A new antitrust case shows that Prime inflates prices across the board, using the false promise of ‘free shipping’ that is anything but free.
Last week, the Washington, D.C. Attorney General Karl Racine filed an antitrust suit against Amazon. The point of the suit is simple, but not stated explicitly – to unravel Amazon Prime, which at this point has at least 126 million members, roughly the same number of households in America (128.5 million).
I’ve read a bunch of the coverage, but no one has hit that point yet. So that’s what I’m going to write about today.
“Happily and Deeply Intertwined”
It’s a fascinating moment in the political fight over big tech. On the one hand, the four dominant tech firms have never been more powerful or profitable. On the other hand, there is increasingly a consensus that our political leaders have to do *something* about their power. As a result, Google and Facebook are facing government litigation, and Apple has been fighting off legislative attempts to rein in app stores. Nothing has yet breached the castle walls of any of these firms, but we’re getting closer all the time.
This week, it was Amazon’s turn. On Wednesday, Washington, D.C. Attorney General Karl Racine alleged that Amazon was using its power to manipulate online retail prices. But there is something a bit different about this case than the ones targeting Google and Facebook. As Shira Ovide put it in the New York Times, Racine is making the claim that Amazon isn’t just crushing competitors, but *raising* consumer prices in the process.
It’s a longstanding claim by some of the independent merchants who sell on Amazon’s digital mall that the company punishes them if they list their products for less on their own websites or other shopping sites like Walmart.com. Those sellers are effectively saying that Amazon dictates what happens on shopping sites all over the internet, and in doing so makes products more expensive for all of us.
The reason this case is considered important is because higher consumer prices fit within the orbit of the consensus for antitrust. While there are possible problems with the case, Racine isn’t going outside the orthodoxy of modern antitrust the way enforcers are with the Facebook case. Against Facebook, enforcers are trying to claim that Facebook is engaged in more surveillance than consumers would otherwise prefer, and that this choice is akin to a price hike. That’s true, but it’s a somewhat novel antitrust claim. In this case, Racine is saying Amazon raised consumer prices using monopoly power. This case is not pushing the boundaries of antitrust law, it’s straightforward consumer harm.
That said, I think there’s another important aspect of this case that has gone largely unmentioned, which is that the Amazon Prime program, the keystone that holds Amazon’s dominance over retail together, is effectively being subsidized by the scheme Racine laid out. If you get rid of Amazon’s ability to force sellers to keep their prices high, then Prime, and its promise of free shipping, falls apart, as does much of the Amazon Marketplace business model. Other parts of Prime, such as Amazon’s ventures in Hollywood (like its recently announced purchase of MGM), may also not make sense if Racine wins.
To understand why, we have to start with the idea of free shipping. Free shipping is the God of online retail, so powerful that France actually banned the practice to protect its retail outlets. Free shipping is also the backbone of Prime. Amazon founder Jeff Bezos knew that the number one pain point for online buyers is shipping – one third of shoppers abandon their carts when they see shipping charges. Bezos helped invent Prime for this reason, saying the point of Prime was to use free shipping “to draw a moat around our best customers.” The goal was to get people used to buying from Amazon, knowing they wouldn’t have to worry about shipping charges. Once Amazon had control of a large chunk of online retail customers, it could then begin dictating terms of sellers who needed to reach them.
This became clear as you read Racine’s complaint. One of the most important sentences in the AG’s argument is a quote from Bezos in 2015 where he alludes to this point. In discussing the firm’s logistics service that is the bedrock of its free shipping promise, Fulfillment by Amazon (FBA), he said, “FBA is so important because it is glue that inextricably links Marketplace and Prime. Thanks to FBA, Marketplace and Prime are no longer two things. Their economics . . . are now happily and deeply intertwined.” Amazon wants people to see Prime, FBA, and Marketplace as one integrated mega-product, what Bezos likes to call ‘a flywheel,’ to disguise the actual monopolization at work. (Indeed, any time you hear the word ‘flywheel’ relating to Amazon, replace it with ‘monopoly’ and the sentence will make sense.)
Why would FBA be the glue here between Prime and Marketplace? Shipping and logistics is extremely expensive, far more than the membership fees charged by Prime; Amazon spent $37.9 billion on shipping costs in 2019, and much more in 2020. No matter how amazing your logistics operation, you can’t just offer free shipping to customers without having someone pay for it. Amazon found its solution in the relationship between Prime and Marketplace. It forced third party sellers to de facto pay for its shipping costs, by charging them commissions that reach as high as 45%, according to Racine, merely to access Amazon customers. That’s nearly half the revenue of a seller going to Amazon! And this high fee isn’t just because fulfillment or selling online is expensive; Walmart charges significantly less for its fulfillment services and access charges to its online market, and eBay’s market access fees are also much lower than Amazon’s.