How to Combat Amazon’s Monopoly in E-commerce

Executive Summary

Amazon has a monopoly in the e-commerce market due to its market share of about 43% (Chevalier, 2021) and its ability to control the rest of the market through its competitive price rule. Amazon can uphold this monopoly power by eliminating competitors and creating a barrier to market entry. Amazon eliminates competition by engaging in predatory pricing and purchasing competitors and creates a barrier to entry through its use of consumer data. Without competition, Amazon can set prices for the market and has no incentive to innovate. To combat this issue, possible actions include breaking Amazon into smaller companies, creating price floors to prevent predatory pricing, and creating data-sharing mandates. The optimal solution would be to create price floors and a limited data-sharing mandate as these solutions, when implemented correctly, can diminish Amazon’s power while maintaining innovation and product standards.

Introduction

Competition fuels innovation. In a free market, each competitor must fight to create a cheaper, faster, more sustainable, and overall better product to win the consumer. This beautiful fight for the buyer no longer exists when one company controls the market and wins customers, not due to their product, but rather a lack of options. Instead of creating the best product, the company can focus on maintaining its dominance and making sure the customer has no alternatives. Innovation becomes disincentivized, and in the end, the customer loses. Although far from reality in most sectors, this concern is imminent in e-commerce due to the power of Amazon.

Amazon today is more than an online marketplace and has become an empire consisting of a publishing service (Amazon publishing), streaming platform (Prime Video), web service (AWS), grocery store (Whole Foods), gaming platform (Prime Gaming), fitness device creator (Halo), smart home device creator (Ring Doorbell), live stream service (Twitch), online pharmacy (Amazon Pharmacy), and so much more. Over 72% of US households are Amazon Prime members (Chevalier, 2022), roughly 74% of US consumers begin all online shopping on Amazon (Laurenthomas, 2019), and 43% of all US e-commerce is conducted through Amazon (Chevalier, 2021). With almost 500 billion dollars in revenue a year, Amazon grossed $837,330.25 a minute in its 2021 first quarter (News February 4, 2022). The size of Amazon is so immense that one in every 153 working Americans works at Amazon (Reuter, 2021).

Although Amazon uses this power to create useful products for the consumer, it is also used to take over markets and maintain its monopoly power. Politicians have recognized this abuse and have launched over 16 antitrust lawsuits against Amazon in the past year (Long, 2021). One of these cases was brought forth by Karl Racine, the attorney general of Washinton, DC, who stated that Amazon has “kept prices for goods artificially high, hampered competition, stifled innovation, and illegally tilted the playing field, all in its favor” (Morrison, 2022). Unless regulated, Amazon’s power and market control will only grow and continue to hurt consumers and competitors.

Is Amazon a Monopoly?

The first antitrust act was the Sherman Act in 1890 which was passed to ensure fair competition and equal prices. Since 1890 there have been two main styles of thought to define a monopoly: a market-based structure style which was used through 1960 and the Chicago School approach which gained prevalence in the 1970s. The market-based structure approach believes a larger number of companies are needed to have competition and that mergers inhibit competition. The Chicago School believes that market outcomes such as size and structure should be viewed to determine a monopoly, and consumer prices are the main way to access competition (Lina M. Khan, 2017).

Amazon’s company structure and market share can be analyzed through both the lens of the market-based structure and the Chicago School approach. Amazon has a very large market share and extensive vertical and horizontal integration, both of which violate the market-based approach. The Chicago Schol states that “predatory pricing, vertical integration, and tying arrangements never or almost never reduce consumer welfare” (Markham, 2022), all of which have been conducted by Amazon. Amazon has violated the definition of monopoly according to both schools of thought due to their market power, predatory pricing, and barriers to entry.

Amazon Market Power

Amazon controls all of e-commerce by controlling prices. Statista shows that in 2021 over 43% of all e-commerce in the United States was conducted by Amazon (Chevalier, 2021). Although significant, this statistic does not show the power Amazon has over the remaining 57% of the e-commerce market.

This power comes from the pricing model on the Amazon website. The Amazon buy box is the box to the right of the product which includes the “Buy Now” and “Add to Cart” buttons, displayed in the left image below. The right image shows a similar product, however, without the buy box. Without the buy box, a customer must click the “See All Buying Options” button and from there choose the same item from a list of different sellers. A product being in the buy box is incredibly powerful as over 83% of Amazon sales are buy box products (About the Author: Seamus Breslin Designer & Designer, 2022). Some sellers report a decline in sales of up to 60% when removed from the buy box (Dalpiaz, 2020).

Amazon’s competitive pricing rule states that a seller’s product is not eligible for the buy box if other platforms carry their product at a lower price. This may sound like a good system that benefits the consumer, however, it leads to inflation in all other sectors of e-commerce. Amazon charges a larger fee to sell on their site than most other sites of 6–45% of the total product price per purchase with an average cost of 15% in addition to a mandatory $39.99 a year selling plan (Aviso & Simmons, 2022). Walmart, the second-biggest e-commerce site in the US, charges 6–15% of the total product per item (Nagaraj, 2022). Because it costs more to sell a product on Amazon, sellers increase their price on Amazon so they are still able to make a profit on this site. To stay in the buy box though, sellers then need to increase the price of their products on all other websites to this higher Amazon price. Because sellers rely on being in the Amazon buy box, Amazon can increase their prices knowing that their products will always be the cheapest since sellers will adjust their products on other sites to meet Amazon’s.

Amazon Maintaining its Monopoly Power by Eliminating Competition through Predatory Pricing and Purchasing Competitors

Amazon’s profit model prioritizes “long-term market leadership considerations rather than short-term profitability” — Jeff Bezos (Bariso, 2017). In 2015 Amazon had net revenue of $107 billion, however, it only profited $496 million, meaning over $106 billion was put back into the company. This ongoing trend, which can be seen in the graph below, involves most of the revenue generated by Amazon to be reinvested into gaining market share (Roettgers, 2016).

Because of Amazon’s wealth, they can sell products at a loss to gain market share and bankrupt competitors. This act is called predatory pricing and is illegal under section 2 of the Sherman Act of 1890. The most famous example of this is Quidsi, a previous Amazon competitor. By 2010 Quidsi was making over $300 million a year in selling diapers through its site diapers.com and had plans to expand to soap.com (Laurenthomas, 2017). Amazon saw them as a competitor and Amazon executive Doug Herrington wrote to Jeff Bezos, “We have already initiated a more aggressive ‘plan to win’ against diapers.com in the diaper/baby space.” These emails were obtained by the House Judiciary Committee in the Amazon antitrust case (Timothy B. Lee, Jul 30, 2020). Shortly after, Amazon offered a new program called “Amazon Mom” which offered moms free a free Prime membership and 30% discounts if they subscribed to monthly purchases. Internal documents show Amazon losing $200 million a month from diaper products due to this deal. Quidsi sold to Amazon in 2010, and less than two years later Amazon ended these 30% diaper discounts (Laurenthomas, 2017).

Another example is in 2007 when the online shoe store Zappos was gaining popularity, Amazon created a competing shoe selling platform Endlass.com which offered consumers free overnight shipping and a $5 return on every purchase. Amazon lost $150 million on Endless and in 2009 Zappos was sold to Amazon. Two years after this sale, Amazon closed Endless.com (Rikap, 2021). Amazon also used this method to obtain a 67% market share of the ebook market by selling their books for about $9.99 a book instead of the $13 Amazon paid for them, taking a marginal loss of about $3 per book. This was done to convince readers to buy their expensive e-reader, the Kindle. Amazon book prices have since increased and those who bought the Kindle now need to pay these higher book prices as Amazon makes it extremely difficult to read books not bought on Amazon on the Kindle (Lina M . Khan, 2017).

Because of Amazon’s wealth, it can operate at a loss and consume competitors. Even though competition does arise, Amazon has the economic power to undercut its competitors or purchase them, which Amazon has a larger history of doing. Some notable purchases by Amazon are seen in the chart below.

Notable Acquisitions (Carmen Ang, 2021)

• Whole Foods Market, June 16, 2017, $13.7 billion
• Ring, February 12, 2018, $1.8 billion
• Zoox, June 26, 2020, $1.2 billion
• Zappos, July 22, 2009, $1.2 billion
• MGM Studios, May 26, 2021, $8.5 billion
• Twitch, Aug 25, 2014, $970 million
• PillPack, June 28, 2018, $839 million
• Souq, March 27, 2017, $580 million
• Quidsi, November 8, 2010, $545 million

Amazon Maintaining its Monopoly Power by Eliminating Competition With a Data Market Barrier

One of Amazon’s mission statements is “customer obsession”, with an emphasis to ​​“figure out what they [customer] want, what’s important to them” (Amazon, 2020). To do this, Amazon uses data collected about the user to predict trends and recommend products. Amazon has the most servers in the world, over 1,400,000, and over 1,000,000,000 gigabytes of user data (Miller, 2015). They collect data such as location, search history, clicks, demographics, Alexa voice recordings, Kindle recommendations, Prime video watching history, Amazon music history, and more. With this data, Amazon can help the user locate the one product they are looking for out of the over 12 million products on Amazon (retailTouch, 2020), ensure popular items are close to their consumers for fast delivery and understand when and why users come to their site.

Without this customer data, Amazon would be a much worse product. No other company has access to this data so they cannot make a product comparable to Amazon. A company needs a user base to collect data and make a strong product however it needs the data, to begin with, to attract users. This creates a large market entry barrier as no other company can make products that can compete with Amazon and this model does not allow for the creation of competitors.

Benefits of Intervention

Amazon makes incredible products and has revolutionized supply chain standards; however, the monopoly power that it holds in the e-commerce space is dangerous and harmful to consumers. Because of Amazon’s size, wealth, and market power, no company can compete with Amazon. This is because other e-commerce sites are not able to make a competitory product due to data access, and if a competitory product is made Amazon can bankrupt them through predatory pricing. Since Amazon losing its power due to competition is near impossible, this problem must be solved through governmental intervention.

Government intervention to dismantle monopolies is not unprecedented and in the past has been very beneficial. In 1956 AT&T was broken up into 8 smaller companies due to antitrust allegations (Beattie, 2021), and in 1998 Microsoft was forced to share its computing interfaces (CFI, 2022). In both of these instances after the antitrust allegations were settled, the respective markets were more competitive and the original company was not severely harmed. AT&T and Microsoft are still very powerful, influential, and profitable companies today.

Policy option 1 — Break up Amazon

One solution is to break Amazon into smaller individual companies. Amazon could be broken into multiple companies such as Amazon the platform, Amazon the seller, Amazon the book publisher, etc. Through this, Amazon would no longer be able to use its selling platform to promote its own products such as Amazon books or Amazon basics. In addition, Amazon would not be able to engage in predatory pricing because each smaller company would have significantly fewer resources. This solution is heavily enforced by many politicians including Elizabeth Warren during her 2020 presidential campaign, Senator Josh Hawley, and Bernie Sanders (Warren, 2020).

This proposal, however, has many flaws. Splitting up Amazon would make Amazon less powerful and its product would greatly suffer. Amazon can offer low prices because of its vertical integration and without this, Amazon would be forced to raise prices. A breakup would also hinder Amazon’s innovation and risk-taking ability. Since Amazon is such a large company it can afford to put tremendous resources into innovation and risky new ideas that may not become profitable. They are also able to attract strong engineering talent to create these products. A smaller company does not have these same resources. Breaking Amazon up would cause their products to worsen hurting the company and the consumer.

Lastly by the nature of tech companies, it is likely that if Amazon was broken up one of the pieces would grow significantly larger than the rest and become a monopoly again. Amazon is powerful due to its machine learning algorithm which relies on users’ data. The more users the better the algorithm and the better the product. Therefore, if one piece of Amazon were to gain slightly more users than the rest, that product would become significantly better than the rest, which would drive more users, more data, and then an even better product. This would repeat until there was one clear winner which would gain the majority of users, becoming the next Amazon. It is possible that breaking up Amazon could be a good short-term solution but the break up would greatly hurt the consumer.

Policy option 2 — Have Data Sharing mandates

One of the factors that make Amazon such a successful company is its use of data in its machine learning algorithms. Without this data, it is almost impossible for competitors to create a ‘better’ product since their algorithms cannot be as accurate without the data. If other companies had access to Amazon’s data, they could create a product as good or better than Amazon which could then attract more users.

Data sharing mandates would solve this issue by forcing Amazon to share its data with competitors. These mandates have been used before such as in the EU Data act passed on February 23 2022. This act, which among other things, “looks to make data sharing and use/reuse easier for all by setting standards at an EU-wide level” (Sam Schechner, 2022). In this act large companies such as Amazon, Google, Apple and Facebook will have to share their data with smaller competitors to create a more competitive environment. Since this act is extremely new no data has been shared yet, but it sets the stage and precedent for how this data will be shared and shows the importance of doing so (Sam Schechner, 2022).

There are many limitations to data sharing mandates though, such as user rights and privacy issues. Users may not be comfortable with their data being given to other companies, and since this data is more widely distributed, privacy breaches would be more likely. According to Business Wire, customers are already wary about Amazon using their data with 86% of users concerned about data privacy (Flynn, 2017). According to Statista, 40% of users said they distrusted Amazon with their data (Johnson, 2022). With users already worried about the data Amazon and other companies collect, it is unlikely that they would want their data given to competitors. In addition, if Amazon knew their data was being shared they would be less incentivized to collect the best data. Amazon collects data to sell more and give its product a competitive advantage. If Amazon had to spend money to innovate on data creation and then the advantage was also given to other companies for free they would be significantly less inclined to do so as they bear all of the cost with no advantage over competition, since competitors would also receive this data. New data is useful and can create a better product, so less data would prevent innovation, lead to a worse product and again, hurt the consumer.

Policy option 3 — Set minimum prices

Amazon can maintain its monopoly position by using predatory pricing to bankrupt competitors and gain market share. With minimum price mandates, Amazon would be unable to force competitors out of the market. These price floors would not make goods more expensive but would prohibit Amazon from selling goods at a loss.

Many economic principles explore how to create these price floors, one of which is the Areeda-Turner rule created in 1975 by Phillip Areeda and Donald Turner and published in the Harvard Law Review Association. This principle states that a price is considered predatory pricing if the price is less than the marginal cost (cost to produce one more unit) of the good (Phillip Areeda and Donald F. Turner, 1975). This theory has been used previously to prove predatory pricing, most famously in the Brooke Group Ltd. v. Brown & Williamson Tobacco Corp supreme court case in 1993 (U.S Reports, 1992).

One limitation to this approach is that it is hard to regulate. Since Amazon sells so many products it is difficult for officials know the price Amazon is buying each one for. In addition, companies may find loopholes in these rules which can take shape as a discount or subscriptions such as a free Prime membership. The price itself may be fair but the discounts could lower the price to the company selling at a loss. All of these cases make it very difficult for regulators to decide what counts as predatory pricing.

What do we do?

From this analysis, the best course of action would be to set minimum price mandates on goods and to enable a small data-sharing mandate. Price floors can be ignored on a day-to-day basis, however, when Amazon is competing with another company for market power, these minimum prices must be enforced so smaller companies can maintain their market share.

Price floors are not enough as new sites need to be created to compete with Amazon. Therefore, there needs to be data-sharing mandates. Instead of sharing all of their data, Amazon should be mandated to share a small amount of data. This would give smaller companies a start to make a better product before they collect their own data, and allow for Amazon to still have the advantage of the data they collect. With these solutions, competition can be created within the e-commerce market place and innovation can continue.

References

27, A. N. F., Nagaraj, A., says:, N., says:, D. H., & says:, A. N. (2022, February 27). Guide on walmart seller and Marketplace fees in 2022. SellerApp. Retrieved March 3, 2022, from https://www.sellerapp.com/blog/walmart-seller-marketplace-fees/

About the Author: Seamus Breslin+ Designer, & Designer. (2022, February 3). How to win the Amazon Buy Box in 2022 (FBA Sellers Guide). RepricerExpress. Retrieved March 3, 2022, from https://www.repricerexpress.com/win-amazon-buy-box/

Amazon’s Antitrust Paradox — Yale Law Journal. (n.d.). Retrieved March 4, 2022, from https://www.yalelawjournal.org/pdf/e.710.Khan.805_zuvfyyeh.pdf

Aviso, A., & Simmons, K.-J. (2022, February 10). Amazon seller fees: Cost of selling on Amazon in 2022. Fit Small Business. Retrieved March 3, 2022, from https://fitsmallbusiness.com/amazon-seller-fees/

Bariso, J. (2017, April 20). This original letter from Jeff Bezos to Amazon shareholders teaches some extraordinary lessons in leadership. Inc.com. Retrieved March 3, 2022, from https://www.inc.com/justin-bariso/20-years-ago-amazons-jeff-bezos-sent-an-extraordinary-letter-to-shareholders.html

Beattie, A. (2021, September 13). AT&T: One of the successful spinoffs in history. Investopedia. Retrieved March 3, 2022, from https://www.investopedia.com/ask/answers/09/att-breakup-spinoff.asp

Brooke Group Ltd. v. Brown & Williamson … — tile.loc.gov. (n.d.). Retrieved March 4, 2022, from https://tile.loc.gov/storage-services/service/ll/usrep/usrep509/usrep509209/usrep509209.pdf

Carmen Ang , Article/Editing: . (2021, May 28). Amazon’s most notable acquisitions to date. Visual Capitalist. Retrieved March 3, 2022, from https://www.visualcapitalist.com/most-notable-amazon-acquisitions/

Chevalier, S. (2021, October 13). U.S. Amazon Market Share 2021. Statista. Retrieved March 3, 2022, from https://www.statista.com/statistics/788109/amazon-retail-market-share-usa/

Chevalier, S. (2022, February 22). U.S. HHS with an Amazon prime subscription 2022. Statista. Retrieved March 3, 2022, from https://www.statista.com/statistics/861060/total-number-of-households-amazon-prime-subscription-usa/

Dalpiaz, H. W. (2020, March 31). Lost buy box vs. buy box suppression on Amazon. Marketplace Strategy. Retrieved March 3, 2022, from https://marketplacestrategy.com/blog/lost-buy-box-vs-buy-box-suppression-on-amazon/

How many products does Amazon Carry? Retail TouchPoints. (2020, January 8). Retrieved March 3, 2022, from https://www.retailtouchpoints.com/resources/how-many-products-does-amazon-carry

Laurenthomas. (2017, March 29). Amazon is shutting down Quidsi, after the diapers.com parent failed to make money. CNBC. Retrieved March 3, 2022, from https://www.cnbc.com/2017/03/29/amazon-shuts-down-quidsi.html

Laurenthomas. (2019, March 20). 74% of consumers go to Amazon when they’re ready to buy something. that should be keeping retailers up at night. CNBC. Retrieved March 3, 2022, from https://www.cnbc.com/2019/03/19/heres-why-retailers-should-be-scared-of-amazon-dominating-e-commerce.html

Long, K. A. (2021, August 2). Private antitrust suits stack up against Amazon, mirroring federal scrutiny. The Seattle Times. Retrieved March 3, 2022, from https://www.seattletimes.com/business/amazon/private-antitrust-suits-stack-up-against-amazon-mirroring-federal-scrutiny/#:~:text=Those%20cases%20bring%20the%20number,review%20of%20cases%20on%20CourtListener.

Microsoft antitrust case. Corporate Finance Institute. (2022, February 26). Retrieved March 3, 2022, from https://corporatefinanceinstitute.com/resources/knowledge/strategy/microsoft-antitrust-case/

Miller, R., Ndofunsu, R., Lynch, I., Kajave, R., Parnon, T., & Nagarajan, B. (2015, November 4). Inside Amazon’s cloud computing infrastructure. Data Center Frontier. Retrieved March 3, 2022, from https://datacenterfrontier.com/inside-amazon-cloud-computing-infrastructure/#:~:text=Amazon's%20huge%20scale%20offers%20advantages,between%2025%20and%2030%20megawatts.

Morrison, S. (2022, January 13). The true cost of Amazon’s low prices. Vox. Retrieved March 3, 2022, from https://www.vox.com/recode/22836368/amazon-antitrust-ftc-marketplace

News February 4. (2022, February 4). Amazon reports 22% increase in full-year net sales for 2021. Retail Insight Network. Retrieved March 3, 2022, from https://www.retail-insight-network.com/news/amazon-results-2021/#:~:text=Amazon's%20full%2Dyear%202021%20net,despite%20global%20supply%20chain%20disruption.

Predatory Pricing and Related Practices under Section 2 of the Sherman Act. (1975). Harvard Law Review, 88(6), 1111. https://doi.org/10.2307/1340250

Reuter, D. (2021, July 30). 1 out of every 153 American Workers is an Amazon employee. Business Insider. Retrieved March 3, 2022, from https://www.businessinsider.com/amazon-employees-number-1-of-153-us-workers-head-count-2021-7

Rikap, C. (2021). Amazon’s data-driven intellectual monopoly. Capitalism, Power and Innovation, 154–174. https://doi.org/10.4324/9780429341489-10

Roettgers, J. (2016, January 28). Amazon clocks $107 billion in revenue in 2015. Variety. Retrieved March 3, 2022, from https://variety.com/2016/biz/news/amazon-clocks-107-billion-in-revenue-in-2015-1201691106/#:~:text=Net%20income%20was%20%24482%20million,to%20%2488.99%20billion%20in%202014.

Timothy B. Lee — Jul 30, 2020 6:42 pm U. T. C. (2020, July 30). Emails detail Amazon’s plan to crush a startup rival with Price cuts. Ars Technica. Retrieved March 3, 2022, from https://arstechnica.com/tech-policy/2020/07/emails-detail-amazons-plan-to-crush-a-startup-rival-with-price-cuts/

US About Amazon. (2020, September 18). Who we are: Amazon. US About Amazon. Retrieved March 3, 2022, from https://www.aboutamazon.com/about-us

The consumer-welfare standard should cease to be the North Star of Antitrust. Markham Law. (2022, March 12). Retrieved May 1, 2022, from https://www.markhamlawfirm.com/the-consumer-welfare-standard-should-cease-to-be-the-north-star-of-antitrust/

Dow Jones & Company. (2022, February 28). Tech Giants to be forced to share more data under EU proposal. The Wall Street Journal. Retrieved May 1, 2022, from https://www.wsj.com/articles/tech-giants-to-be-forced-to-share-more-data-under-eu-proposal-11645618258

Flynn, C. (2017, March 7). Global Study indicates nearly nine out of ten consumers concerned about data security and privacy; however, 80 percent demand personalized service. Global Study Indicates Nearly Nine Out of Ten Consumers Concerned About Data Security and Privacy; However, 80 Percent Demand Personalized Service | Business Wire. Retrieved May 1, 2022, from https://www.businesswire.com/news/home/20170307005123/en/Global-Study-Indicates-Nearly-Nine-Out-of-Ten-Consumers-Concerned-About-Data-Security-and-Privacy-However-80-Percent-Demand-Personalized-Service.

Johnson, J. (2022, January 27). U.S. Trust Tech Companies Personal Data 2021. Statista. Retrieved May 1, 2022, from https://www.statista.com/statistics/800764/trust-tech-companies-keep-personal-data-secure-private/#:~:text=As%20of%20November%202021%20in,the%20service%20with%20their%20information.