Feds Are Suing Amazon Over Prime. Here's Why The Suit Looks Weak

When President Biden named Lina Khan as chairwoman of the Federal Trade Commission (FTC) in 2021, the appointment strongly suggested that antitrust regulators were finally going to get tough on Big Tech.

The consensus, shared by both Republicans and Democrats, that tech firms had amassed too much size and power and perhaps needed to be broken up.

Khan had been especially critical of Amazon Inc.  (AMZN) - Get Free Report. In 2018 at Yale University, she authored an influential paper in which she argued that the company does not play by the normal rules.

While most publicly traded companies want to generate profits, Amazon does the opposite: the company is willing to lose a lot of money in pursuit of growth. As a result, Amazon is able to crush competitors by simply undercutting them on price.

Some also allege that the company stifles competition by operating an online marketplace in which they access sales data on vendors and then offer similar products that compete with those vendors. Since Amazon was so big, vendors had no choice but to accept this arrangement.

Less competition, antitrust law generally reasons, means higher prices for consumers.

Underwhelming so far

Kahn seemed poised to do something about this. So more than two years in her tenure, here are the actions the agency has taken against the e-commerce giant:

• Forced Amazon to return $61.7 million in tips back to drivers in its Flex program.
• Required the company to delete voice recordings, especially from children, picked up by the Alexa voice assistant.
• And its most recent case, the agency suing the online retailer, alleging that it used illegal tactics to get customers to subscribe to Prime, additionally making it difficult to cancel said subscription.

Not to say these issues aren’t important but given the hype around Kahn’s appointment and beliefs about Amazon, they seem kind of underwhelming.

Perhaps Kahn is opting to build some momentum by going after low-hanging fruit. But a cursory look at FTC’s record so far against Amazon suggests the agency is nowhere close to building a major antitrust case against the online retailer, never mind one that could force it to break up.

There may be two reasons for this.

The first is that Amazon described in her Yale paper no longer exists.

Over the past few years, the company has shifted from the grow-at-all cost mentality that has defined most of its existence to one that now stresses profits and cost cutting. The retailer has laid off thousands of workers, paused or eliminated real estate projects, pressed vendors for greater profit margins, and moved to reduce product returns.

Hard to prove harm 

And as for the second major anti-trust argument against Amazon, that it both sells competitors’ products and uses the data to compete against them, it might be hard to prove its marketplace hurts consumers or vendors.

Martin Heubel, a former Amazon category manager who now advises brands on how to work with the company, said the company’s marketplace certainly gives Amazon a significant edge.

“It allows Amazon to tap into the best of both worlds: receiving profitable commissions from third party sellers, as well as yielding free data insights into the performance of each product category, not only at brand, but at the product level,” he said.

“This gives Amazon a significant advantage over other online retailers, as it doesn't have to rely on a trial-and-error approach when assigning its resources to its retail business, Heubel said. “Amazon can launch private label products with confidence, and also benchmark its first-party vendor business against the performance of its third-party sellers.”

Ultimately, competition between Amazon and the vendors that use its marketplace actually “leads to lower prices for end shoppers,” he said.

And in a recent study published in the journal Service Science, researchers found evidence that suggests that third-party sellers actually performed better than expected when competing with the platform, charging higher prices and increasing their revenues.

“The platform can be a ‘friend’ instead of a ‘foe’ when it enters the market to compete with third-party sellers,” the authors write.

It’s hard to argue Amazon should break up if you can’t specifically prove how the retailer hurts competitors or consumers.