Amazon accidentally makes a case for its own regulation

·5 min read
The Capitol.
The Capitol. Illustrated | iStock

Amazon is facing proposed regulation in Congress from an unusual bipartisan group concerned about its size and market power. In response, as David Dayen writes at The American Prospect, the company has deputized its entire population of third-party sellers as unpaid lobbyists, effectively threatening that if they don't convince Congress to stop the regulation, Amazon will shut down the third-party marketplace.

The strategy might work. Amazon might get what it wants, but the threat itself helps demonstrate why the company is badly in need of federal regulation.

Let me first cover the fundamentals. A situation in which a single company owns and controls a marketplace in which both the company and other businesses sell products inherently makes a hash of all the incentives economists tell us are great about capitalism. As antitrust scholar (and current chair of the Federal Trade Commission) Lina Khan explains in a famous 2017 article, Amazon's status as a platform for other, much smaller businesses poses novel challenges to antitrust frameworks — especially in how factors outside of price are important.

For instance, Amazon has little incentive to ensure the goods third-party sellers list are of high quality — or even real, non-fraudulent products — because it is paid as a middleman instead of as a seller. The gigantic scale of third-party sales, made possible because Amazon can use automated systems instead of expensive human labor, makes the problem worse: No computer system can possibly have 100 percent accuracy in detecting cheaters among billions of products.

The company has a similar problem with its product reviews. Savvy customers have known for years that Amazon's star ratings are worthless. Sellers have long figured out how to boost their ranking with promotional giveaways — a free product in return for a promise of a 5-star review. The practice is prohibited, but it still happens constantly. Even less scrupulous sellers simply buy fake reviews. (Some time ago I bought a computer headset with a 4.5 star rating which, when it arrived, contained an offer of a $20 bribe if I would post a screenshot of a 5-star review. Naturally, the product turned out to be garbage.)

Amazon does have strict policies against fraudulent reviews as well as automated systems that try to detect them, but its efforts are obviously inadequate. Indeed, sellers have abused these procedures by posting fraudulent reviews on competitors' items so Amazon will remove the listings.

Amazon also has several directly perverse incentives regarding its third-party partners. It holds for itself almost all the valuable data produced by shoppers and is infamous for using this surveillance to produce crummy knock-off copies of top-selling items. Since Amazon controls the way its internal search works, it can and does rig the search results to favor its own products. When Amazon and other third-party companies sell the same item, Amazon can rig search outputs to favor its own listings. Amazon sells advertising on search results, too, allowing companies to place their products higher up the ranking for a price. And the star ratings aren't calculated as a simple average — it's a proprietary algorithm that could easily be used to mislead consumers.

Incidentally, the core of the proposed regulation as it relates to Amazon is banning exactly this kind of self-dealing abuse of leverage created by the platform's market power.

All these practices corrupt the information processing of market institutions about which neoliberal ideologues like Friedrich Hayek love to rhapsodize. It's impossible for Amazon customers to be rational economic actors. Because of inadequate monitoring, sale of counterfeit or fraudulent items is rampant on Amazon. Its quality assessments are totally untrustworthy. And for any particular search string, the customer has no idea whether Amazon is showing you the "most relevant" products, as it claims, or the products that will most enhance its own bottom line.

All this illustrates a deeper point: Markets require regulation to work. They're theoretically supposed to harness self-interest and greed to get people to help each other economically, but cheating and fraud are always more profitable and, if successful, easier than honest business. Competition doesn't naturally happen along axes of price and quality rather than bareknuckle cheating or sabotage. That requires rules.

As yet, Amazon has suffered little blowback for all these problems. The reason is market power — customers have few options for whole classes of products, and the company has gotten so big (and is backed so strongly by the investor class) that it can gloss over these issues by keeping prices low and customer service reasonably good, at least for now.

That same market power is why Amazon is trying to bully hundreds of thousands of third-party sellers into swarming Congress. (Somebody has to keep Jeff Bezos mind-blowingly rich and regularly flying to the edge of space on a suspiciously-shaped rocket.) The company is almost certainly bluffing about its threats to shut down its marketplace — third-party sellers make up the majority of Amazon sales, providing it with virtually free money in the process — but sellers still might bend to this pressure.

If anything, the strategy shows Congress isn't going far enough: Lawmakers ought to break up the company in addition to regulating its third-party business. But for now, bringing antitrust regulation back from the dead is a good start. It's time to remind Amazon the United States government is not the personal plaything of the oligarch class.

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