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Are the antitrust laws implicated by Amazon’s new strategy of depriving sellers of access to its platform unless they offer it market-beating prices that they cannot offer to anyone else? The short answer is that the practice exposes Amazon to arguable but problematic claims under the restrictive federal statutes, but also to more promising claims under California’s more permissive antitrust laws.

The analysis is as follows. Amazon possibly has acquired monopoly or near-monopoly positions in some retail markets — for example, the submarket for the sale of e-books in the United States (which is a problematic market, but is one in which Amazon holds a monopoly position if the market is properly defined for antitrust purposes). This circumstance by itself is not a condemnation of Amazon. If Amazon holds monopoly positions, it has gained them by lawful conduct — that is, by offering a superior service that customers prefer. More recently, however, Amazon might have abused such monopoly positions as it might hold in order to preserve them. This new circumstance possibly implicates antitrust issues.

Amazon has become the indispensable distributor of reference for an ever larger number of suppliers and customers, but in a recent dispute with one of its suppliers, Hachette, a book publisher, it acted to prevent reasonable distribution of Hachette’s books unless Hachette sold them to Amazon at prices that Hachette could scarcely afford. If Amazon were to adopt this approach with other suppliers in other retail markets that it has come to dominate, the practice could allow it to entrench its existing monopoly positions and establish new ones, but it would expose it to credible claims of unlawful monopolization, attempted monopolization and conspiracy to monopolize in violation of Section 2 of the Sherman Act and related state-law statutes, as well as related claims for inducing unlawful price-discrimination in violation of the Robinson-Patman Act and conspiring with its (coerced) suppliers to impose unlawful restraints of trade in violation of Section 1 of the Sherman Act.

Under existing federal precedents, however, Amazon would have a strong defense against such claims. It could argue that it seeks only to obtain for itself the lowest possible prices that the market will bear, and that it passes along these market-beating prices to its customers, who benefit from them. Amazon could thus argue that its practice of exacting the lowest possible prices from its suppliers is profoundly pro-competitive and promotes the welfare of consumers in its markets by offering them lower prices than they must otherwise pay. The only rejoinder to the argument under existing federal law would likely be that Amazon offered prices that were below its own cost in order to drive rival retailers out of business, after which it would charge higher prices than it could have done had the rival retailers not been run out of business. Even then, it would still be necessary to show that no rival retailer could re-enter any of the affected markets in order to undersell Amazon once it decided to engage in price-gauging. That is, under the established federal law on “predatory pricing” the above antitrust challenge to Amazon’s harsh dealings with its own suppliers could succeed only if the plaintiffs were to show with proof that Amazon planned to exact supra-competitive prices in the affected markets after chasing its rivals from them, and that when it did so no new rival would be able to re-enter these markets in response to its excessively high prices. Amazon could further argue that it owes no obligation to do business with any particular supplier. So Amazon could be expected to argue in response to any of the above claims.

The rejoinder might be as follows. By subduing its suppliers and forcing them to offer market-beating prices on onerous or impossible terms, Amazon has excluded existing and potential rivals from competing against it, thereby depriving customers of choice of retailer or distributor and depriving them of the benefits of competition for their custom. This circumstance in turn has led to or will inevitably lead to a dearth of innovation and inferior service in the markets in question. It might even be possible to argue that the suppliers, confronted with such intolerable pressures, are unable to develop or offer their products in the manner in which they otherwise would have preferred! These lines of argument would be novel and innovative (if the presiding judge was moved by them) or lacking in support and subject to dismissal on the pleadings (if the presiding judge applied antitrust laws more stringently).

The U.S. Supreme Court has issued decisions on predatory pricing and refusals-to-deal that make such claims problematic or impracticable under federal law, but the challenge in those cases did not concern the loss of consumer choice and ensuing harm to customer service and innovation. Besides, these claims might enjoy a far more favorable hearing under California’s antitrust law, which in recent years has expressly declined to follow the federal standard for predatory pricing, and which sometimes gives a more favorable hearing to claims premised on the evils inherent in the suppression of competition without strict proof of higher prices or lower output.

Below I address these points more fully.

Amazon Likely Holds Monopoly Positions That It Has Lawfully Acquired

Amazon arguably holds a monopoly position in certain retail markets or “submarkets.” Its business model is ingenious, and its original success never entailed the slightest hint of any sort of antitrust violation. Rather, Amazon apparently succeeded the old-fashioned, time-honored way: By coming up with a better idea than anyone else, and by putting this idea into practice better than anyone ever could have reasonably expected: Amazon’s website offers more and better information about the broadest possible range of products, as well as the best available prices for these products. Its “fulfillment centers” (warehouses and logistical operations) allow it to fill most orders on short notice, often on the following day. It has transformed how customers shop for products, especially when they know in advance what they wish to purchase and do not feel any need to look at the product in person or “kick the tires” a little before making the purchase. Along the way, Amazon became so successful that it inevitably “disrupted” the way retailers make sales: Most large “brick-and-mortar” sellers have tried to adapt by developing their own online sales, and many new retailers principally make only online sales. Owing to network effects and imposing barriers to entry, however, Amazon alone rules the roost in this new world of online sales. It has become the eight-hundred pound peddler of goods to consumers.

In certain markets, Amazon possibly holds or is poised to obtain a monopoly position, which is presumed to exist when the seller makes at least 65% of overall sales of the product(s) in question in the market, and when its position is largely unassailable because of significant barriers to entry. See Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995) (“To demonstrate market power circumstantially, a plaintiff must: (1) define the relevant market, (2) show that the defendant owns a dominant share of that market, and (3) show that there are significant barriers to entry and show that existing competitors lack the capacity to increase their output in the short run.”)

In Amazon’s case, it likely makes 65% or more of overall sales in certain retail markets. On current trends, it will likely improve its position in these markets because of the following substantial barriers to entry: (1) The cost and technical expertise required to develop a huge network of servers and state-of-the art software that provides up-to-date information and ever-changing, market-beating prices for all products listed, with the information provided by Amazon and an ever-larger network of participating third-party sellers; (2) the costs and technical expertise required to open and operate warehouses and advanced logistical operations around the world and in all key metropolitan areas in the United States and many other countries; (3) the costs and technical expertise required to meet regulatory and taxation requirements imposed by a multiplicity of jurisdictions located around the world; and (4) formidable “network effects,” as ever more suppliers and consumers use Amazon as the preferred distributor for sales. Not many firms have the resources even to contemplate the challenge, let alone undertake it with success.

Amazon, then, likely has become a monopolist in certain markets. These markets would be those in which it makes 65% or more of sales of a given category of products (the relevant product market, which in turn consists of a particular kind of product and all reasonably interchangeable substitutes), but limited to specified geographic regions (the relevant geographic product market, which can be difficult to identify in the era of online sales, but often will be nationwide markets or smaller regions when the timing or cost of delivery is essential to the sale of the products in question). If Amazon holds this position in certain markets, the position is likely protected by the above barriers to entry, so that it would hold a monopoly position in any such market. To the extent that this has occurred, it is a blameless circumstance. Amazon obtained its success not by antitrust violations, but by developing a superior business model and surpassing even its own expectations when putting this business model into practice. This conduct is entirely lawful and even laudable: It is never an antitrust violation to acquire or maintain a monopoly position by providing goods or services that are superior or less expensive than competing goods and services. This is good, old-fashioned “competition on the merits” of the very kind that the antitrust laws encourage and strive to protect. Amazon’s original success, then, is a true success story of almost unprecedented proportions, not the illicit gains of an antitrust predator. Amazon appears to be a modern business that has adroitly figured out how to use modern technology in order to transform the manner in which customers buy products for their private use.

Amazon Is Likely Committing Ongoing Antitrust Violations in Order to Preserve and Enlarge Its Monopoly Positions, Even if It Acquired Them Lawfully in the First Place

So far, so good. But has Amazon nevertheless become an antitrust violator after gaining its dominant market positions in a lawful manner? Owing to its monopoly position or near-monopoly position in certain markets, Amazon has become an indispensable distributor of the products sold in these markets. If a seller makes one of these products, it will have too few sales unless it can sell them to Amazon. If it has too few sales, it will be unable to realize economies of scale necessary to remain an efficient supplier or even to remain in operation at all. Amazon, however, will refuse to list or sell the supplier’s products, or do so only in a very disadvantageous manner that discourages sales of its products, unless it submits to Amazon’s onerous pricing requirements. Many suppliers will reluctantly oblige Amazon, since the alternative is to suffer an unaffordable loss of sales and market presence. In this manner, Amazon is able to berate and subdue its suppliers into giving it market-beating prices that its direct competitors cannot offer. This practice in turn allows Amazon to preserve and enlarge its existing monopolies and to develop new monopoly positions in an ever-longer list of markets. This is problematic, since unlawful monopolization occurs when a firm uses anti-competitive or predatory practices in order to preserve an existing monopoly position, even if it acquired it by lawful means in the first place. See United States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S. Ct. 1698, 1704, 16 L. Ed. 2d 778 (1966) (“The offense of monopoly under s 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”) (emphasis supplied).

Disgruntled suppliers and direct competitors might then claim to be the victims of this misconduct, which can possibly be challenged under federal antitrust law, but the challenge would be highly problematic or possibly doomed at the outset. Here anyway would be the arguable challenge: By subduing its suppliers into offering onerously low prices, Amazon has committed unlawful monopolization and attempted monopolization in violation of Section 2 of the Sherman Act, and it has also committed an unlawful conspiracy to monopolize in violation of Section 2. See id. In addition, Amazon has prevailed on its vulnerable suppliers to conspire with it to commit unlawful restraints of trade in violation of Section 1 of the Sherman Act. CfLeegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877, 893-94, 127 S. Ct. 2705, 2717 (2007) (“A dominant retailer, for example, might request resale price maintenance to forestall innovation in distribution that decreases costs. A manufacturer might consider it has little choice but to accommodate the retailer’s demands for vertical price restraints if the manufacturer believes it needs access to the retailer’s distribution network…. As should be evident, the potential anticompetitive consequences of vertical price restraints must not be ignored or underestimated.”) (Citing 8 P. Areeda & H. Hovenkamp, Antitrust Law 47 (2d ed.2004)). Lastly, Amazon has wrongly induced its suppliers to commit unlawful price discrimination in its favor in violation of the Robinson-Patman Act. See 15 U.S.C. §13 (f) (inducing unlawful price discrimination).

The most notorious example of this arguable misconduct has occurred with book-sellers, whose books Amazon will not list properly, or timely deliver, or sell at all, unless the book-sellers submit to its oppressive pricing. Nothing prevents Amazon from using the same tactics in any market in which the original suppliers of the products overly depend on Amazon for ongoing sales because of its established position and the above barriers to entry.

I hasten to add that I have not independently examined these matters, much less confirmed them. My own sources are newspaper reports and such knowledge of retail markets as I have gleaned from my work in other matters over the years. I would not be surprised, however, to learn that Amazon is soon named as a defendant in a prominent antitrust case. It might beat the claim, even quickly. But if the court were to allow the claim to proceed, and if the suppliers or excluded competitors were to prevail by showing that Amazon used the system to snuff out promising challengers, the floodgates might open, and it would be named as an antitrust defendant in other, similar antitrust cases. Such a process is not a bad thing. Rather, it is antitrust law doing its work by checking the abuses of dominant firms. In response Amazon would likely reform its practices, failing which it would suffer the ruin of antitrust hell, exactly as it should do.

Amazon started as a revolutionary “disrupter” of an established way of doing business. It likely has become a monopoly in certain markets precisely because it has been so good at what it does. It perhaps has failed along the way to grasp that one of the very tactics that allowed it to excel (always insisting on obtaining the lowest possible prices) possibly exposes it now to antitrust scrutiny and sanctions. A firm may lawfully employ certain practices that later become unlawful only because the firm continues to use them in order to suppress competitors and fortify its monopoly positions.

An Antitrust Challenge Under Federal Law Would Be Problematic, But Possible. I add one last cautionary note before my readers seize the moment by racing to court to file antitrust claims against Amazon: Amazon’s defense would be formidable and possibly successful: It would argue that its practices are lawful under the antitrust laws precisely because they allow it to offer lower prices to its own customers. Such conduct is a legitimate, compelling business purpose of the kind that exonerates apparent antitrust offenses. See United States v. Microsoft Corp., 253 F.3d 34, 58-59 (D.C. Cir. 200 1) (to prove unlawful monopolization, the plaintiff must show that the defendant has acquired or maintained its monopoly position by means of anti-competitive conduct, as opposed to pro-competitive conduct that benefits consumers even if it destroys competitors).

The rejoinder, however, seems worthy of a full hearing. The above conduct, even if it leads to lower prices at present, also deprives customers in the affected markets of the intangible benefits of having various sellers vie for their business by offering innovative services or other services that an anonymous network of computers and logistical operations cannot offer. This loss of choice and ensuing lack of innovation and responsiveness to the customers constitute a form of harm to competition, unless we are all presumed to be soulless automatons who prefer to buy commodities at bargain-basement prices without regard to any other consideration. Amazon’s defense would depend upon the flawed presumption that only the current list price to the consumer matters. What should be decisive is not today’s list prices, but the long-term effects wrought by loss of competition and consumer choice. History confirms that such a loss of competition is eventually and inevitably ensued by deteriorating service, a lack of innovation, and even higher prices. At a minimum, these matters deserve full scrutiny.

Regardless, the modern United States Supreme Court has imposed formidable or really insurmountable barriers to any claim of monopolization that is premised on charging prices so low that rival sellers are run out of business. These claims can no longer succeed under Section 2 of the Sherman Act (the monopolization offenses) or the Robinson-Patman Act (unlawful price discrimination), save upon making a showing that has never been successfully made: Namely, the plaintiff must show that the predatory seller has lowered its prices below its own costs, thereby run its competitors out of the affected markets, and, having done so, plans to raise its prices to supra-competitive rates in these markets; moreover, after it raises its prices to supra-competitive rates that it could never charge in competitive markets, no existing or potential rival will be able to return to these markets to offer lower prices in response because of the barriers to entry. See Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc., 555 U.S. 438, 448, 129 S. Ct. 1109, 1118 (2009) (“[F]irms may not charge “predatory” prices — below-cost prices that drive rivals out of the market and allow the monopolist to raise its prices later and recoup its losses.”) (citing Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 222–224, 113 S.Ct. 2578) (extended explanation of this standard and its application to price-discrimination claims under the Robinson-Patman Act).

To make the above claims under federal law, it is necessary to compile hard evidence that the suppression of rival distributors and retailers in the affected markets has led to inferior service and a dearth of innovation. This lack of responsiveness and innovation in turn has snuffed out promising alternative business models that otherwise might have resulted in lower prices. Cf. Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877, 893-94, 127 S. Ct. 2705, 2717, 168 L. Ed. 2d 623 (2007) (“A dominant retailer, for example, might request resale price maintenance to forestall innovation in distribution that decreases costs. A manufacturer might consider it has little choice but to accommodate the retailer’s demands for vertical price restraints if the manufacturer believes it needs access to the retailer’s distribution network…. As should be evident, the potential anticompetitive consequences of vertical price restraints must not be ignored or underestimated.”) (Citing 8 P. Areeda & H. Hovenkamp, Antitrust Law 47 (2d ed.2004)).

The argument in federal court therefore must run as follows: Amazon, now protected from competition, no longer feels impelled to offer market-beating service, and besides the excluded competitors had developed new ways to make online sales but were prevented from making the effort before they could ever succeed at it. Had they not been run out of the different markets, they would have offered new services that allowed customers to purchase their preferred products on terms and conditions that Amazon does not offer at all or only at higher prices or otherwise on inferior terms.

California Antitrust Law Provides Better Support. A more promising route might be to assert claims for price discrimination, restraint of trade, and predatory pricing under the much more favorable antitrust precedents that are followed in California. These claims could concern only conduct that has had a substantial effect on businesses and consumers located in California. See Bay Guardian Co. v. New Times Media LLC, 187 Cal. App. 4th 438, 457, 114 Cal. Rptr. 3d 392, 405 (2010) (violation of California’s Unfair Practices Act occurs where seller sells its wares below its own cost for the purpose of eliminating rivals and without regard to any subsequent ability to recoup its losses) (“Even the objectives of the [federal and California] laws, though certainly similar, are not identical. The Sherman Act and Robinson–Patman Act seek to prevent anticompetitive acts that impair competition or harm competitors, whereas [California’s Unfair Practices Act] reflects a broader legislative concern not only with the maintenance of competition, but with the maintenance of fair and honest competition.”) (citing ABC Internat. Traders, Inc. v. Matsushita Electric Corp. (1997) 14 Cal.4th 1247, 1262, 61 Cal.Rptr.2d 112) (internal quotations omitted).

At a minimum, Amazon’s heavy-handed approach to its suppliers, most notoriously to booksellers, raises significant antitrust questions that deserve a full hearing. Has Amazon become an antitrust offender? It is now a serious question.

William Markham, San Diego Attorney, © 2014.