We Americans work hard, but we also love to play hard by engaging in an assortment of diverse hobbies. And as we all know, even with the Internet, finding that obscure item to facilitate our obsessive hobbies can often prove daunting.
Like many folks, my search often begins at Amazon where I can find not only items sold directly by Amazon but also items offered by thousands of third-party sellers. So long as an item is marked “Eligible for Amazon Prime,” my purchases are delivered to my door in two days. And, if something doesn’t work out, Amazon offers hassle-free returns. A shopper’s paradise.
Without question, Amazon Prime is an efficient and beneficial business arrangement: third-party sellers get access to millions of potential customers; Amazon earns revenue by respectively charging sellers a fulfillment fee and customers a Prime subscription; and consumers get access to a bevy of products with guaranteed two-day delivery and hassle-free returns. In other words, Amazon has created a healthy online market where lots of buyers and sellers can transact.
Unfortunately, many in Congress don’t see it this way. This January, the Senate Judiciary Committee—without the benefit of a legislative hearing—voted to approve S. 2992, the “American Innovation and Choice Online Act” subject to a Manager’s Amendment. The ostensible purpose of the bill is to impose a non-discrimination standard on platforms like Amazon to prevent self-preferencing. However, because the bill is poorly drafted and its unintended economic consequences never contemplated, the practical (and perhaps deliberate) effect of the bill will be to destroy the Amazon Prime business model.
Two provisions of the proposed legislation strike directly at the heart of Prime:
The first is contained in Section 3(a)(5) of the Manager’s Amendment, which would make it unlawful for Amazon to condition access or preferred status or placement on its platform “on the purchase or use of other products or services offered by the covered platform operator that are not part of or intrinsic to the covered platform itself.” In laymen’s’ terms, third-party sellers will no longer have to use Amazon’s fulfilment services if they want to sell products eligible for “Prime” designation on Amazon’s platform.
The problem, however, is that Amazon Prime is essentially a contract between Amazon and its customers: in exchange for a subscription fee, Amazon guarantees two-day delivery and hassle-free returns. While third-party sellers could certainly self-fulfill their own orders, the bill would effectively force Amazon out of the fulfillment process and thus preclude it from guaranteeing two-day delivery. After all, a company can’t guarantee what it can’t control. Unable to offer this guarantee, Amazon would be forced to limit the “Prime” designation only to those products that it both sells and fulfills to avoid legal liability, reducing customer choice.
(Of course, customers are always free to scour the Internet to find the individual items they want, order direct from third-party sellers’ own webpages, and then pay for expedited delivery on an à la carte basis. But it is unclear how legislation that deliberately raises transaction costs benefits consumers.)
The second provision is Section 3(a)(1) of the Manager’s Amendment, which is a direct ban on all self-preferencing. While such a provision may seem innocuous in concept, the actual draft language of the bill is not.
Basically, all the government would have to do to succeed is to demonstrate “by the preponderance of the evidence” that Amazon had “preference[d]” its own products, services, or lines of business over those of another business user “in a manner that would materially harm competition.” Not only does the bill establish a low evidentiary threshold for success, but the “materially harm” standard itself is also highly problematic.
To begin, the phrase “would materially harm competition” is ambiguous. Indeed, what exactly constitutes “material”? More than a minimum amount?
Similarly, it is odd that the bill deliberately uses the word “would” to evaluate on-going—rather than future—conduct. If some on-going conduct “would” violate a statute, then a firm could be in violation without any showing of actual harm. Basic due process, at least in the United States, requires an affirmative determination about whether some conduct does or does not violate a statute before the government can mete out punishment. We have a presumption of innocence in this country; we do not have a presumption of guilt.
Finally, yet perhaps most troubling, is the lack of any reference in the entire bill to the lodestar of antitrust law—the consumer welfare standard. This omission means that when evaluating whether a covered platform such as Amazon may have “materially harmed competition,” there is no possibility to conduct a rule of reason analysis to see if any of the alleged harms are outweighed by potential efficiency benefits. Instead, it is straight to the gallows: If found guilty, then Amazon would be subject to a penalty of up to 15% of total revenue for the time of the alleged infraction. At about $1 billion in sales per day, the risks to Amazon are enormous, especially considering the company’s operating margin is only 6%.
Which brings us back to the point of the pencil: the American Innovation and Choice Online Act, as currently drafted, would break Amazon Prime. It should come as no surprise that Amazon has informed its partners that the legislation, if codified, may force the company to shutter third-party sales. Sponsors of the bill argue nothing in the legislation requires Amazon to cease third-party sales and the company is bluffing.
Given that millions of Americans like Amazon’s business model the way it is now (not to mention relied upon Amazon Prime heavily to survive the lockdowns), is this legislative game of chicken one that some in Congress really want to play?
Lawrence J. Spiwak is the President of the Phoenix Center for Advanced Legal & Economic Public Policy Studies (www.phoenix-center.org), a non-profit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.