FTC sues Amazon for pricing algorithm

Amazon is being sued by the Federal Trade Commission (FTC) and 17 states (including Pennsylvania) for anti-discounting measures, including a pricing algorithm called “Project Nessie.”

The complaint claims “Amazon is a monopolist. It exploits its monopolies in ways that enrich Amazon but harm its customers.” It adds that Amazon “reportedly” takes half of every dollar from their third-party sellers. The complaint reports that these sellers feel forced into using Amazon’s fulfillment service. (Fulfillment clients store their products at Amazon warehouses and when an order is placed, Amazon picks, packs, and ships the product to the customer.)

Amazon also supposedly punishes sellers who offer goods elsewhere for lower prices. For example, according to the complaint, “Amazon knocks these sellers out of the all-important ‘Buy Box,’ the display from which a shopper can ‘Add to Cart’ or ‘Buy Now’ an Amazon-selected offer for a product.” The percentage of purchases made through the “Buy Box” is said to be 98 percent. Amazon also may purposefully suppress a seller’s products in search results. Though Amazon stopped contractually obligating sellers to offer their best price through Amazon, they have such contracts with some specific high-volume merchants. A secondary part of the complaint was the fact that Amazon boosts paid advertisers in its search results, which raises sellers’ costs on average. Additionally, Amazon has some restrictions on which sellers are “Prime Eligible,” based upon whether sellers use Amazon’s fulfillment service. The FTC and states claim that the anti-discounting measures are part of a self-reinforcing monopolistic cycle. The complaint describes such tactics as illegal because they raise sellers’ prices, and therefore prices in general, on other online retail marketplaces.

Project Nessie is a reinforcement learning pricing algorithm that some Carnegie Mellon researchers found anticipated tit-for-tat pricing strategies used by competitors, raising prices with the knowledge that other large online retailers would follow suit. Thus, Amazon as well as its major competitors presumably end up with somewhat higher profit margins. According to the complaint, this has “extracted” a billion dollars from American households. The complaint claims that Amazon turns this algorithm off during times of public scrutiny and back on when no one is looking.

Amazon pushed back on these characterizations of its business practices. It claimed that “all of the other businesses that sell in our store set their prices independently, but to help them increase sales and make our store more attractive to customers, we also invest in tools and education to help them offer competitive prices.” However, when third-party sellers choose to price goods badly, Amazon doesn’t “highlight or promote offers that are not competitively priced.” Amazon also described its fulfillment and advertising services as completely optional and beneficial to third-party sellers. It lamented that the FTC is supposedly “filing a misguided lawsuit against Amazon that would, if successful, force Amazon to engage in practices that actually harm consumers and the many businesses that sell in our store — such as having to feature higher prices, offer slower or less reliable Prime shipping, and make Prime more expensive and less convenient.”

FTC Chair Lina Khan has long been critical of Amazon. In fact, she first became well-known due to her essay “Amazon’s Antitrust Paradox,” published in 2017 in the Yale Law Journal. In this essay, she critiqued the Chicago School’s supposed dismissal of the practice of predatory pricing, exemplified by Amazon. She wrote, “Amazon has established dominance as an online platform thanks to two elements of its business strategy: a willingness to sustain losses and invest aggressively at the expense of profits, and integration across multiple business lines.” This is in stark opposition to the FTC’s current case against Amazon (for uncompetitive prices that are higher than market rate rather than lower than market rate). Of course, Amazon’s profit margin has risen in the meantime. Khan, as FTC chair and beforehand, has consistently been an antitrust figure.