Private label business: Amazon’s leveraging strategy

explained, Google benefits from higher CPC so for other companies it is more difficult to offer better deals, and Microsoft is trying to do it and can try to do it thanks to the fact of being a very big and wealthy company that can also suffer losses from the search engine market.

The result of Google giving away users’ personal data to advertisers is that these are able to discriminate more precisely and actuate personalized pricing (see section 5.1.2), practice that can harm consumers as we discussed in the relative section.

5.4 Private label business: Amazon’s leveraging strategy

Amazon has been introducing private label brands since 2009. At the moment the company has 20 private labels brands in 18 different categories, ranging from food to electronics: the most known is certainly Amazon Basics, that accounted for 85% of the company’s private label sales in 2017, while most of the other brands don’t even bare the company’s name and many consumers don’t even know they are buying an Amazon product. The products are sold only on Amazon

Marketplace platform. Some expert sustain that these are the results of an anti-competitive strategy that Amazon pursued for years: Amazon uses Marketplace as a laboratory, analyzing sales and consumer behavior data about third party products to understand the performance of products sold on its platform and then introduce its own products in the platform according to the results of its analysis. In this way, before introducing its own private labels brands products, Amazon knows they would be profitable: for example, the company could invest in a product that had great success offering a private label brand alternative and giving it more visibility on Marketplace (Amazon can do this since it controls the platform); Amazon can do this without taking risks for putting a new product on the market, since the risks were on the third party seller that in the first place started selling its product on Marketplace because they “bear the initial costs and uncertainties when introducing new products; by merely spotting them, Amazon gets to sell products only once their success has been tested”. [21] Randy Miller, a former director at Amazon, provided further it evidence of this with his statement of “if you don’t know anything about the business, launch it through the Marketplace, bring retailers in, watch what they do and what they sell, understand it, and then get into it”. [12] Research confirms Mr. Miller’s statement, indicating that talking about a product category, “entry by Amazon is more likely for products with higher prices, lower shipping costs, and greater demand, with the likeness for entry increased by the average consumer rating of the product”. [71] The result is that Amazon is largely benefiting from its private labels business:

Amazon Basics holds higher market share than branded competitors in many product categories, for example in online battery purchases it surpass Duracell, Panasonic and Energizer; in online

purchases of diapers it came only after Huggies and Pampers.

In addition to creating its own private labels brands, Amazon has been acquiring companies with an already established private label brand, for instance the company bought Whole Foods in 2017 that was already very well known in US for its private label brand 365 Everyday Value. This attitude shows how Amazon is exploring continuously new product areas to enter in.

5.4.3 Anticompetitive consequences

Amazon’s growth thanks to this strategy pose anticompetitive concerns. With its private label brands Amazon is growing barriers: a 2017 study called “State of Amazon Marketplace” [72]

interviewing 1600 Amazon sellers show some interesting outcomes. As we can see from the results in Image 5.8, 45% of sellers on the platform are most concerned about Amazon competing with them, 50% about the high fees imposed by the company and 52% about Amazon taking away their seller privileges.

Image 5.8 Amazon Marketplace Sellers’ biggest concerns. [72]

This study show how sellers are losing trust in Amazon and starting to realize how its business it’s trying to do all to favor its brands, by copying rivals’ best products, putting these on the platform at a lower prices and higher rank, positioning the rivals in a situation of disadvantage and causing a decrease in sales for them. To ensure retailer compliance, Amazon uses service level agreements (SLAs) providing sellers with a feature where they can view their performance scores every day, with the fees and the fines they accumulated for poor scores: in fact, the company sanctioned aggressively third party sellers that don’t comply with delivery schedule, need re-packaging and so on. At the same time, sellers can’t do anything more than complain, because they can’t give up being on Amazon’s platform since without being there they wouldn’t be competitive: they depend on Amazon. “This feature of Amazon’s power largely confounds contemporary antitrust analysis, which assumes that rational firms seek to drive their rivals out of business. Amazon’s game is more sophisticated. By making itself indispensable to e-commerce, Amazon enjoys receiving business from its rivals, even as it competes with them. Moreover, Amazon gleans information from these competitors as a service provider that it may use to gain a further advantage over them as rivals—

enabling it to further entrench its dominant position.” [21]

There are three forms of manipulation that Amazon uses to this purpose: product search, product cost and scalability. The first type is the one we just discussed, manipulation of the way consumers search for products in the marketplace: Amazon controls its platform so it can leverage its ads and put labels like recommended products (Amazon’s choice, Best Seller..) to shift focus towards its products making them more visible and making more difficult for third party sellers to merchandise theirs. Researches show that 70% of consumers select a product from the first page results, and less than 10% goes until the fourth page: this give an idea of how difficult can be for third party sellers products to be found. Sometimes, in order to gain ranking, sellers decide to pay a 10-20% fee on sales to Amazon to warehouse and ship their product for them (“Fulfilled by Amazon” program). It works, since according to a report conducted on 250 products “Fulfilled by Amazon vendors and Amazon itself were just about the only sellers — 94 percent of the cases we analyzed — that ever

product cost, since Amazon is able to offer, as we said, private label brand products at the same quality of the branded ones but at a lower price. Searching on Amazon.it “Duracell batteries” the first result shown are the one of Image 5.9: even though I specified in the research the brand

“Duracell” the first result shown is Amazon Basics batteries, with a price of 13,25€ for 48 batteries.

Immediately after, we find the Duracell ones, provided with 42 reviews against the 1080 of the Amazon Basics ones, and at almost the same price (something more since it is 13,96€) but with half the number of batteries, 24 instead of 48.

Image 5.9 First two results from the research “Duracell batteries” on Amazon.it The unit price is half and the private label Amazon Basics for batteries has good reviews, fast delivery and easy returns: this make it more attractive to buy these ones.

The last form of manipulation is scalability and it refers to Amazon’s ability to completely control its marketplace platform.

It is very difficult to demonstrate the anticompetitive effect of Amazon’s tactics since it could be seen just like vertical integration, a totally competitive practice.

5.4.4 Consumers’ harm

Bezos’s company has always claimed to be consumer centered, putting consumers at first and doing everything to satisfy them. Anyway, the practice described is not only disadvantageous for sellers, but also harms consumers. Some investigations reported how it affects consumers: giving advantage to its products in the product search Amazon hides better options where consumers would pay less.

The study conducted on 250 products revealed how “an Amazon customer who bought all the products from the buy box would have paid nearly 20 percent more than if they had bought the cheapest items being offered by other vendors”. [72] In order not to be tricked they could do a depper research since “sellers who don’t win the buy box are placed on a page called “More Buying Choices,” on a list that Amazon describes as ranked by price plus shipping.” But even doing so, in the “price + shipping” ranking Amazon omits shipping costs only for its products and the ones that have a membership with Amazon, so consumers can also be tricked to think one product is cheaper and then, at the end of the transaction, they see they have to pay also the

shipping costs that were not specified before:“since Amazon doesn’t include the cost of shipping for

itself and its fulfillment partners, the rankings on that page can be misleading.” [72] This led consumers to make uninformed choices, reducing their welfare.