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Access to Amazon’s Site Enhances Third-Party Merchants’ Competitiveness

Here’s a letter to a new correspondent:

Mr. B__:

Thanks for your e-mail in response to my essay at AIER on the State of California’s recently announced antitrust action against Amazon. That action specifically challenges Amazon’s practice of discouraging third-party merchants who sell their wares on Amazon’s site from charging for their wares offered for sale also on other sites – such as those of Target and Walmart – prices lower than they charge for their wares on Amazon’s site. You write:

It seemed to me, though, that you’re conflating the interests of sellers with the interests of the consumers who buy through them. It’s economically rational for the sellers to stay with Amazon because they benefit from Amazon’s efficiencies, but they just pass on the additional costs to consumers. The consumers may have interests and preferences that don’t coincide with that of the sellers. Many consumers may prefer to buy at a lower total cost, even if it’s somewhat less convenient or if delivery is slower, etc.

First, the complaint issued by California’s Attorney General identified third-party merchants as being among the victims of Amazon’s practice.

Second and more substantively, if Amazon’s site offers services or has features that are especially beneficial to third-party merchants – as California’s complaint concedes – it must be true that these services and features better enable merchants who sell on Amazon’s site to earn differentially greater profits on their sales. So the question becomes: Does Amazon’s platform enable third-party merchants to reap monopoly profits (that is, to profit at the expense of consumers), or does Amazon’s platform enhance merchants’ ability to compete for customers (that is, to profit by being better able to serve consumers)?

If for no reason other than that third-party merchants also sell on other sites, it’s highly implausible that selling on Amazon’s platform is a source of monopoly power and profit for third-party merchants. If all Amazon does is to push up the prices of third-party-merchants’ wares to monopolistic levels, then consumers would buy these wares, not on Amazon’s site, but at lower prices on sites owned by Target, Walmart, and other retailers that host e-commerce sites. And Amazon’s attempt to discourage price-cutting on other sites would fail because no third-party merchant would agree to charge prices that are monopolistic knowing that other merchants – of which there are many – will undersell them by charging prices that are competitive. 

Here’s the bottom line: Because merchants are quite numerous they have no monopoly power. And so no merchant has any interest in being cornered into charging monopolistically high prices given that any merchant so cornered would be outcompeted by rival merchants who refuse to be so cornered. Rival merchants who are not so cornered will, by advertising the competitively low prices they charge on e-commerce sites other than Amazon’s, easily outcompete any merchant who is foolish enough to allow Amazon to compel it to charge prices that are monopolistic. With no reason to assume that the typical merchant is self-destructively foolish, when we observe merchants agreeing to abide by Amazon’s terms in exchange for being able to sell on Amazon’s site, the only reasonable conclusion is that Amazon’s site provides unique services or features that enhance rather than stifle third-party-merchants’ competitiveness. 

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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