Like many ordinary consumers who make multiple buying decisions every day, my husband has to decide what he wants to buy, whether he should purchase online or from a local store, and which merchant to buy it from.
In addition to attending to household item needs, he tinkers with old trucks, so his restoration projects create a seemingly endless need for automotive components.
Each buying decision requires him to determine what weights he puts on three different criteria: Faster, better, cheaper?
When he needs a standard product, the decision is based on the urgency of the demand, because prices are competitive and the quality is known. Immediate purchases may require a run to the local store. Or he uses Amazon Prime if he can wait a day or two. The service provides him fast and free delivery, and he enjoys the peace of mind of hassle-free returns of unwanted items.
When he requires specialized or rare parts, he turns to specialty auto part shops–some may be nearby, but most are online. For online purchases on Amazon Marketplace, he is willing to put up with longer waits and shipping costs associated with non-Prime products. At other times, he sources them directly from the vendor’s website, or hops on the phone to get their expert sales advice. He knows he has to pay more for the benefits of these services.
Prime members–approximately fifty percent of the US adult population– routinely make similar purchase decisions. In addition to Prime, they subscribe to other memberships and loyalty programs, and shop around by choosing the marketplace that best fits their needs.
On the flip side, merchants also use several options when selling their products. They can set up their own shops, locally or online. Or they can use retailers and online marketplaces. Often, they rely on multiple channels simultaneously to optimize sales. Their decisions also require the same calculus: what weight should they place on faster, better, cheaper?
Fulfillment by Amazon (FBA) is popular among merchants who offer products that have a large customer base making frequent transactions. Nearly three-quarters of Amazon’s almost 10 million sellers are part of the FBA program, which grants them access to Prime’s logistical network of warehousing, shipping, customer service, and returns. They profit through an increase in revenue, and a decrease in fulfillment costs. Smaller or specialized merchants often choose to fulfill their own orders, and also use alternatives such as Etsy and Ebay, based on whether the benefits outweigh the costs.
The American Innovation and Choice Online (AICO) Act is poised to take such choices away. The Justice Department-backed bipartisan bill is being hailed as a modernization of antitrust. Says Senator Klobuchar, “At its core, this is about lowering costs for consumers and helping competitive business…the bill is pro-competition and it is common sense.”
Politicians are known to master the art of the sound-bite.
But a deeper dive into the Amazon Prime business model reveals why the Act will stifle the benefits of innovation, decrease competitiveness, and increase costs for consumers and merchants.
“Relentless Innovation” Underpins the Dominance of Amazon Prime and Marketplace
The AICO Act targets “Big Tech” based on the ideological premise that by definition, monopolies are anti-competitive. However, as I explained previously, Amazon’s dominance in online shopping is the result of the company outhustling its competitors, in contrast to many monopolies artificially propped by government regulation.
This difference was in stark display at the onset of the pandemic. While Amazon rose to the challenge of providing fast and low-cost home deliveries for an entire nation under lockdown, Internet providers enjoying local monopolies by government edict were not as responsive to the concomitant need for broadband access in rural and low-income communities.
With an unyielding focus on what Bezos calls the “divine discontent” of customers, Amazon Marketplace and Prime represent the biggest retail innovations in history.
Amazon is competitive, inasmuch as it has to earn every transaction on its marketplace. The sources of its competitiveness are the state of the art data analytics and a logistics and fulfillment network that integrates human capital, artificial intelligence, and robotics. This allows each transaction to be customized by the individual buyer or seller who choose what is in their own best interest, relative to their other available options.
The AICO Act will Hurt Consumers, Particularly Those Who Benefit from Lower Prices
The AICO Act prevents Amazon from using its marketplace insights to develop off-brand merchandise known as AmazonBasics. Policymakers have widely criticized this company practice for hurting competitors.
But it is no different than what American supermarkets do when creating their own private label grocery brands. Kroger relies on marketplace data to develop store-brand staples such as soups, snacks, and condiments. So do Walmart and Target, which provide prime shelf space to their own brands. Millions of consumers rely on these value options, particularly in a time of raging inflation.
By restricting AmazonBasics, the AICO Act would artificially prop up the few merchants who lose sales because consumers prefer lower prices at the expense of countless consumers hurt by the removal of cheaper options. And it would decrease competitiveness by bestowing an artificial advantage to Walmart and Target which are unaffected by the Act.
The AICO Act also prevents Amazon from noting which third-party merchants are part of their FBA program. Consumers such as my husband rely on Prime designations to determine which products have guaranteed free and speedy delivery. The faster, better, cheaper matrix consumers rely on to make their purchases would be broken.
Absent this differentiator, consumers lose valuable information and are less likely to buy from merchants on Amazon. In turn, Amazon will not be able to charge willing merchants for FBA, depriving it of the revenue and economies of scale needed to fund this revolutionary consumer program. Merchants would need to handle their own shipping without the efficiencies of Amazon’s innovations.
The AICO act will throw consumers back to the bad old days of long waits, high shipping costs, and complicated return policies.
The AICO Act will Hurt Merchants, Particularly Small and Specialized Businesses
The AICO Act will decrease competitiveness by bestowing an artificial advantage to USPS, UPS, and FedEx, the shipping companies that stand to gain the most if Amazon’s FBA is curtailed. Merchants who currently rely on FBA’s efficiencies will experience an increase in fulfillment costs and be deprived of the flexibility of choosing between faster, better, or cheaper.
It will also hurt third-party merchants who don’t participate in FBA, the very merchants it is supposed to help.
Third-party merchants account for 56% of sales on the Amazon marketplace and enjoy access to millions of customers who otherwise would not see their products. Amazon Prime Day alone boosts sales of small and medium-sized businesses. It accounted for 3.5 billion in sales in a single day at the height of the pandemic.
Prohibiting Amazon from using retail practices that are otherwise common in the industry will create a fundamental shift in its business model. Amazon has noted that the extreme fines associated with potential violation of vague, broadly written restrictions will “make it difficult to justify the risk of Amazon offering a marketplace in which selling partners can participate.”
The AICO Act will result in small and specialized merchants losing access to online customers like my husband, threatening their ability to survive.
The AICO Act is Un-American in its premise.
The AICO Act uses the strong and long arm of the Government to pick winners and losers. It represents a fundamental difference in the worldview of politicians vs. ordinary consumers and producers.
Whereas politicians operate in a zero-sum world of win-lose in election campaigns, consumers and producers operate in voluntary markets where mutually-beneficial transactions make all parties better off by allowing them to choose the best among available options.
As a country built on the freedom to choose and to excel, America has thrived due to the twin engines of innovation and enterprise that propel newcomers to displace erstwhile giants.
In the retail industry, Sears’ dominance in the early 1900s was challenged by Walmart in the latter part of the century. Itself the target of antitrust ire, Walmart’s dominance was ultimately checked by Amazon.
When the “divine discontent” of customers is matched by “relentless innovation” by producers, we all benefit from options that are faster, better, and cheaper.
That’s the way the marketplace works. Policymakers should avoid throwing sand in its gears and accomplish the opposite of what is implied in the name of the American Online Choice and Innovation Act.
The Act is Un-American as it reduces competitiveness by punishing Amazon because it is the preferred online choice of consumers and merchants alike, thanks to its innovativeness.