Amazon's monopoly power: the time for tinkering is over

The European Commission slowly starts to move against Amazon. But is it enough?

Welcome to The Counterbalance, the newsletter of the Balanced Economy Project.

We’ve just led and co-written a submission to the European Commission on Amazon, signed by a coalition of non-governmental groups, and which got fairly extensive media coverage.

In short, it is asking the Commission to start taking Amazon’s monopoly power¹, more seriously, and take proper action at last.

We’ve been highly critical of the Commission’s stance towards monopoly power. It is heavily in the thrall of a destructive and ideological system of monopoly, which has led to it blocking precisely zero of the over 1,000 Big Tech acquisitions in the past decade. Its fines on Big Tech firms like Amazon amount to several billion dollars - but have hardly dented these firms’ insane growth rates. And, as we have noted ad nauseam, of over 8,000 mergers notified to the Commission since 1990, it has prohibited only 30 - less than 0.4 percent. 

Yet it seems that now, as evidence mounts of the multiple societal and democratic harms that spew continuously from Big Tech firms, the Commission is slowly, groggily, starting to get more active. 

Amazon is a case in point. In 2019, the Commission opened a formal antitrust investigation into its use of sensitive data from independent retailers who sell on its marketplace, to check if it is tilting the competitive playing field in its direction.  A year and a half later, in late 2020, the Commission opened a second case on the criteria and conditions used for the “Buy Box” and Prime label, alongside a "preliminary view that it has breached EU antitrust rules by distorting competition in online retail markets." (You don’t say! The stories we hear, from sellers on Amazon.)

Separately, an incoming Digital Markets Act is likely to beef up competition policy and enforcement over Big Tech giants — but, crucially, only up to a point.

So, what has Amazon done, in response to these moves?

Well, recently it proposed to the European Commission a set of "commitments", or promises, to play nice with its sellers. The Commission invited comments on those commitments, so we made a submission last week, with help from the Netherlands Centre for Research on Multinationals (SOMO), and co-signed by a dozen trade unions and public-interest groups.

A special kind of flywheel

In 2001, the story goes, Amazon’s founder Jeff Bezos sketched out a flywheel on a napkin, to illustrate his company's strategy. (Facebook, by the way, has also used the word 'flywheel' in this context, p13.)

If you have a spinning flywheel with many nodes, a boost to any one of those nodes will accelerate them all.

So, for example, the more customers Amazon has, the more third-party sellers feel obliged to use its platform marketplace - and the more sellers, the more customers flock there. The more of each, the more market intelligence and data it can harvest, giving it a rising advantage over others.

And the more sellers and buyers, the more indispensible it becomes to each, and the more power Amazon then has, to extract fees unfairly. The more fees, the more acquisitions can be afforded, and the more untapped markets it can enter, increasing the number of nodes on the flywheel. The more this happens, the more political power Amazon has, to tilt the rules in its favour.

Unchecked, this strategy can tend rapidly, almost autonomously, towards growing, snowballing, monopoly power (as organisations like the U.S. Institute for Local Self Reliance have documented extensively.) 

Nodes, often rather creepy ones, are being added all the time, further boosting the momentum of the flywheel, and penetrating ever further into our lives. As the landmark "Ciciline Report" for the U.S. Senate outlined in 2020:

In 2017, Amazon purchased Blink, followed by Ring in 2018 — both to solidify its position in the home security market. In an internal document, Amazon recognized that security could “feed our flywheels (Prime, Alexa) while being a large, profitable business in its own right.”

Prior to these acquisitions Jeff Helbling, Vice President at Amazon, emailed a group of Amazon executives, recapping a discussions on the transactions he had with Mr. Bezos. there, he detailed the twin justification for the acquisitions, saying that “two senses matter — eyes and ears.” Amazon had already locked down “ears” through its continued development of Alexa Ring and Blink would act as Amazon’s “eyes” right outside the home.”

Each node, again, boosts the others. And as Bezos said of the acquisition of Ring:

"my view here is that we’re buying market position — not technology. And that market position and momentum is very valuable."

The "most common" reason for acquisitions, Bezos added, was to acquire "market position" - which in practical terms means market power (pp 308-310).

This flywheel is still gathering momentum. Bezos could probably just lie in a hammock and doze all day, and wake up periodically to note each part of his empire growing, and reinforcing the others.

Not only is this a special kind of flywheel, which can feed its own momentum, but its monopoly power is contagious. The more Amazon dominates one part of an economy, the more its competitors feel the need to bulk up, to defend against Amazon’s power.

All in all, Amazon is an exceptionally dangerous and out-of-control phenomenon, increasingly present at the heart of our systems of trade, commerce, and everyday lives.

Our submission

So our submission looks at the commitments it has made, and the European responses to date, to see how they measure up to this fast-growing threat.

Our most basic and immediate point is that Amazon’s commitments to play nice aren't worth the paper they're printed on. They are weak, vague, inappropriate, and riven with loopholes. As we put it:

"These [commitments] are an attempt by Amazon to forestall and delay effective measures against its abusive activities and its dominant position – i.e. to set the agenda for the Commission.
. . .
Amazon’s core business model clearly involves creating, then exploiting, basic conflicts of interest. Its new proposed commitments seem designed to ensure that these profitable conflicts ultimately remain intact. We see this offer as a threat to consumers, businesses and workers. It will not stop Amazon from abusing its dominance."

So we recommend that the Commission reject Amazon's commitments outright, and instead pursue its existing antitrust cases vigorously.

But we went further, too. And to explain this, we'll start with a quick detour.

Conflicts, conflicts, everywhere

In January we wrote about the Facebook whistleblower Frances Haugen, making the point that even though her testimony about Facebook's cynicism was shocking and undoubtedly true, the solutions she offered were dead wrong.

Haugen, like many others, has called for regulators to fix and regulate Facebook’s behaviour: the symptoms of its monopoly power.

This approach fundamentally misunderstands where the source of the problem lies. Indeed, Facebook/Meta has been asking for regulation, because doing this alone distracts from what its founder Mark Zuckerberg really fears: breaking up and dispersing its power. Until we do that:

"the giant will lobby, sidestep and bulldozer its way around (or through) any rules, laws, taxes, regulations and "fixes" that we throw at them."

We need regulation, of course we do. But if we want it to have teeth, if we want to protect privacy, tackle fake news, rebuild small businesses, de-polarise our societies, and all the other good things our economies need, then we need to open up the political space to do it, which means breaking up excessive concentrations of power. If we leave monopoly power intact we’ll be condemned to operate in the margins of that power, tinkering and tweaking, when we should be transforming.

With Amazon, it’s the same story, but with some specific features.

For example, Amazon sells its own branded stuff on its platform, in direct competition with independent sellers also using its platform. That is a massive, unavoidable - and highly profitable (for Amazon) conflict of interest, where it is player and referee at the same time. 

No matter how much Amazon promises to behave better, those conflicts will lie there like crocodiles, guzzling the lifeblood from surrounding economic ecosystems. With its unrivalled access to sensitive data about the whole marketplace, Amazon will be able to use myriad techniques to wriggle past its own promises, or regulation.

It’s worth recalling the century-old strategies of the arch-monopolist John D. Rockfeller, whose riches were also based on exploiting massive conflicts of interest. The legendary investigative journalist Ida Tarbell (whose own father had been crushed by Standard Oil) described how Rockefeller rolled:

"It takes time to crush men who are pursuing legitimate trade. But one of Mr. Rockefeller's most impressive characteristics is patience.

He was like a general who, besieging a city surrounded by fortified hills, views from a balloon the whole great field, and sees how, this point taken, that must fall; this hill reached, that fort is commanded.

And nothing was too small: the corner grocery in Browntown, the humble refining still on Oil Creek, the shortest private pipe line. Nothing, for little things grow."

Jeff Bezos would surely agree. Amazon's recent purchase of iRobot, which makes the autonomous Roomba vaccuum cleaners, is a case in point, as antitrust expert Tom Smith notes:

"Some readers might have difficulty getting worked up about the acquisition of a vacuum cleaner company. However, at some point, competition authorities may feel that Amazon’s accretion of market power across many closely-related markets surely becomes detrimental [and] worrisome."  

Regulators around the world who have waved through those 1,000+ Big Tech acquisitions in the past decade, have apparently forgotten that warning from an earlier age.

So back to our submission to the Commission, and its focus on Amazon’s profitable conflicts of interest.

"Commitments not to abuse market power generated by these conflicts are a pale shadow of what is needed: elimination of those conflicts. In our view, the only way ultimately to eliminate these conflicts is structural legal remedies, such as legally separating Amazon’s marketplace from its retail and logistics operations."

Structural remedies

If you have conflicts of interest, you can logically do two things. First, you can paper over those conflicts. Or, second, you can go to the source and eliminate them. That means "structural legal remedies" - which means breaking Amazon up. It's really not rocket science.

Now, we should note some green shoots here. Although European competition authorities have never broken up a Big Tech firm or blocked a Big Tech merger, others are starting to take action.

The UK last year took the first action globally to block a Big Tech takeover (of Giphy by Meta;) and this was followed soon afterwards by the United States Federal Trade Commission, which is now trying to block another Meta takeover, of the Within virtual reality fitness app. These may seem small, but they mark a real vibe shift - and, don’t forget Tarbell’s warning, “little things grow.”

But the Commission, which has prided itself for years on being a global antitrust leader now risks being leapfrogged by others, and falling behind.

The Digital Markets Act, and Merger Control

Europe's incoming Digital Markets Act, admittedly, does cautiously dip its toe into the water of “structural remedies” - but only "as a last resort option." Why?

In this context, we added a further recommendation to our submission: a transformation of merger doctrines to reverse the burden of evidence for gatekeeper firms like Amazon. Currently, regulators have to jump over high bars to prove why mergers and acquisitions shouldn’t go ahead. It is essential to flip this, so it’s the company, like Amazon, that would have to jump over high bars to prove why it should: firstly, why an acquisition won't be harmful, and secondly, why the gatekeeper simply can't build its own version of the product or service, and leave the competitor intact. 

As our last post on climate change and competition policy explained, a fair amount of what is required could be achieved with existing tools on the books: we just need to stiffen spines. Smith adds, for example, that regulators and enforcers can use a "flywheel theory of harm" to invigorate the existing toolbox. [Update: Jonathan Kanter, head of the U.S. Department of Justice Antitrust Division, just commented on this. As reported in Competition Policy International:

“Rather than simply cracking down on horizontal mergers and letting vertical deals slide by, he said that antitrust enforcers should think more about how a deal or acquisition create “a flywheel effect” that reinforces a monopoly.” ]

Inflation watch

There's one final element in our submission, which seems particularly salient in this high-inflation era. Is Amazon really offering low prices?

People flock to Amazon not just because it's so damned convenient, but because they think it's cheaper. And, relative to others, it is. But what about in absolute terms? Can Amazon really build a $1.3 trillion company based on ultra-low prices?

But now, consider this (topical) Amazon purchase.

We've circled the "Buy Box", one of the subjects (alongside the Prime service) of the EC's ongoing investigation from 2020.  This Buy Box is an instrument of awesome power, because over 80 percent of sales on Amazon go through it (you can click away to other stuff, but most people don't bother). 

Sellers feel they have to get their products into that Buy Box, so they will submit to all sorts of unreasonable conditions imposed by the gatekeeper, to get into it.  

How do sellers get in? Well, Amazon imposes conditions telling them what they need to do. For example, its so-called “Fair Pricing” policies for the German marketplace (the UK's is similar) contains this:

Our emphasis added. Here, if you are a seller who sets a price on Amazon's marketplace that is higher than what you are offering off Amazon, you can be removed from the Buy Box: a deadly threat to most sellers.

The implication is not just that you must offer low prices on Amazon: it is also that you are forced to offer higher prices elsewhere, as a result. (We’ve spoken to sellers who confirm that that is the case.)

But there’s another step to this. Amazon's high fees - likely to be significantly inflated by its market power - are baked into the Amazon price. So if you are forced to set your prices higher than this, then those high fees will be baked into prices across a wide swathe of the non-Amazon retail economy.

In fact, U.S. District of Columbia Attorney-General Karl Racine has been making exactly this point (in a case, now under appeal.) And, in a consumer suit making a similar point, Bloomberg reports:  

“Amazon.com Inc. must face consumer antitrust litigation challenging “most favored nation"-style policies that have allegedly driven up the prices of “virtually all products offered for sale” online in the U.S., a federal judge in Seattle ruled.”

[Update: California’s Attorney-General has just filed a sweeping new lawsuit also alleging the same blocking of competition by Amazon, resulting in higher prices.]

Amazon retorts that no, it has instead been forcing prices down, by insisting on low prices on its marketplace.  Who is right?

What we do know is that if it isn't clear whether Amazon is lowering prices across our economies, as most people think, or actually increasing them: then this warrants intensive and intrusive further investigation.  And another matter, which neither the Commission investigations nor our submission, nor Racine's suit tackle, is "predatory pricing", where a monopolist uses its prodigious resources to price below cost, killing competitors.  Does Amazon engage in this? Well, it certainly has the power to.  

The Fear Factor

While researching monopoly power, and certainly in our discussions with sellers on Amazon, we have repeatedly come across two words: fear, and serfdom.

It is a rare seller who wants to go on the record against Amazon. Many sellers - especially smaller ones with few alternatives to using Amazon marketplace - know they can be wiped out with the flick of an unaccountable Amazonian algorithm.

And it is also surprising how often that latter word (or just 'serf') crops up, independently and unprompted. We have heard it first hand in the music industry, several times in the agriculture sector (e.g. here), and now from people selling on Amazon. 

But it is not only small sellers that are being crushed. Big tech giants are increasingly able to intimidate everyone, even very large businesses, as Cecilia Rikap notes:

"Even such a titan as Netflix recently said it relied on Amazon Web Services (AWS) and could not easily switch to another cloud provider. Uber, which can only operate via Google Maps, and Booking have similarly recognised their dependence on Big Tech. . . Siemens is also dependent on the Big Tech cloud."

Let’s get serious

It's time to stop tinkering with Amazon. The  European Commission should have the courage to take bold measures. It should continue its antitrust investigation and put structural remedies  on the table.

Our submission is the latest sign of a new anti-monopoly movement that is now just starting to emerge in Europe.

If you want more on Amazon, this video from Matt Stoller is well worth a watch (as is his recent piece on the fall of a cheerleading monopoly.)

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ENDNOTES

We’re only offering a short crop of endnotes today.

Some (strong) thoughts, after I stepped down as boss of Australia’s competition regulator - Rod Sims.

National security exemptions are popping up all over the place. E.g. here.

Canada is reviewing its Competition Act - and civil society has some opinions.

Germany is mulling “structural” options in the face of rampant abuse - Bundeskartellamt - and a request for comments, which closes on October 28th.

Anti-monopoly, a master narrative for our times? - Democracy Journal Barry Lynn's profound and hopeful article is written for a U.S. audience, but is relevant anywhere.

1. We don’t hew to the dictionary definition of monopoly, where a single seller lords it over everyone, but a situation where a firm has significant and durable market power.