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Amazon's Pricey Secrets Lead to FTC Lawsuit for Antitrust Violations

By Vaidehi Mehta, Esq. | Last updated on

For sellers and buyers alike, Amazon Prime can be a really convenient tool. We've even covered on various blogs how you can leverage Amazon's services to make some sweet dough on the side. But as you probably know, the company is far from perfect. Sellers have been complaining that the company pockets way too much — close to half of their profits on sales through their Fulfillment Service. The company has also been in hot water for everything from selling defective products to the treatment of its workers. But one thing that most people can agree on is that many of Amazon's prices are unbeatable. However, according to a new lawsuit from the federal government, there may be some sketchy practices underlying those great Prime deals.

Last week, the Federal Trade Commission (FTC) and the attorneys general of 17 different states sued Amazon, alleging illegal "price spiking." The FTC claims that Amazon used a secret algorithm to manipulate rivals' weaker pricing algorithms and lock competitors into higher prices. The algorithm was allegedly used for years and helped Amazon to improve its profits on items across shopping categories while making competitors raise their prices and charge customers more.

FTC Peeks Into Amazon's Secrets

According to the FTC's complaint, the Amazon team came up with a "secret algorithm" that they named "Project Nessie," which they used up until 2019 to raise prices across the most popular online shopping destinations. Although Amazon admits to having a project with such a name, it says that Project Nessie's purpose was to try to stop its price-matching from resulting in unusual outcomes where prices became so low that they were unsustainable. Of course, the full scope of Amazon's alleged practices are unknown because much of the information they have provided, even to the feds, has been redacted. The FTC has thus requested more public access to Amazon's inside information in the complaint so that the public can see the full scope of the company's allegedly illegal monopolistic practices.

Federal and State Antitrust Statutes

Legally, the FTC claims that Amazon is at fault under various laws, both federal and state. At the federal level, the company has allegedly violated the three major antitrust statutes: the Sherman Antitrust Act, the Clayton Antitrust Act, and the Federal Trade Commission Act (FTC Act). Antitrust laws are important because they help to protect competition and promote consumer welfare. Competition leads to lower prices, better quality products and services, and more innovation. Antitrust laws also help to prevent businesses from becoming too powerful and abusing their market power. These laws are enforced by both the FTC and the Department of Justice (DOJ).

The oldest of these laws, the Sherman Act, prohibits two main types of anticompetitive conduct: restraints on trade and monopolies. The Clayton Act supplements the Sherman Act by prohibiting specific business practices that are likely to lessen competition or create monopolies. These practices include price discrimination, exclusive dealing arrangements, and mergers and acquisitions that substantially lessen competition. The FTC Act was passed to prohibit "unfair methods of competition" and "unfair or deceptive acts or practices." The FTC Act is broader than the Sherman and Clayton Acts and can be used to challenge a wider range of anticompetitive conduct.

In addition to these federal laws, there are also several state antitrust laws. State antitrust laws are generally similar to federal antitrust laws, but they may have some important differences. For one, the federal antitrust laws apply to all businesses that operate in "interstate commerce" (between states), whereas state antitrust laws only apply to businesses that operate within the state's borders. State antitrust laws are enforced by state attorneys general (rather than the DOJ), which is why all of the state AGs are co-plaintiffs with the federal government. In the case of each state that is part of the suit, their AG is bringing suit under their own state's specific antitrust act.

Pricing Algorithms and Potential Collusion

Generally, Amazon is being pursued by countless jurisdictions for the same underlying act: alleged price-fixing via algorithms. Pricing algorithms are computer programs that use data to calculate prices for products and services. They can be used by businesses of all sizes, from small retailers to large corporations. Pricing algorithms typically take into account a variety of factors, such as cost, demand, competition, time of year, the customer's location, and the customer's purchase history.

Are pricing algorithms legal? Well, to give a circular answer, they aren't if they violate antitrust law. Businesses cannot use pricing algorithms to engage in price fixing or collusion with competitors. Businesses also cannot use pricing algorithms to engage in predatory pricing, which is when a business sets prices below cost to drive competitors out of the market. In addition to antitrust laws, pricing algorithms may also risk violating consumer protection laws, for example, if they are used to deceive or mislead consumers.

Another potential illegal move that can come with companies using pricing algorithms is a specific type of anti-competitive practice called "adversarial collusion." This is where one company manipulates other sellers that use their own pricing algorithm, which can be done by sending carefully crafted inputs to the other algorithms or by manipulating the environment in which the algorithms operate. For example, the attacking company could send fake customer reviews to a competing company's algorithm, which could cause the algorithm to raise its prices. Or, the attacker could create fake competitor websites that offer lower prices, which could cause the competitor company's algorithm to lower its prices. Adversarial collusion is a relatively new phenomenon, and while it is still not fully understood, it's capable of being a serious threat to competition. In the case of Amazon, some experts who study price algorithms are worried that the company could be engaging in such practices.

Amazon Says FTC Got it Wrong

Amazon's Senior Vice President and General Counsel gave a public response on behalf of the company, declaring its intent to contest the lawsuit and stating various reasons that he thinks the FTC is "wrong on the facts and the law."

The company claims that their practice of matching low prices and enabling third-party sellers to set their prices independently fosters leads to overall lower prices and promotes healthy competition, benefiting both consumers and sellers. It denies the allegation that it forces sellers to use its services, emphasizing the freedom of choice for sellers. Amazon asserts that it is just one player in the vast and competitive market that is the retail industry.

Rather than what the FTC alleges, Amazon contends that the practices that are at issue in the suit have actually "helped to spur competition and innovation across the retail industry, and have produced greater selection, lower prices, and faster delivery speeds for Amazon customers and greater opportunity for the many businesses that sell in Amazon's store." The company argues that if the FTC is successful in its lawsuit, "the result would be fewer products to choose from, higher prices, slower deliveries for consumers, and reduced options for small businesses — the opposite of what antitrust law is designed to do."

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