The FTC’s case against Amazon is built on bad economics
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The FTC’s case against Amazon is built on bad economics

The FTC’s claims about seller fees do not paint an accurate picture of the price interactions between Amazon and the third-party sellers who use the platform.

As the Federal Trade Commission continues its misguided antitrust case against Amazon, a key focus has been Amazon’s treatment of third-party sellers. The FTC claims that Amazon is abusing sellers by steadily increasing commission fees. However, the case fundamentally misrepresents the economics occurring in this digital market.

The FTC argues that the increasing percentage of revenue third-party sellers pay to Amazon in exchange for selling on the platform is a function of its monopolistic power. One report by Marketplace Pulse shows sellers have gone from paying 20-30% of revenue from goods sold in 2016 to 50% in 2022. According to the FTC, this reflects Amazon’s growing ability to force terms onto sellers to increase its profits. 

However, a closer interrogation of the market shows that Amazon has only raised seller fees in areas where it has increased its service offerings while simultaneously offering sellers a way to mitigate the commission. This indicates that Amazon is not abusing its size to extract unfair fees from third-party sellers but instead raises prices when its service offering has changed or improved. 

Amazon charges three fees to sellers: the transaction fee, the fulfillment fee, and the advertising fee. The transaction fee is Amazon’s commission for the sale and is not optional. The fulfillment fee is charged for using Amazon’s logistics network, and the advertising fee determines the advertising placement of the product. The latter two are optional for sellers. 

Amazon’s transaction fee or referral fee, arguably Amazon’s only real commission of the offering since the other two fees it charges depend on the services it offers, has stayed flat at 8%-to-15% on average, depending on the type of product being sold. It hasn’t changed even though Amazon has a much broader pool of potential customers than it did five years ago. Sellers still pay the same fee despite having access to a larger pool of potential customers, which does not appear to have changed as Amazon has gained scale. 

While the fulfillment fee may have risen from 20% to 35% in some cases, the increase is supposed to reflect an improved logistics network and faster deliveries. As Amazon Prime has evolved, it has upgraded from general shipping services to two-day shipping, eventually to one-day shipping, and now it offers same-day, two-hour shipping in more than 90 metro areas. 

If sellers are given access to a more sophisticated and rapid logistics system, it is reasonable to expect that they may have to pay a higher price for it. The FTC case claims this is abuse but fails to recognize the nuance of the price-to-service interaction occurring. If sellers do not find the value of Amazon Prime logistics worth the cost, they do not have to use it and could design their fulfillment system to match Prime. However, this has proven difficult for sellers to achieve, demonstrating why Amazon Prime’s logistics system has value to the seller market. 

Amazon has tried other ways to offer sellers the Prime logo while taking a smaller fee but will only do so if it does not impact customer satisfaction. In 2015, sellers were allowed to use their own fulfillment centers while still showing the Prime logo. Amazon reversed its decision because the third-party fulfillment times didn’t meet Amazon Prime’s standards. While Amazon is working to bring back a third-party Prime program, the company says its focus remains on delivering the best possible experience for customers, not extracting more seller fees. In the end, Amazon’s fulfillment fees are entirely optional, and sellers could theoretically find a way to match Prime shipping times on their own. 

Another area where Amazon has raised prices is in advertising. However, these higher prices reflect increased competition in the advertising marketplace. Google and Facebook, two of the next largest advertising platforms, have also raised prices over the last decade. Advertising prices also increase in more competitive markets and may be cheaper for more niche markets, reflecting a healthy functioning market where supply and demand determine price levels. The advertising fee is optional, and products can become popular organically, driven mainly by the number of sales and customer reviews. 

The FTC’s antitrust claims against Amazon’s seller fees lack economic nuance, painting too simple a picture for the court that does not capture the price interactions between sellers and Amazon. In some sense, Amazon has not raised its commission at all despite having a much larger platform. They only charge sellers more when they offer more services, and most of the targeted fees are optional. Unnecessarily increasing seller fees, passed on to sellers in the form of higher prices, would make Amazon less attractive overall to consumers. Keeping prices low for consumers is why Amazon’s transaction fee has remained stable, and it only charges more to sellers when it offers more.