Amazon sued for inflating prices across the internet

Amazon's latest nationwide advertising campaign emphasizes its "low prices." The ads are extremely simple. "That's a low price!" various people say while browsing on a phone. The tagline is "Spend Less. Smile More." 

A new lawsuit filed on Tuesday by DC Attorney General Karl Racine, however, argues that the opposite is true. The lawsuit alleges Amazon uses monopolistic practices to artificially inflate prices for products — even those offered for sale on other websites. 

Far from enabling consumers to obtain the best products at the lowest prices, Amazon instead causes prices across the entire online retail sales market to be artificially inflated, both for products sold on Amazon’s online retail sales platform and on its competitors’ online retail sales platforms.

How does this work? Many of the products offered for sale on Amazon are sold by third-party sellers (TPSs). Until 2019, TPSs were required to agree to "a clause that explicitly prohibited TPSs from offering their products on a competing online retail sales platform, including the TPS’s own website, at a lower price or on better terms than the TPS offered the products on Amazon." 

The problem with requiring TPSs to offer their lowest price on Amazon is that the company charges TPSs significant fees to sell on Amazon. Some of the fees are charged to any company that sells on Amazon; some are charged in exchange for warehousing, fulfillment, and shipping. Using Amazon's "optional" services is the easiest way to become "Prime Eligible" and be featured on the service. Overall, these fees can amount to up to 40% of the purchase price. 

Why do TPSs pay up? Amazon controls 50% to 70% of the online retailing market. According to the lawsuit, Amazon is abusing its market power by forcing TPSs to pay inflated fees and then incorporate those fees into the price it charges for the product anywhere online. This not only inflates prices for consumers but undermines competition by making it virtually impossible for other online retailers to undercut Amazon on price. 

In 2013, these practices were investigated by competition regulators in the UK and Germany. Amazon then withdrew its policy in Europe but left it in place in the United States and other countries. In December 2018, Senator Richard Blumenthal (R-CT) sent a letter to Amazon raising concerns that the "price parity provisions in Amazon's contracts with third-party sellers could stifle market competition and artificially inflate prices on consumer goods."

In March 2019, Amazon dropped the "price parity" policy in the United States but replaced it with a new "fair pricing policy." Under the new policy, Amazon can "impose sanctions on a TPS that offers a product for a lower price or on better terms on a competing online retail sales platform." Amazon will demote listings on products that are offered for less on other websites, decimating sales. Other sanctions include "freezing TPSs’ inventory, placing holds on TPSs’ accounts and payments from Amazon sales, and suspending or revoking the TPSs’ accounts entirely."

Amazon aggressively enforces its "fair pricing" policy by "software and employees to monitor publicly available information about products offered by TPSs on other online retail platforms." The lawsuit describes this new policy as "an effectively-identical substitute" to the old policy. 

The DC lawsuit asks for an injunction preventing Amazon from continuing anti-competitive practices, civil penalties, and actual damages to consumers that paid inflated prices.  

Amazon's response

In response to the lawsuit, Amazon released the following statement:

The DC attorney general has it exactly backwards – sellers set their own prices for the products they offer in our store. Amazon takes pride in the fact that we offer low prices across the broadest selection, and like any store we reserve the right not to highlight offers to customers that are not priced competitively. The relief the AG seeks would force Amazon to feature higher prices to customers, oddly going against core objectives of antitrust law.

But Amazon's statement appears to obscure the issue. The lawsuit does not seek to force Amazon to "highlight offers to customers that are not priced competitively." Rather, it seeks to force Amazon to stop punishing companies that offer their products for lower prices on other online platforms. 

As a ProPublica investigation revealed, Amazon does not always feature the seller with the lowest price. Rather, Amazon routinely advantages sellers that use all of Amazon's fulfillment services.

Amazon's European problem

Amazon is also facing legal issues abroad. In November, "the European Commission reached the preliminary view that Amazon breached EU competition rules." 

The Commission found that Amazon was engaging in anti-competitive practices by "systematically relying on non-public business data of independent sellers who sell on its marketplace, to the benefit of Amazon's own retail business, which directly competes with those third party sellers." That data "allows Amazon to focus its offers in the best-selling products across product categories and to adjust its offers in view of non-public data of competing sellers." As a result, the Commission found, Amazon is able to "avoid the normal risks of retail competition."

In Congressional testimony, Amazon officials have claimed "that when it makes and sells its own products, it doesn’t use information it collects from the site’s individual third-party sellers—data those sellers view as proprietary." But "interviews with more than 20 former employees of Amazon’s private-label business and documents reviewed by The Wall Street Journal reveal that employees did just that." Amazon reportedly uses the data to gain insight on "how to price an item, which features to copy or whether to enter a product segment based on its earning potential." 

In response, Amazon CEO Jeff Bezos "promised an investigation and told Congress that he was 'not satisfied that we have gotten to the bottom of it.'" About half of TPSs face competition from Amazon brands, according to a survey. 

The European Commission also opened a new inquiry into "the possible preferential treatment of Amazon's own retail offers and those of marketplace sellers that use Amazon's logistics and delivery services."