You might be surprised to learn that Amazon — yes, Amazon — has been credibly accused of making online shopping more expensive for you. Let me explain.
One of the things that firms can do in a free market is enter into different types of contracts with one another. One of those contracts might involve a buyer requiring a seller to offer the same prices that it offers all other buyers.
While this sounds like it might lead to lower prices overall, it can actually do the opposite. For instance, before 2015, online travel agencies such as Booking.com and Expedia were able to force European hotels to show the same prices on their websites as they offered on intermediary platforms. By comparing prices in countries that banned such clauses to those that didn’t, researchers estimated a complete ban lowers prices by up to 4%. This suggests that the so-called price parity clauses were dampening competition between online travel agencies as well as competition between those agencies and other forms of booking (such as booking in person, by phone, or at the hotel’s individual website).
The way this probably happened is that when the price parity clauses were in effect, consumers paid the same whether they booked on an online agency or via an alternative method. Since booking online is more convenient and the clauses meant the prices were the same either way, most people booked online. Because the price-parity contract prevented hotels from passing on the fees charged by the online agencies to consumers, this artificially raised prices for the fee-less methods. Once the clauses were banned, hotels were able to offer lower prices to customers who made bookings directly, and online travel agencies were able to compete with one another on price.
This is the same behavior that the Federal Trade Commission (FTC) alleges Amazon has engaged in for years, according to a lawsuit first filed in 2023 under President Joe Biden (and then-FTC Chair Lina Khan) and still being pursued by the Trump administration today. California filed a separate suit in 2022, making similar allegations but alleging a violation of state rather than federal laws. (Amazon countered that its actions are pro-competitive and ultimately save customers money.)1
According to the FTC and California complaints, Amazon requires that sellers offer Amazon customers the lowest price for their products — even though the cost of doing business on Amazon is higher than on alternative e-commerce platforms. This is because Amazon effectively requires sellers to use its in-house fulfillment services (which, according to the FTC, are more expensive than competitors such as FedEx) if they want their products to have the “Prime” badge.2 It’s also because sellers effectively have to buy ads if they want their products to be shown to customers in search results.
As a result, these Amazon-specific costs would need to be reflected not only in the Amazon price of a product but everywhere that product is sold.
The technical term for this sort of requirement is a “most favored nation” (MFN) clause. There is a wide range of literature showing that in platform markets, MFNs lead to higher fees for sellers, higher retail prices for consumers, and reduced entry from competitors — particularly from lower-cost, lower-quality business models.
If sellers do not comply with the MFN requirement, their products are downranked in search results, according to the complaint, drastically reducing their sales. If you’re a seller, taking the hit on pricing is probably worth getting the higher ranking on Amazon search because Amazon is by far the dominant e-commerce platform in the United States, serving 180 million Amazon Prime subscribers in the country.
The alleged arrangement is great for Amazon but bad for basically everyone else. It’s obviously bad for sellers, who are unable to offer discounts to shoppers who either buy from the seller’s own website or use platforms that charge less for fulfillment. It’s bad for Amazon’s competitors, such as Walmart, that cannot compete to be the lower-quality, lower-cost alternative in e-commerce. And it’s bad for consumers, because it deprives us of the option to pay less for lower-quality service if we want to.
I am an Amazon Prime subscriber. I value the convenience of being able to buy everything in one place and the fast shipping. But I also value saving money.
I used my first paycheck from The Argument to buy something I’ve wanted for a long time: a KitchenAid stand mixer. On Amazon, the model I bought was listed for $399 and ships tomorrow. On Walmart, the same model was listed for $349 and took about a week to ship.3 I chose to buy my stand mixer from Walmart. If Amazon had its way, I wouldn’t have had that option.
Rigging the bids
Amazon doesn’t just sell products to consumers like you and me. It also sells ads to sellers — those sponsored results that show up when you search for a keyword like “sneakers” or “Lamy fountain pens.”
These ads are sold via auctions that happen in milliseconds, every time a customer searches for something. And according to a new FTC lawsuit, filed jointly with 22 state attorneys general from both political parties on Aug. 31, Amazon has been rigging those auctions for years.4
Typically, when we think of auctions, what we have in mind is a “first-price auction.” When you make a bid, you win if your offer is the highest, and you pay the amount you bid. The risk with this kind of auction is that the winner is very likely to overpay, particularly when bidding is “blind” (when you don’t know what the other bidders’ offers are).
There is another kind of auction that solves this inefficiency, even if you keep the bidding blind: a “second-price auction.” The bidding process is the same: Bidders make offers, and the highest offer wins. But the winner is only charged the minimum price needed to win. If I bid $1,000 and you bid the second-highest offer at $500, then I would win the auction but only pay $500.01.
This is called a “Vickrey auction,” and it’s the standard way that online ads are sold. The FTC complaint alleged that Amazon consistently represented to sellers who bought ads on its platform that it was running Vickrey auctions, but that it secretly switched the process to a first-price blind-bid system without telling them.
According to the complaint, Amazon opened all the bids, observed what the highest bid was, then inserted a “shill bid” that was just below the highest bid. This allowed Amazon to systematically overcharge sellers for ads with what the company called “reserve prices.”
“Reserve prices are good for Amazon because they don’t change the allocation [of ads] and advertisers must pay more for the same advertising,” reads an internal memo cited in the FTC complaint. “Obviously, the benefit to Amazon comes at the cost of advertisers.”5
This isn’t just bad for sellers. To the extent that sellers pass along the cost of advertising to consumers, it may have also indirectly harmed the end consumer.6
The proper remedy isn’t breaking up Amazon
The evidence suggests that over the last several decades, there has been an increase in concentration and a corresponding decline in competition throughout the economy. And the evidence from these two cases strongly suggests that Amazon has engaged in anticompetitive practices that raise prices for consumers and merchants that use its platform. This is a problem worth taking seriously.
In “Amazon’s Antitrust Paradox,” Lina Khan’s famous 2017 paper in the Yale Law Journal, Khan wrote that “forcing [Amazon] to split up its retail and Marketplace operation” — separating Amazon the seller of goods from Amazon the platform operator — would help prevent its anticompetitive behavior. I’m not so sure.7
First, it’s not clear to me why a firm operating as both marketplace and retailer is per se anticompetitive. After all, plenty of grocery stores carry a mix of branded products and store brand items, and that seems to work fine for consumers.
Second, even if Amazon were broken up, the marketplace operation could still enforce price parity clauses and rig bids against sellers (including, if it were profitable, against the now-independent Amazon retail operation).
None of that takes away from the fact that Amazon’s current behavior, if the FTC’s allegations are true, is illegal and harmful to consumers and small businesses. And both groups deserve a remedy that eliminates the anticompetitive behavior while preserving the efficiencies of Amazon’s existence as a platform.
Fortunately, it’s not conceptually difficult to design one.
“Amazon should not be allowed to have MFNs in its contracts with sellers, nor enforce any that it does have, nor should the company be permitted to create what is effectively an MFN by in any way penalizing sellers when it finds those sellers charging lower prices in rival distribution channels,” Fiona Scott Morton, a professor at the Yale School of Management who specializes in antitrust, told me.
In addition, Amazon should be required to disclose to sellers what kind of auctions it uses when selling ads. A court-appointed technical committee could periodically look at Amazon’s software to monitor compliance and field any complaints from merchants. Or Amazon could divest running the auctions to a separate company; if the ad seller and the auctioneer aren’t the same firm, the auctioneer no longer has an incentive to rig the bidding process.
Note that, while this divestment would promote competition, it probably wouldn’t meaningfully shrink Amazon’s market share. In other words, it wouldn’t accomplish the loudest and most famous goals of the neo-Brandeisian policy movement that Khan played a major role in inaugurating.
Even if Amazon stopped employing de facto MFN clauses and stopped bid-rigging in ad auctions, my guess is that it would remain the dominant e-commerce firm in America, just maybe with something like 35% market share rather than 41% market share. The reason is that e-commerce is a platform market, and platform markets tend to be winner-take-all. Both customers and sellers derive real benefits from platforms like Amazon: It’s convenient for buyers to have a one-stop shop for lots of things, and it’s convenient for sellers to have a platform with a bunch of shoppers on it. That’s why everyone in America loves Amazon.
Taking the problem of increasing economic concentration seriously means actually trying to do something to promote competition. You can score a lot of points on social media with a dogmatic belief that big is always bad and that the larger a firm’s market share is, the worse its impact on consumers is, no exceptions. And you can beat down a lot of critics by arguing that they are in thrall to nefarious “corporate power.” But it is less likely to work if your goal is to actually win antitrust cases.
In fact, to the extent that existing antitrust laws and precedents are insufficient, and that judges are likely to be biased in favor of firms, that should make you even more focused on doing rigorous economic analysis. That is the only way to demonstrate clearly that a firm is engaging in anticompetitive behavior, rather than falling back on hand-wavy claims.
Conversely, the reflexive belief that antitrust enforcement is nothing more than a fig leaf for crude anti-business views or a stalking horse for socialism is equally misguided.
Accurately diagnosing anticompetitive behavior will often lead to less-sexy remedies — permanent injunctions and court-appointed monitors, for instance — rather than breaking up a company. But rigorous economic analysis is the only way to win antitrust cases in a legal environment that is increasingly favorable toward firms.
Protecting competition is good for consumers and good for small firms. Effective antitrust enforcement increases overall economic efficiency, and it has progressive distributional effects because the shareholders of large firms tend to be rich, while the poor spend a larger share of their incomes on consumption.
But we shouldn’t kid ourselves. Antitrust isn’t a panacea. It’s a powerful and important tool to make capitalism work better.
Recommended reading:
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Shoppers are much less likely to buy products without the Prime badge. Conditioning the Prime badge on sellers using Fulfillment by Amazon looks like an example of “tying” — using dominance in one market to foreclose entry by competitors in another market.
That model is no longer listed by Walmart, but I checked the purchase receipt in my email.
Per the complaint, the FTC’s investigation started in 2024 under the Biden administration. There is plenty to criticize about how the Trump administration has handled antitrust policy, but having read the complaint, this strikes me as a good case. (You can read Amazon’s press release in response to the bid-rigging case here.)
If sellers had known that Amazon was actually running first-price auctions, they would have adjusted their strategy by “bid shading” — basically, bidding less to avoid overpaying for ads — but since Amazon repeatedly told sellers that it was running second-price auctions, they did not adjust their bidding strategy, per the complaint.
There’s also a great snippet in the complaint — paragraph 179 on page 66 — from the transcript of an Amazon employee’s conversations with ChatGPT, including the line: “Give me some different terms for the term ‘surcharge’ in Sponsored Product pricing. This term is currently used to describe the additional price that we charge on top of the second price [in cost-per-click] we charge to advertisers.”
Khan’s main claim in her 2017 paper is that Amazon harms competition by engaging in widespread predatory pricing. But when she was chair of the FTC, the case the agency filed alleged that Amazon harmed competition by raising prices, not by lowering them.
Well-argued and informative piece. Loved it.
Oh man Milan, OG vintage take assuming the point of antitrust is to protect consumers from artificially high prices ;)