Comment: Online retailers should follow FTC’s lead in Amazon suit

The antitrust suit provides a rule book on how to incentivize rather than punish sellers and customers.

By Leticia Miranda / Bloomberg Opinion

The Federal Trade Commission’s lawsuit accusing of running an illegal monopoly has potential implications beyond the e-commerce behemoth’s successful marketplace and logistics business. For retailers that followed in Amazon’s footsteps and launched their own online marketplace, the lawsuit should act as a code of conduct on what not to do regardless of the outcome of the lawsuit.

Retailers from Walmart to Macy’s have followed Amazon’s e-commerce playbook in recent years and launched their own online marketplaces where independent sellers compete for sales. But where Amazon has gotten in trouble with the FTC is through its alleged abuse of power as the dominant marketplace landlord, marketplace seller and delivery business. The FTC accused the company of using a “set of interlocking anticompetitive and unfair strategies,” including punishing merchants for selling their goods for less on competitor sites and burying sellers that don’t pay for the company’s delivery or ad services. Amazon said its practices have spurred competition and innovation across retail, and consumers would face higher prices and slower delivery without them. Even so, Amazon is the U.S.’s largest e-commerce company by far, taking almost 38 percent in market share, according to e-commerce market insights firm Insider Intelligence.

Not all marketplaces are the same. But there are some rules here that make for sensible business. For instance, Amazon sellers have long complained about unfair competition to win the site’s notorious “buy box,” which automatically gives one selected seller the sale on a certain product listing. To even be eligible, merchants must pay a monthly fee, and can increase their chances of winning the coveted position by paying Amazon to warehouse and deliver their goods. Amazon says shoppers are ensured of more reliable shipping if sellers use their logistics services because the company houses the goods, packs them and ships them. But buying into these services can be pricey, amounting to about half the cost of every sale.

But instead of reducing a merchant’s chances of winning sales, online marketplace retailers can consider incentives for sellers to use their logistics services as in the case of Walmart. Walmart ran a temporary offer earlier this year where new sellers could get a rate reduction on its fulfillment, advertising and pricing services. By incentivizing — rather than punishing — sellers, online retailers can avoid tarnishing relationships with small businesses on their platform while also encouraging the use of additional services.

Amazon’s marketplace model also goes wrong in how the company competes directly with sellers on the platform. Merchants have described the dynamic as similar to “trying to open a convenience store next to Walmart.” Third-party sellers not only have to compete with each other, but the owner of the market. Online retailers should instead consider making their third-party marketplace separate from their own site, similar to what Madewell has done. Madewell’s third-party marketplace, called “Labels We Love,” is a curated slate of independent companies selling on the company’s site. Each of these brands use their own customer service and logistics network, but essentially use Madewell as a platform for advertising. By doing this, the retailer avoids competing directly with independent sellers.

Amazon’s retail marketplace model upended the way shoppers traditionally buy and sell goods and services. Before Amazon, retail worked in a very simple way: companies wanted to sell something, they found a manufacturer (typically in China or some other low-cost producer), imported the goods and sold them in stores for (hopefully) a profit. And it’s true that Amazon’s marketplace business model spurred innovation across retail, particularly at a time when the industry was floundering as online shopping drew a bigger share of retail sales. But as business adopts new practices, it should also adopt new rules. That might end up being Amazon’s biggest misstep.

The federal scrutiny may already be encouraging Amazon to change how it does business and, by extension, how competing marketplaces do operate. It recently partnered with Canadian competitor Shopify to offer shipping through Prime, the company’s premium subscription program, even if a seller doesn’t not sell on the marketplace. It also recently dropped a planned fee increase for sellers who ship Prime-eligible products out of their own warehouses instead of Amazon’s.

Still more can be done. These changes don’t address the practices that have driven its marketplace to be as dominant as it is today. Amazon may have written the e-commerce playbook, but it shouldn’t write the rule book.

Leticia Miranda is a Bloomberg Opinion columnist covering consumer goods and the retail industry. She was previously a business reporter at NBC News and a retail reporter at BuzzFeed News.

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