In the world of ecommerce, Amazon commands a considerable share of online retail transactions. Its dominance influences pricing strategies and market dynamics across the virtual storefront industry. This unparalleled market position gives Amazon significant leverage over competitors, enabling it to set trends and dictate terms for its sellers.
In September 2023, the Federal Trade Commission (FTC) filed a complaint against Amazon, alleging that it created a monopoly by exploiting customers and businesses to maintain control over the ecommerce market. Recently, online retailers, Target and Amazon, each hosted summer sales events which demonstrated some of the coercive tactics alleged in the complaint.
Tactics Driving Amazon’s Market Dominance
Central to Amazon’s success is its sophisticated pricing algorithm. According to the FTC complaint, Amazon’s algorithm is one of the main driving points supporting its ability to monopolize the market. The algorithm dynamically adjusts product prices based on several factors, including demand, competition, individual shopper data, external market conditions and more. Amazon’s ever-changing prices creates a sense of urgency in consumers and requires competitors to adjust prices accordingly to keep up.
The FTC further alleged that the algorithm contains built-in anti-discounting tactics to deter sellers from offering their products at lower prices on other websites. The algorithm enables Amazon to sell high volumes of product at the lowest price among online marketplaces. The FTC also argued that Amazon punishes sellers who list their products at better prices elsewhere, such as taking away prime eligibility, removing the price from a product’s view, or kicking sellers out of the “Buy Box.”
The Buy Box is the display section where shoppers purchase a product. Multiple sellers might list the same product on Amazon, but only one will win the Buy Box. Winning the Buy Box is key for Amazon sellers, as 98% of Amazon sales are made through the Buy Box. A reputable seller with the lowest price is often the recipient of the Buy Box. If a seller is removed from the Buy Box, their sales plummet. Purchasing an item not featured in the Buy Box requires shoppers to take an extra step, to the “Other sellers on Amazon” section. Most consumers never take that step because it is less convenient, less accessible, and results in a loss of sales.
Circle Week Sales Event Confirms Amazon’s Schemes to Control Seller Pricing
Target’s Circle Week sale concluded on July 13, three days before Amazon’s infamous Prime Day. In the past, Target displayed percentage discounts for sale prices and shoppers had to add a product to their cart to reveal Circle Week actual sale prices. This year, Target showed the sale price upfront, without requiring the extra step. By displaying the sale price, Amazon’s algorithm detected that lower prices were being offered during the Target sale.
The FTC’s allegations were evidenced during Target’s Circle Week sale. According to a recent article, seller Brandon Fishman’s Amazon sales plummeted because the algorithm identified the Circle Week sale price, causing him to lose the Buy Box and accompanying sales. He reached out to Target with concerns, and Target adjusted the settings to the “show price in cart” option, once again impacting Amazon’s pricing algorithm.
Many sellers have reported that attempting to offer lower prices on alternative platforms caused their listing to lose the Buy Box, become deprioritized, or even delisted from favorable positions in Amazon’s search results.
Prime Day 2024 (July 16-17)
Amazon Prime Day is a hallmark event, showcasing Amazon’s ability to drive massive sales volumes and shape consumer spending behaviors. During Prime Day, Amazon promotes steep discounts and exclusive deals to Prime members. It incentivizes new consumers to subscribe to a Prime membership while those who are already members flock to the platform for bargains.
Forbes reported that Prime Day sales hit a record $14.2 billion this year. In the US alone, online sales reached $7.2 billion on the first day of the sale. This figure includes sales across all online marketplaces. This ecommerce surge is exacerbated because other retailers are forced to launch deals to compete with Amazon. This concentrated spike in sales not only reinforces Amazon’s market dominance but amplifies its ability to control consumer purchasing decisions and competitors’ sales and pricing strategies.
Effects on Manufacturers and Sellers
The FTC stated in its complaint:
“Amazon recognizes that sellers find ‘that it has become more difficult over time to be profitable on Amazon’ due to Amazon’s ‘increasing fees and costs.’ But as one seller explains, ‘we have nowhere else to go and Amazon knows it.’”
Both first- and third-party sellers may become overly dependent on Amazon for sales, which limits their ability to attract customers through other channels. Amazon’s fees and commissions eat into profits, forcing adjustments that may not be feasible for some.
For sellers, navigating Amazon’s pricing requirements poses unique challenges. The intense competition and emphasis on discounted prices can pressure sellers to participate in promotions that will squeeze or even eliminate profit margins due to Amazon’s fees. But by listing on Amazon, sellers have access to a colossal consumer base and now established distribution system. Amazon sellers must actively manage their listings to account for short-term sales opportunities and maintain long-term positioning and profitability.
Manufacturers are also affected by Amazon’s strategies and Prime Day. While participating in Prime Day is likely to drive sales and visibility, compliance with Amazon’s requirements might impact manufacturers’ relationships with other wholesalers, retailers, and distribution channels. Amazon requires Prime-eligible sellers to use its fulfillment service, Fulfillment by Amazon (FBA). This control over distributors can impact manufacturers’ relationships with other distribution centers, wholesalers, and retailers. Additionally, manufacturers need to incorporate techniques to protect their brands from the same pitfalls Amazon’s pricing techniques impose on sellers.
Impact on Consumers
From a consumer’s perspective, Amazon Prime and sales events like Prime Day offer unmatched access to products at discounted rates. The exclusivity of deals and incomparable convenience fosters a perception that Amazon is the go-to destination for convenience, value, and accessibility. It is important to remember that sales events are meant to influence consumer spending habits. Advertising and marketing tactics are also utilized to encourage impulse purchases.
Ultimately, these are not new tactics; but they have proven to reinforce loyalty amongst Amazon’s massive membership population. However, the heightened reliance on Amazon to provide competitive pricing and product availability is limiting consumer choice in the broad scope of ecommerce, as Amazon contributes to sellers’ inability to lower prices on other platforms.
Conclusion
As the digital marketplace evolves, it is crucial that Amazon and other online retailers balance innovation with fair competition. While the FTC’s complaint is still in its infancy, Amazon’s monopolization of ecommerce has clear impacts on manufacturers, sellers, and consumers alike. Amazon’s strategy may offer convenience and broad access to products, but it also raises concerns about market fairness, consumer choice, and data privacy.
Amazon’s hand in the marketplace can feel overwhelming without a plan in place but navigating it correctly shows dividends. For guidance and assistance on developing and protecting your brand in this ever-changing and competitive online ecommerce environment contact Jon Groza (JWG@kjk.com; 216.736.7255), Tony Dempsey (AFD@kjk.com; 216.736.7244), or one of KJK’s eCommerce attorneys.