FTC Sues Amazon Over Its Monopoly Power

October 5, 2023

The Federal Trade Commission (FTC) has reinforced its aggressive stance on enforcing antitrust laws by filing a federal lawsuit against Amazon on September 26, 2023. Seventeen other states have also joined in this legal action against Amazon. Per the FTC, “Amazon’s ongoing pattern of illegal conduct blocks competition, allowing it to wield monopoly power to inflate prices, degrade quality, and stifle innovation for consumers and businesses.”

The complaint filed in the United States District Court in Seattle alleges that the ecommerce juggernaut committed specific anticompetitive practices to restrain trade in violation of both the Clayton and Sherman Antitrust Acts, laws that the FTC regularly enforces. The 172-page Complaint lays out a litany of proposed antitrust and anticompetitive actions by the retail giant. However, the FTC states that it is not initiating litigation against Amazon solely because it has become too big but because Amazon has “engaged in a course of exclusionary conduct that prevents current competitors from growing and new competitors from emerging.”

FTC Takes Aim at Monopoly Maneuvers

Central to the FTC’s allegations are Amazon’s market power and exclusionary conduct. The FTC alleges that Amazon has “durable monopoly power” in both the online superstore market and the online marketplace services market, which are amplified by the impact of scale and related network effects. The online superstore market is identified as Amazon’s business which sells a wide variety of products to consumers.

The FTC then identifies an online marketplace services market and defines it as, essentially, the benefits and services available to sellers using the Amazon Marketplace. “Chief among these services is access to an established online U.S. customer base,” as well as ratings, reviews, advertising, product pages, and price setting.

At an estimated 82% market share of the online superstore marketplace, the FTC alleges that Amazon has dominant control of the market as compared to its competitors such as eBay, Walmart, and Target.

Amazon’s Alleged Market Dominance Tactics

As alleged in the complaint, Amazon gained and maintains its dominant market share through exclusionary conduct. Amazon services such as fulfillment by Amazon (“FBA”) and Amazon Prime create high barriers to enter into the online superstore and services market and in turn keeps potential competitors out, which creates a feedback loop that attracts sellers and deters competitors.

The FTC also alleges that Amazon uses special teams and projects to prevent competition and punish sellers. Specifically, Amazon is alleged to maintain a price-surveillance team that Amazon uses to punish third-party sellers who offer lower prices. Amazon then imposes additional, prohibitive contractual obligations on the third-party sellers that suppress price competition, which can lead to “total banishment from Amazon’s Marketplace.”

Nessie: Amazon’s Mysterious Pricing Algorithm Unveiled (or Concealed?)

The complaint also references a secret pricing algorithm known internally at Amazon as “Project Nessie,” which the FTC alleges Amazon used to unfairly compete with third parties and leverage its market share unfairly. However, the references to how “Project Nessie” works were redacted in the publicly filed complaint, except to have the FTC note that “[t]here is no valid and cognizable justification for Amazon’s use of Project Nessie.”

Nessie appears to be a pricing algorithm that collects data from consumers and adjusts the price charged based on the data collected. The complaint alleges that the use of the algorithm results in “overcharging [Amazon’s] customers” and “degrading the services it provides them” as well as “extracting [redacted] from American households,” likely a reference to personal information, or consumer behavioral information. Amazon itself noted that Nessie is not only the name of one of its Seattle office buildings, but also described it as “a system used to monitor spikes or trends on Amazon.com.” Thus, the algorithm may simply adjust prices to specific consumers based upon their own preferences or market trends.

Uncertain Battle for Market Fairness

The FTC hopes that the lawsuit will “hold Amazon to account for [its] monopolistic practices and restore the lost promise of free and fair competition.” However, the outcome remains uncertain, given the FTC’s recent challenges in similar cases against Meta and Microsoft. As of now, Amazon has not filed a response to the complaint.

For assistance navigating these issues or the Amazon Marketplace generally, please reach out to Kyle D. Stroup (330.978.6549; KDS@kjk.com), Mark D. Rasch (301.547.6925; MDR@kjk.com), or one of KJK’s eCommerce attorneys.