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FTC faces big test in Amazon suit alleging its retail site is illegal monopoly

The Federal Trade Commission (FTC) and 17 state attorneys general sued Amazon Tuesday, alleging that its dominant online retail store Amazon.com is illegally monopolizing two markets.

The case represents a big test for FTC chair Lina Khan, who has made taking on Big Tech the cornerstone of her tenure. At the same time, the antitrust regulator faces a big hurdle to making its case, by putting forward a novel approach to gauging harm to competitors in its complaint.

The suit alleges that Amazon holds monopolies in online markets for buyers and sellers. According to the FTC, Amazon is violating US antitrust law by degrading consumer choice and blocking sellers from selling goods at lower prices elsewhere online.

“Our complaint lays out how Amazon has used a set of punitive and coercive tactics to unlawfully maintain its monopolies,” FTC Chair Lina Khan said in a statement.

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“The complaint sets forth detailed allegations noting how Amazon is now exploiting its monopoly power to enrich itself while raising prices and degrading service for the tens of millions of American families who shop on its platform and the hundreds of thousands of businesses that rely on Amazon to reach them.”

The FTC claims that Amazon uses anti-discounting measures that hurt sellers and keep other online retailers from offering prices lower than Amazon's. It also says that Amazon's requirement that sellers use its fulfillment service to be able to access its Prime service makes it more expensive for sellers to offer their products on other platforms.

The commission further claims that Amazon replaces organic search results on its marketplace with paid ads that frustrate consumers, and that the company biases its own products in search.

The suit calls for a permanent injunction against Amazon to keep the company from "engaging in its unlawful conduct and pry loose Amazon's monopolistic control to restore competition."

Amazon, however, refuted those claims.

"The practices the FTC is challenging have helped to spur competition and innovation across the retail industry, and have produced greater selection, lower prices, and faster delivery speeds for Amazon customers and greater opportunity for the many businesses that sell in Amazon’s store," David Zapolsky, Amazon senior vice president of global public policy and general counsel, said in a statement.

"If the FTC gets its way, the result would be fewer products to choose from, higher prices, slower deliveries for consumers, and reduced options for small businesses — the opposite of what antitrust law is designed to do.”

Cases in hand

The latest Amazon antitrust case adds to the several that Khan, 34, is juggling against tech giants. In one case against Facebook-owning Meta, the agency under Khan tried unsuccessfully to block Meta's acquisition of virtual reality fitness company Within.

The FTC is also trying to force the social media juggernaut to split apart its social media platforms Facebook, Instagram, and its messaging service WhatsApp. That case was filed before Khan took over as chair.

Another target: Microsoft (MSFT). In July, Khan dropped a challenge to prevent the Windows maker from completing its acquisition of "Call of Duty" developer Activision Blizzard (ATVI), after a federal court blocked the commission’s request for an injunction to pause the deal.

During a July hearing before the House Judiciary Committee, some Republicans pounced on Khan’s failures, calling her a "bully" and arguing that her leadership of the agency had been a "disaster."

The Amazon litigation also marks the latest legal maneuver in a multi-government crackdown against various markets dominated by Big Tech.

Agencies overseen by both the Biden administration and the Trump administration, along with dozens of US states, have filed antitrust lawsuits alleging that Meta (META), Google (GOOG, GOOGL), and Microsoft (MSFT) are wielding their market power to illegally stomp out competition.

One of those cases against Google went to trial this month over government claims that Google is illegally paying companies like Apple, Samsung, Mozilla, and Verizon to secure its search engine as a default.

The companies are also under new pressure to open up their platforms to competition in Europe. Earlier this month, the European Union's antitrust regulator targeted Amazon, along with Google parent Alphabet, Apple, Meta, Microsoft, and ByteDance, as "gatekeepers" subject to new competition rules under the Digital Markets Act.

Amazon has previously come under fire in the EU over concerns that it used non-public data about third-party sellers to develop its own competing consumer products. The company has since agreed to change its business practices.

This is also not the first US case against Amazon's business practices.

The FTC alleged in a separate lawsuit filed in June that the company duped consumers into signing up for its Amazon Prime subscription and slowed their attempts to cancel. Prime subscriptions currently cost members $139 per year, or $14.99 per month, in exchange for free shipping and other services.

Amazon generated $134 billion in sales during its most recent quarter. Its dozens of companies span industries from Amazon.com to cloud computing, electronics, publishing, entertainment, payment processing, grocery retail, package delivery, and online pharmaceuticals.

'Amazon's antitrust paradox'

Khan has been thinking about Amazon for some time. She initially rose to prominence after publishing a 2017 article in the Yale Law Journal titled "Amazon's Antitrust Paradox."

The article argued that modern antitrust laws weren't equipped to tackle the tech industry's anticompetitive behavior because they were too focused on pricing as a means of determining consumer harms.

Federal Trade Commission (FTC) Chair Lina Khan testifies before a House Judiciary Committee hearing on
FTC Chair Lina Khan testifies before a House committee in July. (Kevin Wurm/REUTERS) (Kevin Wurm / reuters)

Shades of Khan’s thesis run through the FTC’s novel antitrust complaint.

The commission argues that although Amazon’s comparatively competitive prices benefit consumers, writ large, its seller policies harm small business owners by favoring businesses that hire Amazon's in-house services including advertising and sellers fees. In turn, the FTC’s theory goes, that harms consumers by forcing them to pay higher prices.

These arguments echo lawsuits filed by the state of California and Washington, D.C., which argued that Amazon’s pressure on third-party sellers to sell on Amazon.com at the lowest price anywhere forced the sellers to hike prices outside of the platform.

California Attorney General Rob Bonta claimed that Amazon's practice artificially inflated prices on rival retail websites — such as Walmart.com (WMT), Target.com (TGT), and eBay.com (EBAY).

Amazon has denied those claims, saying sellers set their own prices and that Amazon made no effort to prevent them from offering lower prices elsewhere.

The case filed by Washington, D.C., was thrown out by a judge last year, and the California case is ongoing.

Bonta's suit is distinct from other antitrust cases focused on Amazon's seller terms because it alleges violations under California law, rather than federal law. It also narrows the so-called relevant market, and focuses on the company's alleged punishment of seller behavior.

The FTC's hurdle in its new suit is to overcome the price-centric tests that underpin antitrust law, and to overcome the defense theory that low prices promote, rather than block, competition.

“This is a common misconception,” Boston University economics professor Florian Ederer told Yahoo Finance. “It sounds like it would be pro-competitive, but it is actually anti-competitive.”

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