An FTC lawsuit could create a better online marketplace for us all

While the online shopping ecosystem is a more convenient way to shop for consumers and has opened up new opportunities for sellers, it could be so much better.

When shopping this holiday season, there is a good chance you’ll be online. Last year, over 87 million Americans went online to shop on Black Friday alone. Sites like Amazon have made the shopping experience simpler for a lot of us, and they’ve mostly eliminated the need to line up outside of big box retail stores in hopes of securing the holiday season’s most elusive gift ideas. 

While the online shopping ecosystem is a more convenient way to shop for consumers and has opened up new opportunities for sellers, it could be so much better.

The ability to sell to consumers online means sellers reach consumers far and wide, expanding the market. Consumers benefit from access to more sellers which should translate to greater competition. More competition also means that opportunities for sellers to make high margins on any particular product may be short-lived depending on the intellectual property and uniqueness of the product. This means lower prices for consumers. 

However, this process has been skewed by the overwhelming dominance of Amazon over the marketplace. Amazon is by far the largest e-commerce store in the U.S. effectively making Amazon its own market. Its size and the lack of competitive alternatives mean Amazon has a lot of power to dictate the terms of online commerce for sellers and consumers. And consumers don’t always get the best deal on Amazon. Independent observers have noticed how everything on Amazon is becoming an ad, how paid reviews continue to be a problem and how unsafe products remain available on Amazon. 

Amazon also uses its size — the large variety of products it sells and its customer base — to spread the costs of setting up its national delivery and logistics network and use its purchasing power to buy in bulk at discounted rates. Consumers could benefit from these lower prices if Amazon faces competition. It is the threat — real or potential — that consumers will switch and buy products from other online marketplaces that incentivizes Amazon to pass on cost savings and keep improving its services. Without this competition, consumers do not get all of the benefits that they would get otherwise. 

It is this competitive dynamic among online marketplaces that is the focus of the Federal Trade Commission and 17 state attorneys general’s recent lawsuit against Amazon. The FTC lawsuit alleges that because of Amazon’s size and importance to any seller’s e-commerce sales, it can manipulate its search results — what we see when we search for a product on Amazon — to effectively force sellers to use Amazon’s own delivery service and stop the seller from pricing competitively on other online marketplaces. This is because if a seller is demoted in Amazon’s search results its chances of making a sale drop dramatically as most users tend to purchase products recommended by Amazon or those that appear on the first page of search results. 

In this way, Amazon can use its control over sellers to impede the growth of other online marketplaces. It can then exploit this lack of competition to charge sellers ever-increasing commissions and fees and push consumers to paid search results that might not be the best deal for them. The result, as the FTC explains in its lawsuit, is higher prices for consumers on Amazon and other online marketplaces.

If the FTC succeeds in its lawsuit, it could potentially help create a marketplace that truly benefits the ecosystem of sellers and all consumers. Sellers would be able to freely use alternative delivery and fulfillment services and list their products on other online marketplaces at competitive prices. This would allow smaller online marketplaces to grow and exert a competitive constraint on Amazon. 

Smaller online marketplaces need to grow to provide comparable delivery services, offer better prices, and become an attractive alternative for both sellers and consumers. More competition should mean lower seller fees — passed on as lower prices to consumers, and service improvements like search results based on price, quality ratings, delivery time, and similar objective criteria.

Amazon would also need to respond to this new competition. If you decide to keep shopping with Amazon you should expect better search results, lower prices and bespoke service options like a cheaper delivery-only Prime membership without also having to pay for Amazon’s video streaming service. If not, you would have the option of taking your business elsewhere. 

This changed competitive dynamic should mean a better e-commerce experience for all.

Sumit Sharma is a senior researcher for technology competition at Consumer Reports.