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Antitrust: When You Change the Model, You Change the Math for American Small Businesses

American small businesses should be deeply concerned about Congress’ desire to dramatically alter the rules regarding e-commerce. While Rep. Cicilline and his Judiciary Committee colleagues contend they are trying to “restore a competitive marketplace, enhance innovation, and protect our democracy,” their real goal is to punish America’s leading tech companies for their success based on faulty reasoning that “big” must be “bad.” What’s worse, they are ignoring the legislation’s serious and wide-ranging unintended consequences on small- and medium-sized businesses, which make up roughly half of the American economy.

When legislators and regulators try to drastically change business models by fiat, ignoring market realities, there are always unintended consequences that are almost always borne by small businesses and consumers in the form of higher prices and diminished service. The American Choice and Innovation Online Act, legislation that would create new restrictions on how online marketplaces sell products, would almost certainly have drastic consequences for small business sellers that take advantage of Amazon’s online marketplace. While the stated purpose of this bill is to prevent large companies from unfairly disadvantaging smaller rivals the bill is so overly broad that it would have far-reaching negative implications for small sellers in those marketplaces. 

Amazon’s marketplace is extraordinarily popular with both buyers and sellers for a reason: it works. It works for consumers that want to find millions of different products in one place, it works for large brands that want to benefit from Amazon’s customer base, and it benefits small sellers that could never have the reach or exposure Amazon provides. Prime Day 2021 was the biggest two-day period ever for Amazon’s third party sellers, nearly all of which are small and medium-sized businesses. According to the company, “Customers spent over $1.9 billion on more than 70 million small business products during the promotional period, more than a 100% year-over-year increase on sales compared to the Prime Day October 2020 promotion.” 

It appears that Congress is suffering from tunnel vision, and Members are so focused on regulating large technology companies that they failed to ask important questions on how this will impact small businesses.  These potential effects include: 

    1. A complete shutdown of Amazon marketplace: Despite the rhetoric focusing on Amazon Basics, forcing Amazon to stop selling “its own products” is far more expansive a restriction than just forcing it to shut down private label, which makes up a tiny fraction of Amazon’s business. Instead, it would make Amazon either shut down its entire wholesale (aka “first-party”) retail operation, which is over 40% of its business, or divest or cease to operate its marketplace for independent sellers.  Buying inventory wholesale through vendors is how Amazon’s big box competitors principally operate, and it allows retailers to maintain adequate inventory and secure competitive pricing of key products from major CPG brands such as Proctor & Gamble and Kimberly Clark. Shutting Amazon out of this commonplace model for retailers isn’t feasible, particularly when no other retailer would be subject to the same restrictions.  If forced to choose between its first-party operation (wholesale vendors) and its third-party operation (small sellers), what if Amazon decides to eliminate the marketplace and become a traditional retailer like its primary retail competitors such as Walmart, Target, and Costco?  As written, this is a likely outcome of the package of legislation, yet it is something that the bill’s authors have not addressed. There are literally millions of sellers on Amazon.com – would eliminating the marketplace be an acceptable outcome, Reps. Nadler and Cicilline?
    2. Expansive language that kills services sellers love: Amazon’s fulfillment services (“FBA”) are a godsend for small businesses, who effectively get storage, packing, shipping, returns and exchanges, and even sales tax calculations as a service from Amazon and provide a significantly better experience for their customers. Would Amazon displaying products from third party sellers that use FBA and Amazon Prime at the top of search results be considered preferencing? Or what if the FTC takes the position that FBA is inherently self-preferencing because other companies also provide shipping services to sellers and uses its new powers to force Amazon to divest its fulfillment services? That would be devastating for small sellers.
    3. Increased commissions and fees for third party sellers: If Amazon’s marketplace was forced to become a separate company, it would lose the efficiencies and savings that come from being part of a larger technology and retail company. Warehousing and shipping costs would certainly go up. Should American small businesses be forced to sell on an inferior marketplace that would charge more, just in service of Congress’ crusade against “big tech”?  Also, there is no separate marketplace store today and no separate website brand, so any separately operated store would need to start from scratch in building all the store functionality and brand recognition that Amazon has spent decades developing on behalf of independent sellers.
    4. Losing Ground to Foreign Competitors: If Amazon is no longer an attractive partner for thousands of small and medium-sized businesses, others will almost certainly fill that void. Companies like Alibaba or Wish that benefit from China’s rampant crony capitalism, and that aren’t covered by this legislation, would be more than happy to step in and offer small businesses the services Amazon once did. Would that be a good outcome for American business?

 

These are important questions that Congress has to ask. But in reality, they don’t want to ask, because the answers are uncomfortable. There is no simple way to “separate” the marketplace – to “change the model” – without changing the business, and in turn, “the math.” As previously noted, there’s no separate marketplace website, no separate logistics operation for the marketplace. Amazon is a retailer that offers this integrated service to small business sellers because it is good for sellers and good for customers. We know this because Amazon tried it. Separate marketplace sites Auctions (variable pricing) and zShops (fixed pricing) failed miserably because consumers, surprising no one, like one-stop shopping. 

Digital platforms are extraordinary. They create environments and opportunities for vast numbers of small businesses to create, innovate and compete against each other and longstanding incumbents. The ramifications of this bill go far beyond Amazon by undermining the growth of any potential future marketplaces, at a time when a broad range of retailers are launching marketplaces that allow small sellers to sell in their stores

By empowering small businesses to find customers, access tools and win, marketplaces naturally drive prices down and quality up across product lines, industries, and regions. This model has allowed small businesses across the country and the world to participate in the retail revolution and benefitted millions of American consumers. Legislation like the one that is currently being considered what grind that progress to a halt. 

Supporters of the House antitrust legislation don’t appear to have thoughtfully considered the digital economy’s considerable value, or the impacts the proposed restrictions would have on millions of small businesses that benefit from these platforms.  

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