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Jul 02, 2023

How Amazon Used the Pandemic to Amass More Monopoly Power

Jeff Bezos addresses the audience at the Amazon Re:MARS conference. (Mark

Jeff Bezos addresses the audience at the Amazon Re:MARS conference. (Mark Ralston / AFP via Getty Images)

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If lawmakers in Congress stick to their guns and maintain the threat of a subpoena, at some point in the coming weeks Amazon CEO Jeff Bezos will have to appear before the House Judiciary Committee to answer lawmakers’ questions about the scope and impact of Amazon's market power. The hearing will be a final step before the committee releases the findings from its year-long investigation of big tech and makes a set of policy recommendations that might include breaking up Amazon.

Policy-makers here and around the world are beginning to question whether and how Amazon has abused its position as the gatekeeper for most online product searches and shopping traffic. In addition to the House investigation, antitrust enforcers in California, Washington state, and the European Union are all reportedly weighing antitrust charges against the corporation. Amazon's response to the Covid-19 pandemic should give lawmakers even more questions for Bezos. For the past quarter-century, Amazon has grown its monopoly by exploiting workers, suppliers, and small businesses. During the pandemic, Amazon's abuse has spread to those it claims have always been its top priority: customers.

At the height of the pandemic, with many storefronts shuttered over statewide shelter-in-place orders, shoppers who turned en masse to Amazon's ubiquitous online marketplace found many of the products they wanted wouldn't arrive for weeks. For a company "obsessed" with consumer satisfaction, Amazon Prime was unable to deliver.

On its face, the excuses Amazon gave for the delays rang true. The company was inundated with orders to the point that its warehousing and shipping system buckled. Shoppers had so flooded the Amazon marketplace that the corporation's revenue skyrocketed, even as it chose to stop storing and shipping many nonessential goods.

Ron Knox and Shaoul Sussman

But the surge in customer orders was only part of the failure. The other is that, as demand spiked, Amazon's quest to dominate the shipping industry ultimately won out over its promise to get packages on doorsteps quickly.

The long delivery times that many customers experienced were the result of Amazon's quiet mission to leverage its market power in e-commerce to build a logistics operation that could topple FedEx and UPS. It's been doing this in large part by compelling merchants that sell on its platform to use its storage and shipping system. Even when it became clear that Amazon's logistics weren't up to the task, and that sellers on its marketplace could independently get orders to customers faster, Amazon wouldn't relent.

Amazon's quest to dominate logistics services is well documented. But what is less known is Amazon's decision to curtail the ability of sellers to join a program that during the pandemic, would have allowed the company's millions of customers to more easily find and buy Prime-labeled products with faster shipping times—and sometimes lower prices.

Amazon and its supporters typically defend the company's behavior by claiming the company is acting as a champion of its millions of customers or as a partner of small businesses that rely on Amazon's massive reach to find shoppers. The decision to not allow additional sellers into the program, known as Seller Fulfilled Prime, and not to reopen it during the pandemic clearly hurt both its customers and its third-party sellers.

Prime is Amazon's carrot and its stick. If a seller pays to use Amazon's logistics business, Amazon gives that product a Prime badge and with it, a message: Trust us. It's authentic. It will get to your doorstep quickly, at no extra charge. You can buy it with a click. Businesses that refuse to pay Amazon's additional fees and sell products without the Prime badge? They might as well be invisible to most shoppers, especially Amazon's more than 100 million Prime subscribers. How can anyone tell if it's real? It says it will be delivered in a few days—but how do you know that?

Amazon also makes sure that products with a Prime badge shipped using the company's logistics arm get more prominent placement in the marketplace than competing non-Prime offers, even if the exact same product is sold for a lower price and is delivered faster than the product with the Prime logo. Prime is a psychological ploy Amazon uses to siphon ever increasing fees from small businesses and to expand its monopoly in online commerce to its growing fulfillment business.

As the name suggests, Seller Fulfilled Prime in theory allows businesses that choose to store and ship their own goods in less than two days to get the same placement and promotion as sellers who chose to store and ship goods using Amazon. So when the company launched the program in 2015, it appeared to offer an alternative to third-party sellers without paying Amazon's high tolls.

Back then, Amazon's retail ecosystem was smaller than it is today. It had about half the number of sellers as it does now, and Amazon's own logistic service was still in its infancy. With fewer employees and warehouses, Amazon mostly relied on UPS, USPS, and FedEx to deliver Prime offers. Amazon delivered only a fraction of its own orders itself.

Today, Amazon is quickly approaching 1 million workers—a number that has grown significantly during the pandemic—and it owns more than 150 warehouses around the world. As part of its march toward the total monopolization of the e-commerce supply chain, it has spent years building a logistics system over land, sea, and air intended to rival any fulfillment company in the world.

As this logistics system grew, Amazon adjusted its search and promotion algorithm to penalize those sellers that continued to use another fulfillment company rather than paying Amazon to store and ship its products. Under the algorithm, even products that cost less—surely a crucial metric for shoppers—would be buried beneath listings for products that used Amazon's fulfillment service and carried the Prime logo or were otherwise more profitable for the company.

Then, last February, Amazon closed Seller Fulfilled Prime to new sellers altogether.

The manager of a company that sells on Amazon, who spoke on the condition of anonymity due to fear of retaliation, says that during the pandemic, their products in Amazon's fulfillment system saw significant delays; it would be weeks before Amazon could get those products to customers. The company had the same products in its own warehouse that it could deliver to customers in days, not weeks. But in order for shoppers to find those products, it had to drastically increase the prices of the products stored in Amazon's warehouse, despite the far longer shipping times.

John Nichols

Only after jacking up the prices of their "Prime" offers did the company see some increase in sales, albeit still a fraction of their sales last March, the manager says. If sellers were allowed to offer independent Prime shipping, none of this would have been necessary; Seller Fulfilled Prime offers receive the same algorithmic treatment that products shipped by Amazon receive.

Not only would shoppers have seen more and often better choices had Amazon reopened the Seller Fulfilled Prime program, but Amazon's own workers would have likely been safer during the crisis. Rather than rely on Amazon shipping from warehouses where workers suffered through Covid outbreaks and retaliation for speaking out about conditions, sellers and customers could have more easily chosen fulfillment through companies with union workers—such as UPS—or in smaller facilities with safer working conditions.

Earlier this year, a group of labor unions filed a petition with the Federal Trade Commission calling for an investigation into Amazon's practices. The petition points to Amazon's attempt to dominate package delivery as a key issue. "Amazon has demonstrated its power in the logistics market by disfavoring competitors, limiting options for sellers, and allegedly driving up prices for consumers. Now, the only way that third-party sellers not already enrolled in Seller Fulfilled Prime can obtain favorable search rankings…is if they also pay FBA fees," the petition noted, using the acronym for Fulfillment by Amazon, the company's warehousing service.

Amazon's decision to keep the Seller Fulfilled Prime program closed during the pandemic will enable the tech giant to continue to leverage its dominance in e-commerce to build a massive logistics empire. Many sellers who opted to fulfill their own orders during the pandemic are likely to go back to using Amazon's warehouses to ensure their products get good placement and one-click buying on the site. Had Amazon reopened Seller Fulfilled Prime, many merchants, able to buy shipping services from other carriers, in some cases at lower cost and with more control over their products and customer service, would have had no reason to go back to using Amazon's warehousing and delivery services. Amazon would both lose out on the fees it could charge those sellers and face legitimate shipping and storage competition on its own platform. Amazon has no intention of letting that happen.

Now, Bezos will soon have to answer for this decision. House investigators are keen to learn all they can about Amazon's business practices, and how its monopoly power may be hurting competition, small businesses, workers, and consumers. As members of the Judiciary Committee said in their letter to Bezos insisting that he testify: "It is vital to the Committee, as part of its critical work investigating and understanding competition issues in the digital market, that Amazon respond to…critical questions."

Ron KnoxRon Knox is a senior researcher at the Institute for Local Self-Reliance.

Shaoul SussmanShaoul Sussman is a legal Fellow at the Institute for Local Self-Reliance. His research focuses on the intersection of antitrust law and big tech.

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