Amazon monopoly allegations a warning to SA ecommerce

  • The Federal Trade Commission (FTC) has published a court ruling that exhaustively details Amazon’s anti-competition behaviour in the US and how it harms consumers in order to boost its own profits.
  • One of these methods is through an algorithm that can be used to beat competitors by matching their prices.
  • With Amazon launching next year in South Africa, the allegations paint a bleak picture of what the local ecommerce industry can expect from the retail giant.

A recently released court ruling [PDF] from the Federal Trade Commission (FTC) in the US has revealed a series of allegations on ecommerce giant Amazon’s anti-consumer behaviour and market constricting strategies it employs to boost profits. With Amazon launching in South Africa next year, the allegations should put both potential vendors and other ecommerce platforms on notice.

Many of these strategies, the FTC says, are illegal and damaging. One of which is the employment of a “secret algorithm” that Amazon calls ‘Project Nessie’ to deprive American shoppers of lower prices by predicting when competitors will raise their prices.

This algorithm works for Amazon by deterring rivals from selling products at more competitive prices since Amazon copies prices of competitors, both up and down, and because it enjoys more popularity and mind-share, competitors will lose customers to Amazon.

“Rather than trying to compete, Amazon uses a ‘game theory approach,’ never making the first move and instead disciplining rivals by rapidly copying others’ moves to the penny, both up and down. The goal is to ensure that rivals’ price cuts and discounts do not translate to greater scale, only lower margins,” the FTC explains the court ruling.

“By taming price cutters into price followers, Amazon freezes price competition and deprives American shoppers of lower prices,” it adds. In total, this algorithm is claimed to have generated more than $1 billion in excess profit for Amazon.

Among the highlights of the FTC ruling is the outright statement that “Amazon is a monopolist.”

“It exploits its monopolies in ways that enrich Amazon but harm its customers: both the tens of millions of American households who regularly shop on Amazon’s online superstore and the hundreds of thousands of businesses who rely on Amazon to reach them,” the FTC continues.

One of the ways Amazon is harming vendors that sell on its platform is through the extreme fees it charges them. Amazon is now reportedly taking “close to half” of every dollar from the typical Amazon vendor.

In public statements Amazon says that it recognises that vendors are struggling because of these high fees, but as one vendor explained to the FTC, “We have nowhere else to go and Amazon knows it.”

This is not even counting allegations the FTC made in June that Amazon uses “dark patterns” or methods to purposefully make it harder to unsubscribe from its products and “coercively” funnel users to buy Amazon Prime subscriptions.

In October, after several years of speculation, announced that it was indeed launching an online store in South Africa. This Amazon arm would leverage local vendors to get products to potential South African shoppers faster and with less shipping costs involved.

As part of the announcement, the ecommerce giant made it clear that it was looking for vendors to sell on its platform.

“We look forward to launching in South Africa, providing local sellers, brand owners, and entrepreneurs – small and large – the opportunity to grow their business with Amazon, and delivering great value and a convenient shopping experience for customers across South Africa,” said Robert Koen, general manager of the Sub-Saharan Africa region for Amazon, at the time. The company did not mention what fees it would be charging these vendors.

Allegations of Amazon’s price-matching tactics, and its monopolising and anti-consumer behaviour paint a bleak picture for the future of ecommerce in South Africa. With the FTC claiming that Amazon fears any sort of market disadvantage, it is highly likely that it could employ the same tactics in South Africa against rivals such as Takealot.

In July, the South African Competition Commission called out Takealot, the biggest etailer in the country, for its own anti-competition behaviour and recommended a set of changes it should undertake.

This included the segregation of its retailer division from its marketplace operations, the appointment of different executives for both, the ceasing of “product gating” that ensures that certain products can only be sold on certain platforms, and allowing employees to speak up when they perceive anti-competitor behaviour from the platform, among others.

Competition Commission chief economist James Hodge made it clear that the Commission would be imposing the same suggestions on Amazon would it eventually launch in South Africa.

It is unknown if Takealot has enacted any of the Commission’s suggestions, especially as it has not been seeing the most successful 2023 of its existence.

Amazon will launch in South Africa through sometime in 2024.

[Image – Photo by ANIRUDH on Unsplash]


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