Amazon, Bullying, & Antitrust: Part 607

Acurrent_304x415[1]mazon has a reputation in many circles for being a ruthless competitor. Some have even gone so far as to wonder why Amazon hasn't been the subject of an anti-trust lawsuit brought by the DOJ or one of their smaller competitors. I used to defend Amazon with the argument that they hadn't broken any laws and that their behavior might be ruthless but it wasn't illegal. But after what I read today I am no longer sure if that is true.

Businessweek posted an excerpt this morning of Brad Stone's latest book. The book in question is a critical look at Amazon, Jeff Bezos, and how he is slowly becoming Doctor Evil. It's a good read, but there is one part in particular that caught my eye.

I'm talking about the section that focuses on how Amazon acquired Diapers.com in 2010:

In 2009, Jeff Blackburn, Amazon’s senior vice president for business development, ominously informed the Quidsi co-founders over an introductory lunch that the e-commerce giant was getting ready to invest in the category and that the startup should think seriously about selling to Amazon. According to conversations with insiders at both companies, Lore and Bharara replied that they wanted to remain private and build an independent company. Blackburn told the Quidsi founders that they should call him if they ever reconsidered.

Soon after, Quidsi noticed Amazon dropping prices up to 30 percent on diapers and other baby products. As an experiment, Quidsi executives manipulated their prices and then watched as Amazon’s website changed its prices accordingly. Amazon’s pricing bots—software that carefully monitors other companies’ prices and adjusts Amazon’s to match—were tracking Diapers.com.

...

In September 2010, he and Bharara traveled to Seattle to discuss the possibility of Amazon acquiring Quidsi. While they were in that early morning meeting with Bezos, Amazon sent out a press release introducing a service called Amazon Mom. It was a sweet deal for new parents: They could get up to a year’s worth of free two-day Prime shipping (a program that usually cost $79 a year). Customers also could get an additional 30 percent off the already-discounted diapers if they signed up for regular monthly deliveries as part of a service called Subscribe and Save. Back in New Jersey, Quidsi employees desperately tried to call their founders to discuss a public response to Amazon Mom. The pair couldn’t be reached: They were still in the meeting at Amazon’s headquarters.

On the one hand, this is just Amazon living up to its original name. On the other hand I am surprised that this didn't result in an anti-trust action. Folks, this is almost exactly a situation that inspired anti-trust laws in the first place, so you would think that Amazon would have been investigated and (hopefully) prosecuted.

The deal was investigated by the FTC but was eventually allowed to go through:

The Federal Trade Commission scrutinized the acquisition for four and a half months, going beyond the standard review to the second-request phase, where companies must provide more information about a transaction. The deal raised a host of red flags, such as the elimination of a major player in a competitive category, according to an FTC official familiar with the review. The merger was eventually approved, in part because it did not result in a monopoly. Costco Wholesale, Target, and plenty of other companies sold diapers online and off.

It's pretty clear why. One, Amazon doesn't dominate that market niche, and two, they didn't jack up prices after the acquisition.

This second point was one of the reasons that Apple and their co-conspirators lost, and it's also something Amazon generally refuses to do. Even though many of Amazon's detractor's claim that Amazon is going to do this eventually, there's no sign that Amazon has done it yet.

And so long as they keep their prices low they will probably be able to skirt anti-trust violations just about forever.

About Nate Hoffelder (11389 Articles)
Nate Hoffelder is the founder and editor of The Digital Reader: "I've been into reading ebooks since forever, but I only got my first ereader in July 2007. Everything quickly spiraled out of control from there. Before I started this blog in January 2010 I covered ebooks, ebook readers, and digital publishing for about 2 years as a part of MobileRead Forums. It's a great community, and being a member is a joy. But I thought I could make something out of how I covered the news for MobileRead, so I started this blog."

15 Comments on Amazon, Bullying, & Antitrust: Part 607

  1. “We kept prices low” isn’t a defense in an anti-trust suit. It’s just a very unpopular thing to argue against, so it’s going to take an AG and courts who value the law above consumer sentiment to actually get anything done against a company with the lobbying power of Amazon.

    • If prices stay low then it is going to be rather difficult to prove consumers were harmed. And that is the core principle of anti-trust.

      Please note that I didn’t say impossible, but if Amazon had jacked up prices then the case would be a slam dunk.

    • Modern interpretations of US anti-trust laws emphasize competition among producers rather than retailers. They also emphasize protecting competition in general rather than protecting specific competitors — so long as it’s possible for a new competitor to arise, competition still exists even if all current competitors are eliminated.

      And, as Nate noted, the modern goal of the anti-trust laws is keeping consumer prices low.

      • I’m not arguing that. I’m saying that the Sherman Antitrust Act has absolutely nothing to say about pricing – it’s all about keeping large companies from using extortion, cartels, and monopoly privileges to dominate markets – presumably with the endgame to control prices.

        Right now it’s in vogue to only prosecute for higher prices, because it’s easy to campaign on and popular with the public (look at how the Apple case has been portrayed on many an internet blog as big corporations trying to raise prices when the only illegal act was horizontal collusion – raising prices, MFN, and the Agency model in general are still perfectly legal). If an AG wanted to, though, there’s plenty of legal precedent to support going after companies for the kind of things Amazon does. Amazon just has a whole lot of money thrown at the government to make sure they don’t have to actually defend their business practices.

        • In the past when I’ve had discussions with the FTC and DoJ the impression I’ve come away with is that the courts will not listen to arguments of theory or principle regarding antitrust, and Congress gives them so few resources that they cannot afford to waste them on cases they cannot win. That means that pricing power is the critical test. If you want it different, tell your Congressional representatives.

          The idea that Bezos can exercise much pricing power in the wildly competitive retail marketing field seems absurd. Sure Amazon is a really, really big retailer. But entry is extremely easy (and Amazon goes out of its way to make it easy even for potential competitors). Aside from Kindles, there are already multiple Internet and brick-and-mortar sources of virtually anything Amazon might sell.

  2. Almost only counts in horseshoes and hand grenades. 🙂
    The same report made it clear the feds took an extensive look at the competitive impact of the purchase and found no reason to act.

    Two things to consider that the above report doesn’t mention: diapers.com itself was selling below cost (the story reported at NBC NEWS was they bought diapers at Costco to sell online for less than they were paying), and their market share was very small.

    http://www.nbcnews.com/id/39633906/ns/business-us_business/t/amazons-challenger-only-its-diapers/

    (Amazon itself was not all that big in consumables at the time: one of the reasons they wanted Quidsi so badly.)
    Hardnosed business practices may be shocking but antitrust (and predatory pricing) laws are very precise in what constitutes a violation.

  3. The fundamental rationale for the antitrust laws always was the analysis that monopoly leads to increased prices and decreased quality. That’s always the lead-in to any discussion with the FTC of DoJ on possible antitrust cases. If they don’t see a threat of increased prices and decreased quality I cannot imagine them moving. Why waste your extremely limited resources on cases where it’s very problematic whether you’ll get any support from the courts? It would just be another reason for Congress to cut your funds further. Let Bloomberg tilt at windmills if he likes.

  4. I’m still trying to figure out what the possible problem here is. You can go to any Costco, Target, supermarket, drug store, etc. and buy diapers. How is Amazon buying someone else selling diapers online anticompetitive?

    http://www.ftc.gov/bcp/edu/microsites/youarehere/pages/pdf/FTC-Competition_Antitrust-Laws.pdf

    “Antitrust laws were not put in place to protect competing businesses from aggressive competition. Competition is tough, and sometimes businesses fail. That’s the way it is in competitive markets, and consumers benefit from the rough and tumble competition among sellers.”

    • There isn’t a problem.

      It’s just that this is the kind of thing that Amazon’s detractor’s will point at and proclaim as evil and anti-competitive, and I thought it would make an interesting blog post.

      And it is pretty ruthless – just not illegal.

      • Fair enough.

        I poked around a little to see who has the most retail share of the baby diaper market. Total fail. But I did find this:

        http://www.babycheapskate.com/category/sales-deals/tdfdow/

        Which sort of suggests that (a) Amazon’s prices are NOT the lowest, but they are competitive and (b) that’s a freakishly competitive market.

        A lot of companies focus on pregnant women/families with babies because it’s a time in adult life when longstanding patterns are disrupted and replaced with new patterns that will tend to persist (subject to things like the kids get older and you move up in sizes and from diapers to sporting goods and stuff like that — but you may well keep buying all the kid crap at Target if you started there, or Costco, or Amazon, or whatever). It makes sense that Amazon would need to have an offering in this category (since they seem to want to be Most Things to Most People) — but it also seems like it’s unlikely to attract a lot of attention, given how outrageously competitive this area already is.

        It’s kind of funny tho; diapers are one of the things I don’t think I ever bought on Amazon. Mostly Costco and Target, some local stores. We cloth diapered for a while, too.

        • I’m not surprised.

          The thing is, Amazon is not guaranteed to always have the lowest prices. Nor do they dominate most of the markets they’re in. Those are both myths invented by Amazon’s detractors, and they’re also symptoms of ADS.

      • Oh, Amazon detractors will jump on anything — the stupider the better.
        In this case, the really interesting stuff is what Amazon did afterwards that is telling. Look at the progression: their business intelligence unit flagged diapers.com because they were (somehow) outcompeting Amazon. Then they went after them aggressively, to keep them out of WalMart’ s clutches. And then they bought Kiva Systems, the key to Quidsi’ s efficiency. They spent a billion and a half there.
        I don’t think the driver was diapers. 🙂

        There’s a lot of interesting things in that extract that suggests the book is worth picking up, worth discussing. The Amazon culture, the boomerang-ers, the chart showing their sales and the stock price running in lockstep, the lubricant story, even Bezos’ backstory.

        But antitrust?
        That’s ADS-sufferer fare. Boring.

  5. A few months before Amazon bought Diapers.com (Quidsi) Businessweek ran a cover story about the company (Oct-2010): “What Amazon Fears Most”
    http://www.businessweek.com/magazine/content/10_42/b4199062749187.htm

    Also interesting to note that one of the founders of Quidsi, Vinit (Vinnie) Bharara, is the brother of Wall Street’s nemesis, NY US Atty Preet Bharara. So, it would have been an act of extraordinary chutzpah to have bullied them into selling themselves to Amazon. Perhaps “an offer they could not refuse”?

    BTW, the Quidsi founders who stayed on after the acquisition left this past summer.

  6. Look at it this way, the discounts you get with amazon mom are no where near as generous as when they started, but it’s easy to set up and once you’re looking after a baby you can’t read a book so you watch some tv and before you know it you’re a subscriber to amazon prime for the movies etc…

  7. It’s certainly bullying, if that’s applicable in a business sense. And I suppose it is applicable.
    But amazon’s sins are not bullying smaller companies. It’s tax-dodging, treating temp-workers like crap and not giving to charity.

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