The FTC has finally filed its long-awaited lawsuit against Amazon. However, the courts will likely find their argument wanting if the past is any indication. A key hurdle for the agency is that while leadership may want to avoid emphasizing the consumer, courts don’t. Showing consumer harm by a company almost universally loved by consumers will be challenging.
The crux of the FTC complaint takes place in two marketplaces with different recipients of the proposed harm. The consumer-centric case is focused on a marketplace defined as online superstores with concerns over price-parity requirements for sellers.
The pricing agreements require sellers to maintain price parity between Amazon and other retailers. Based on how courts handle similar contracts, known as Resale Price Maintenance (RPM) agreements, the FTC will likely need to show net consumer harm. RPMs have undergone a legal evolution regarding their per se violation status. If an action is a per se violation, then the judicial system doesn’t consider the context and the implications of the behavior when determining its legality.
Starting in the late 1970s, the Supreme Court began walking back years of per se precedent against RPM-type agreements. Combined, the cases State Oil v. Khan and Leegin Creative Leather Products, Inc. v. PSKS Inc. determined that maximum and minimum-price arrangements would not be considered per se illegal.
Under these new precedents, the legality of RPM agreements would have to be determined based on the rule of reason. This analytical tool balances the positive and negative effects and the market circumstances of agreements before determining their legality. This means that the FTC will face a burden of proof in demonstrating increased costs and negating any pro-competitive justifications.
However, before the FTC makes this argument, they will first need to justify the monopoly status they allege these agreements protect. To do this, the agency crafted a unique definition for relevant markets, which limits the category to U.S. online platforms that offer a wide variety of products but excludes grocery services.
Under this market classification, the FTC alleges that Amazon has a market share of at least 77 percent as of 2021. These estimates are calculated using Gross Merchandise Value to define market share. The problem is that this value doesn’t consider costs associated with doing business, discounts, or returned merchandise. Overall, this value doesn’t measure profitability.
The FTC needs this specific scope for a relevant market since minor tweaks would eliminate any legitimate claims that Amazon has reached monopoly status. If the market were expanded to online retail in the U.S. rather than limited to diverse online retail, Amazon’s share would drop to 37.8 percent, as measured by sales. This new measure would include specialty companies such as Home Depot and Wayfair rather than limiting it to Walmart, Target, and eBay.
The scope of sales also needs to be limited as a closer look shows that while Walmart may lag behind Amazon online, it is a formidable competitor. Its U.S. online shopping service grew five times faster than Amazon’s in 2021 and still beats Amazon in terms of overall sales. In grocery delivery, a market specifically left out of the FTC’s complaint, Walmart is also beating Amazon.
The justification for the specific market is unclear as the complaint didn’t list any tests, such as the hypothetical monopoly test, which has traditionally been used to justify definitions.
For consumers, the nuance of market definitions or alleged harms may get lost in confusion over why a complaint was brought against an immensely popular business. A survey by the American Consumer Institute found that Amazon Prime has a 97 percent satisfaction rate and was separately listed as one of the most trusted brands in America. While the agency may have formally voted to move away from the CWS, thus far, the courts have not agreed, and meeting that standard with a company popular amongst consumers may be difficult.
It remains unclear whether the courts will accept narrow market definitions or any other arguments the FTC has put forth. What is clear is that lawsuits against businesses that offer favored consumer services seem at odds with the FTC’s purpose of protecting consumers.
