In her latest lawsuit against Amazon, FTC Chair Lina Khan has accused the tech giant of stifling competition by requiring 3rd party sellers to use the Fulfillment by Amazon (FBA) services in order to display the Prime badge on their vendor account. Last week, Amazon’s lawyers reviewed a possible defense against these allegations. Their case is airtight.
In September, the FTC and 17 state attorneys general filed a claim accusing the firm of attempting to secure a monopoly position by engaging in anti-competitive strategies. One of these was to make sellers ship Prime orders through FBA services, alleging that this was a tying agreement that pushes vendors to use Amazon logistic services.
To demonstrate the unjustness of the policy, plaintiffs note that 95% of the orders shipped via “Seller Fulfilled Prime” (SFP) — the alternative to using Amazon’s in house fulfillment services — met Amazon’s delivery targets. However, this wasn’t true. The SFP vendors were meeting standard Amazon shipping times (4 -5 business days) 95 % of the time. But SFP vendors were supposed to be meeting the guarantee of the Prime program of 2-Day shipping.
The FTC might have fudged the numbers on this statistic. Amazon Prime orders are required to offer 2-day free delivery — a higher standard than the parameters set for regular Amazon orders. Yet prior to the pandemic, less than 16% of the Prime orders fulfilled by SFP were delivered within the two-day guarantee prior to the pandemic.
In 2019, Amazon stopped the SFP program and had all Prime orders shipped via FBA. The program has recently been revived with much more stringent requirements for Prime badge vendors. Amazon didn’t temporarily snuff out the SFP program to gain market share, but to protect the integrity of Prime shipping services.
Characterizing the shift to in-house logistics for Prime orders as anti-competitive is simply incorrect. The truth is, Amazon needs 3rd party vendors to thrive. They account for approximately 60 % of all Amazon sales — that’s $117.7 billion in net sales, 23% of the firm’s overall revenue, less than 5% of which comes from retail. Third party vendors are integral to Amazon’s success. The idea that Amazon would want to push them out is absurd.
Even if they did want to push them out, so what? If third-party sellers disagree with Amazon shipping policies, they can opt for Merchant Fulfilled Network (MFN) services and handle the logistics themselves. Vendors lose the ability to offer Prime services, but the criteria is less demand to accommodate standard orders. Meaning sellers don’t have to satisfy the two-day shipping metric. Better yet, if they are looking for an intermediary, there is eBay, Ali Baba, Walmart.com, etc. The e-commerce market is far from a “pure monopoly”.
But the relationship between the firm and 3rd party sellers is symbiotic. Amazon provides sellers with an incredible ability to scale-up distribution and to expand their customer base due to the firm’s comparative advantage in logistics and advertising. 76% of vendors who sell their goods on Amazon are profitable. 63% of sellers are profitable within one year. The average firm isn’t profitable until the second or third year of business.
Whether or not Amazon’s push for in house logistics is monopolistic depends on how you define the market. Amazon straddles several industries and provides a myriad of products and services. The company’s market share of the U.S. e-commerce is 37.6 %. As observed by economist William F. Shughart II, when one accounts for brick-and-mortar retailers, they comprise only 6% of the retail market.
In order to claim Amazon is being monopolistic, the FTC has to apply an incredibly narrow market definition to a diverse firm. And if their lawsuit is successful, the result will be an unjust restriction of Amazon’s ability to manage its own premium shipping services.
Amazon has a reputation to maintain. By taking over the logistics on Prime orders Amazon was trying to pick-up slack, since 3rd party vendors were failing to deliver shipments within the 2-day guarantee. This past July Forbes listed Amazon as one of the top brands for customer service. Would it be fair to have Prime subscribers to pay $14.99/month only for Amazon to falter on the guarantee of free 2-day shipping? The firm would be shirking its responsibility to their loyal customers by not fulfilling this advertised commitment.
Taking over on shipping Prime orders was Amazon’s attempt to maintain excellent service for premium-tier customers. Anything else would be a rip-off. But Khan doesn’t care about consumers as much as she cares about punishing big companies for being big. If Amazon were a smaller company, they wouldn’t be in her crosshairs.
