Just in time for the holiday shopping season, California Attorney General Rob Bonta is bringing a lawsuit against Amazon for policies that have helped many buyers find what they are looking for and get the best online deals.
The suit concerns mundane, and haphazardly enforced, agreements between the company and the retailers that use its platform. In the terminology of antitrust law and industrial economics, there are broadly two kinds of agreements among firms. Horizontal agreements, such as price-fixing cartels, involve firms that compete at the same level of the distribution chain. Vertical agreements are those between suppliers and distributors.
Economists are virtually unanimous that horizontal agreements are significantly more dangerous than vertical ones. Recognizing this, U.S. courts evaluate vertical agreements on a case-by-case basis. By contrast, many horizontal agreements—including cartels—are prohibited outright. With his suit against Amazon, Bonta is trying to circumvent this tried-and-true principle.
The case concerns Amazon’s “fair pricing policy,” which requires that retailers not charge a higher price on Amazon than they do on other platforms. As with other vertical agreements, these “price parity clauses,” or PPCs, generally benefit consumers, who don’t have to waste time searching among sites, because they know they are unlikely to find lower prices anywhere else.
They also encourage e-commerce sites to improve their services. With PPCs, consumers have less incentive to use one platform to search for goods and another to buy the thing they are looking for. This means that all retail sites have an incentive to invest in having a good search function and easy consumer interface, rather than sacrificing both in favor of competing on price. Among the other valuable point-of-sale services that PPCs have encouraged retail platforms to invest in are curated reviews, side-by-side product comparisons and useful product suggestions.
For a company like Amazon, bare-bones sites that offer none of these bells and whistles present what economists call a “free-rider” problem. Many shoppers use Amazon as a convenient starting point for their product search. By requiring its retail suppliers to sign PPCs, the company is protected from being undercut by rivals that have made none of those investments in service. PPCs may also deter rivals who also sell through the Amazon platform from bumping up the prices they list on Amazon in order to discourage consumers from shopping there.
That is not to say that PPC clauses never create problems for consumers. They can sometimes make it harder for new retailers to compete with incumbents by offering lower prices. In a sane world, courts would judge the effects of Amazon’s policy carefully based on whether it is reasonable—a standard known in antitrust law as the rule of reason.
But that’s not what Bonta is calling for. Instead, he wants to portray this policy as a price-fixing agreement, on grounds that Amazon sometimes offers its own versions of products that other retailers also sell through its platform (even though PPCs do not limit this competition in any way). The reason for Bonta’s strategy is clear: if courts go along with the argument, he would not have to show that Amazon’s policy harms consumers—which it doesn’t.
Whatever one thinks of Amazon’s clauses, these agreements with retailers are clearly not a price-fixing cartel. Retailers are perfectly free to undercut the prices Amazon charges for similar goods. Amazon’s policy also doesn’t diminish competition among different brands. Sony PlayStation still competes on price with Microsoft’s Xbox.
If retailers think Amazon’s fees are excessive, they can take their business to a rival site, like Walmart, or sell exclusively through their own stores. We’ve seen Birkenstock, Nike, Ikea, and Gap all either contemplate or complete such moves. The stellar growth of rivals like Shopify and Etsy are also reminders that this market is dynamic and highly competitive.
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What’s more, it is not entirely clear that Amazon ever enforced the provision in question. To the extent they did, the sanction for infringing Amazon’s PPC was, allegedly, for a handful of sellers to be demoted from Amazon’s “buy box,” which also happens when another seller offers a better deal.
When all is said and done, Bonta’s suit obfuscates accepted economic and legal principles—including those crafted over decades by U.S. courts—in order to score a political win over a company that has, paradoxically, brought low prices and competition to the masses. This is the exact opposite of what antitrust law was designed to do.
Geoffrey A. Manne is president and founder of the International Center for Law & Economics (ICLE). Dirk Auer is ICLE’s director of competition policy.