. Tying services and products together alone isn’t illegal. For more than a century, disputes involving railroads, hospitals and big technology companies like Microsoft have asked the courts to determine when tying should be deemed anticompetitive, and it’s a subject frequently debated by legal scholars. The merchant’s complaint points to a 1984 Supreme Court ruling that laid out standards for illegal tying, later used in the Kodak case, which the merchant’s letter says pertains to Amazon.“The essential characteristic of an invalid tying arrangement lies in the seller’s exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms,” the 1984 Supreme Court ruling states.
The letter alleges that Amazon uses “carrots and sticks” to coerce merchants to buy its logistics services. Amazon’s control of the marketplace lets it determine which products are most visible on the site. Those using Fulfillment by Amazon are more likely to have their items appear prominently in search results to win sales. Merchants can sell products on Amazon and handle logistics themselves, but many opt to use Fulfillment by Amazon to increase their visibility on the site, a key factor in selling products.Amazon denied its search results favored items it delivers, but said products offered by merchants using its logistics services tend to be more prominent in results. It said that’s not because the search algorithm is biased toward Amazon, but because Amazon logistics “generally provides a better and more reliable experience for our customers than fulfillment through other means,” Amazon general counsel David Zapolsky said in a July letter to the House antitrust panel.
The merchant’s letter disputes Amazon’s testimony. Of more than 120,000 Amazon orders handled by Fulfillment by Amazon from Aug. 25 to Oct. 25, fewer than 25% arrived within two days; more than half arrived in about three days and more than 15% arrived in four days, according to the merchant’s analysis. Despite the slow delivery times, Amazon’s logistics fees were 35% higher than other rapid shipping options offered by UPS and the U.S. Postal Service, according to the merchant.The sticks Amazon uses to coerce merchants to use its logistics services are strict penalties, including getting kicked off the platform, for merchants who handle their own logistics. Merchants using Amazon logistics services aren’t penalized when customer orders arrive late, even though they frequently do, since that’s Amazon’s responsibility. Those who handle their own logistics face stiff penalties for even minor delivery mishaps, including being suspended from selling on the platform, according to the merchant.Merchants decide to use Amazon’s logistics, even when more affordable options are available, because it protects them from being kicked off the platform when deliveries are late.“The most intimidating stick in Amazon’s arsenal is the ability to suspend or threaten to suspend sellers,” that don’t use Amazon logistics, the complaint states.
--With assistance from Ben Brody.
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