Black Friday Special: the rise of the retail monopolists
Black Friday Special: the rise of the retail monopolists
. . . and how Amazon pushes prices up, not down
Welcome to The Counterbalance, the newsletter of the Balanced Economy Project.
Black Friday is upon us again: the annual pre-Christmas shopping bonanza where retailers drop (or claim to drop) their prices to drive sales as the festive season gets into gear.
We’ll start with some advertising of our own: we have just set up a new Linkedin page, which will complement our outputs on the Counterbalance.
This Counterbalance substack will still be used for occasional big, meaty articles; our LinkedIn posts will contain a more regular stream of outputs, little and larger, with plenty of crossover between the two.
Our first LinkedIn article is entitled Black Friday: how monopolists dominate retail, and it looks at both companies and individuals: three of the biggest retail firms in the world (Walmart, LVMH and of course Amazon) – and some of the billionaires behind them – including several ranked in the top 20 richest people in the world. It lays out some of the retail monopolists’ approaches and tricks in building some of the greatest fortunes in world history.
Read it here. Please share, re-post, follow, like, and tell your friends. At this early stage, we need your help.
Is Amazon really delivering lower prices?
Black Friday is a good time to dive into Amazon: especially, to challenge a widely held belief that Amazon drives prices lower.
Anyone ought to question from first principles this common perception of Amazon as a low-cost marketplace: after all, it’s Economics 101 that monopolists jack up prices.
And it turns that Amazon has an amazing, multi-facted mechanism for doing so.
We’ll begin with a lawsuit by the U.S. Federal Trade Commission (FTC) – now updated with some stunning un-redacted sections that weren’t available in the original – as well as an excellent 2023 report by our partner organisation SOMO, showing that the very same thing is happening in Europe.
The FTC complaint makes one thing clear, from the outset.
Now here's the essence of Amazon’s central high-price trick, which relies on its monopoly power.
The first part is obvious enough: Amazon has been hiking its fees extracted from independent businesses selling on its platform: the so-called Third Party Sellers. You can see this very clearly in the data.
The FTC lawsuit echoes this, saying that half – half! – of all seller revenue goes in fees to Amazon, at least when they use Amazon logistics, advertising and so on.
It’s the same in Europe. Here’s SOMO with something related but different: how the price of sending a standard parcel has risen in European countries – even though you’d expect Amazon’s growing size to lead to economies of scale and lower prices.
So: Amazon extracts immense unjustified fees from sellers on its platform, like a private tax system. Those fees, of course, get baked right into the prices that sellers must charge: they mostly operate with tiny margins (since they’re trapped in a subservient relationship with a monopolist) so they have no option but to pass these fees straight to consumers.
Those high prices on Amazon are bad enough: more telling, though, is the astonishing rise of all these percentages and prices over time. You would be hard pressed to find better graphs than these showing the ratcheting up of monopoly power.
So: higher prices on Amazon via monopoly fees. It’s the next part that is more surprising - and troubling.
The One-Two punch of higher prices
Alongside those high fees, Amazon also has something that in Europe they call “Fair Pricing Policy” – which effectively forbids sellers from selling more cheaply elsewhere on the web, off Amazon. And they send armies of bots out across the internet to check up. SOMO:
So to recap: first, those huge fees raise prices ON Amazon, and then Unfair Pricing forces those sellers to raise prices OFF Amazon too, to match the elevated On-Amazon prices.
The FTC complaint calls this trick a “one-two punch of seller punishments and high seller fees [which] often forces sellers to use their inflated Amazon prices as a price floor everywhere else.”
This is not even a cartel arrangement where suppliers agree to raise prices in sync: it’s an awesome display of raw monopoly power to force them to do so, to prevent them from competing with Amazon on price.
This, amid high inflation and a cost of living crisis.
The monopoly life cycle: from innovation to “Too Big to Care”
One of the most lucrative tricks that platform monopolists love to use – free money for nothing – could be called the great advertising swindle: something that has seriously added to Bezos’ fortune. Here’s how it works.
Back in the day when firms like Amazon were starting up, they had to provide the best deals and best services to grow and attract customers: Google had to create the most relevant searches; Apple had to get the best and most relevant apps into its app store, and Amazon had to offer consumers the cheapest and best-quality goods. They competed on being better than the rest.
But as Cory Doctorow and others have explained, successful monopolists enjoy a particular life cycle - or what FTC Chair Lina Khan calls the monopoly playbook.
“In the early years the firms are chasing growth, and [market] share, so they will actually compete to make their products good for people. But we’ve seen how in digital markets once this market tips and the firms are able to enjoy monopoly power, and to start protecting that power, we see that they start becoming too big to care.
They can make their product worse and make it more expensive . . . at the end stage of the monopoly cycle these firms are in extraction mode.” (comments slightly shortened for length.)
Advertising is such a good example of this how this works.
Sellers on Amazon are desperate to get into the all-important “Buy Box”, through which up to 90 percent of sales on Amazon are routed (and also to get into the Amazon Prime programme). They will do anything to get into that buy box – so when Amazon tells them that their products will be featured not just on price and quality, but on how much they spend on advertising – they have no choice but to jump.
As a European seller put it:
“You’re forced to keep buying ads, so that you keep the velocity up, so the algorithm keeps showing your product. Like a hamster on a wheel, you have to just keep going. As soon as you slow the pace, then they’ll just go your competitor.”
Sellers are now increasingly competing against each other in a Hunger-Games style tournament – a process that is actively, deliberately worse for consumers, and for sellers too, who become, in the words of seller Nicholas Parks, “kind of like indentured servants”.
From the FTC lawsuit:
It’s not just Amazon, of course. Google search is getting crappier, with increasing number of paid-for ads promoted above organic results based on relevance. And here’s Epic Games’ boss Tim Sweeney, complaining about Apple’s App Store policies. In an email to Apple in 2018 , he said he found it "super-frustrating that Fortnite is not the first search result when customers search for the text 'Fortnite'".
Your humble correspondent just checked – and Sweeney does seem to have a point.
How much is Amazon making from this advertising pay-for-play? Well, we made this graph from the SOMO data: look at that explosive growth – a 17-fold rise in just four years.
Straight from the monopoly playbook: build the monopoly, then once it’s secure, milk it.
Out in the real world, here is a video where someone orders hats on Amazon – and receives illegal scorpion venom instead. (The rest of the video, from the Institute for Local Self Reliance, is fantastic.)
Not only that, but all the spam content, toxic content, and misleading content that Amazon shoppers will be so familar with benefits Amazon. The more crap out there, the more legitimate sellers have to advertise to stay ahead of them. And, as ILSR’s Stacy Mitchell notes:
“Amazon really benefits from this chaos, and this free for all . . . It [destabilises] legitimate businesses: they really struggle in that environment to find their footing and to make connections with customers, because they’re constantly being knocked over by these underhanded sellers.”
Back to Khan.
“They weren’t being subtle about it. They are actively degrading their services in ways that actively made their products worse. And at various points there were folks at Amazon saying ‘Hey! We think these practices are actually bad for people. Lets not do it.’ And at each juncture they were overturned by the executive.”
Too Big to Care, indeed.
Project Nessie
No exploration of Amazon’s monopoly chokehold would be complete without mentioning Project Nessie. This section was mostly redacted in the original complaint, but under intense media pressure most of the sordid details are now available.
Project Nessie involved a secret Amazon algorithm which identified specific products for which it predicted other online shops would follow Amazon’s price increases. When they switched Nessie on, they raised prices for those products and watched what other online shops did: and if they did, then Amazon kept its higher prices in place.
Amazon extracted over $1 billion via Nessie just from the United States, and, per the FTC:
“Aware of the public fallout it risks, Amazon has turned Project Nessie off during periods of heightened outside scrutiny and then back on when it thinks that no one is watching”.
There is, of course, more to Amazon’s monopoly playbook. If you use the company on Black Friday, bear in mind that you’ll be paying more because of this stuff — and that’s quite likely to be true even if you shop online, OFF Amazon.
You might also ponder who is receiving the fruits of this monopoly predation.
Yet we may feel anger but we need not feel disillusioned: because we now have strong grounds for hope. The FTC case, for example, is aggressively targeting the heart of Amazon’s misbehaviour, and may even presage the full break-up of the company. We are at the start of a sea change as governments and regulators start to take monopoly power seriously at last.
Finally, we made a short, light-hearted video on Amazon, aimed at a particular audience, and with your humble correspondent as the narrator.
Endnotes
How to break up Amazon
Our colleagues at LobbyControl contracted a German competition lawyer, Kim Künstner, to write a detailed legal brief about why, whether, and how Amazon should be broken up in the context of German competition law. It concludes that the only way to tackle Amazon’s power problem is to break up Amazon into smaller business units. Otherwise we will be stuck trying to play whack-a-mole to stop the relentless abusive behaviour of a monopolist that long ago grew Too Big To Care.
See also Amazon's lobbying satellites orbit EU policy-makers, just out from Corporate Europe Observatory, LobbyControl and SOMO, showing how Amazon has expanded its lobby firepower and lobby network in Europe. With some troubling statistics.
No, Europe is not losing its competitiveness
The Financial Times recently ran a breathless long article warning that Europe is becoming ‘uncompetitive’, and provided scary data that the EU economy, in dollar terms, is 65 per cent of the size of the US economy: down from 91 per cent in 2013. Shock! The first problem here is that “competitiveness” in the context of a country or region is economic gibberish. For example, if you suddenly devalue your currency (say, by blowing up a bunch of high-performance export factories,) the competitiveness brigade would likely call this devaluation an improvement in competitiveness, as other local goods would become cheaper relative to exports. But is the devaluation good? (See our article The Great Competitiveness Hoax, for more.) That’s the first problem. But here is also a clear-eyed analysis outlining more reasons why the FT story is bunk. In short, the data in the original story is the result of i) currency fluctuations, ii) how you measure GDP (if you use PPP, the US/EU discrepancy disappears), and iii) demographic changes. That’s it. The FT’s economics commentator Chris Giles said we should file stats like those in the original FT story “in a round plastic container under your desk.”
AI In the Public Interest: Confronting the Monopoly Threat
A major new report from the Open Markets Institute describes how regulators, dazzled by the potential of Artificial Intelligence (AI), seem to be forgetting the lessons of the past. It is essential to view the challenge through the lens of the already existing powers, structures, and behaviors of the corporations that control the foundational technologies and capacities underpinning AI, because AI is rapidly tipping into monopoly. The report offers simple conclusions and directs us towards practical, proven, and constructive solutions that can both minimise the political and social threats posed by AI, and maximise the benefits to individuals and society.
Google paid $26.3bn for search default deals in 2021, executive testifies
The default payments were the biggest part of the $45.6bn in total traffic acquisition costs that Google paid to other companies in 2021 to carry its search service and help it generate more advertising. (Oh, and there’s this: Google witness accidentally blurts out that Apple gets 36% cut of Safari deal.) This is important, because the U.S. Department of Justice is trying to show that Google is a monopoly, in a massive and landmark trial that just wrapped up taking evidence. This is another case that started with a lot of redactions, which later got un-redacted under strong media pressure. And while we’re on that subject . . .
New unredacted materials in the state attorneys-general lawsuit against Facebook
Here’s just one of many shockers:
How Brad Smith used Microsoft’s $1bn law and lobbying machine to win Activision battle
The Financial Times describes a legal, policy and influence machine that costs more than $1bn a year to run, and “which has made Microsoft one of the most effective American companies in practising a new form of global corporate diplomacy to advance its interests.” (Microsoft has also received a demand for nearly $29bn in back taxes in the US dating back to 2004-2013 because of its having used transfer mispricing to shift profits into tax havens.)
Apple tax: iPhone maker and Government suffer major setback in €13bn EU case
The EU’s Advocate-General reports that the EU general court committed a series of legal and methodological errors in a ruling in 2020, which argued that the EU had failed to prove to “the requisite legal standard” that Apple had received €13 billion in illegal state aid from Ireland via a “sweetheart” tax deal that gave it an unfair advantage over other companies. The Irish Times headline here points to one of the weirdest aspects of the case: it casts it as a “setback” to the Irish government if Apple has to pay it these billions that could contribute enormously to Irish public services. That weirdness is because Ireland clings to the notion that it is needs to be a tax haven and offer loopholes like this, to stay prosperous. This is a myth: the real reasons for Ireland’s Celtic Tiger economic explosion lie elsewhere: notably its accession to the EU single market, which was the exact moment that the Celtic Tiger took off.
How British supermarkets crush British farmers
We wrote this article after finding, buried a few paragraphs down in a story on a farming website, this shocker: “It follows a new survey showing that half (49%) of fruit and vegetable farmers are likely to go out of business in the next 12 months, with many blaming supermarkets as a leading threat to their livelihoods.” (We also mentioned this in our first LinkedIn piece about retail monopolists and Black Friday.) See our earlier Counterbalance article, The Gravitational Pull of Supermarket Chains, for more context.
The monopoly in Canada’s blood: How we learned to stop worrying and love big business
A good overview of monopoly power in Canada, with a suggestion that “It is deep within our bones and in our blood – the belief that forming dominant organizations is inherently virtuous.” Also see Keldon Bester’s Fair Competition for an Evolving Economy, with a broader and deeper overview of the problems and how to fix them.
Hearing on the Vodafone-Three merger
We recently co-authored (with Tommaso Valletti) a detailed report on the extensive international evidence on the effects of consolidation, in order to push back against an apparently imminent four-to-three merger between Mobile Network Operators Vodafone and Three in the UK. Here is Valletti giving some quite fiery evidence to the UK parliament, wielding our report, against a bunch of lobbyists. And since our report, important new evidence has emerged about telecoms consolidation in the United States, with the boss of a merging firm caught speaking the truth:
Europe's hidden security crisis
Google and other Real Time Bidding (RTB) firms broadcast RTB data widely in a free-for-all in the EU, including to hostile foreign and non-state actors potentially exposing sensitive European personnel and leaders to blackmail, hacking and compromise.
America's trustbusters are winning
The consensus is that the charge led by Lina Khan has been a flop. The Wall Street Journal has published an attack on Khan approximately once every 11 days. Yet even on the myopic terms of debate set by the media, the story that Biden’s revival of anti-monopoly policy is failing is wrong. Khan has said that to win, the government must be willing to lose, in contrast to her predecessors’ timidity. But there have been many successful and significant challenges, and many mergers have been abandoned without even being litigated: merger filings are down 40%.