Antitrust 12/22/2020

How Amazon Wins: By Benefitting Sellers & Consumers

Chris Marchese
Chris Marchese Counsel

Amazon’s critics still cannot seem to define its business model correctly. They keep crediting Amazon for “inventing” retail practices that are decades-old and widely followed. Perhaps this is because no retailer has ever spurred so much competition, provided so many choices to consumers, or created so many opportunities for independent sellers and small businesses to enter new markets.

Just today, the Wall Street Journal printed an article by Dana Mattioli “exposing” Amazon’s manufacturing practices. 

Except it doesn’t expose much at all–unless you believe Amazon invented knockoffs. Instead, it details once again how Amazon pairs tried-and-true business practices from across markets with its marketplace platform to deliver outsized benefits to Americans.

Understanding Amazon’s Business Model

At its core, Amazon is just an online shopping mall and department store combined into one. Like your local mall, it’s home to sellers whose products range from furniture and fitness equipment to clothing and scented candles. And like Macy’s or any other department store, Amazon also makes and sells its own brands. Amazon is no different from old-school businesses—it merely uses standard business practices more innovatively. 

To be sure, Amazon isn’t your grandparents’ Sears. Amazon’s twist on retail is that it’s also an online garage sale. Spouses can sell never-opened, never-used gifts from their in-laws. College students can sell textbooks that once cost an arm and a leg. And shoppers can resell items after missing the return date.

Most important, Amazon’s retail space enables small businesses to reach buyers beyond their own backyards. Whether a small business owner operates from a storefront on Main Street or from her basement, Amazon’s marketplace means she has a store in every town in every state.

Amazon Follows Traditional Manufacturing Practices . . .

At the end of the day, Amazon’s business model is pretty traditional. Even so, Mattioli is shocked that Amazon-the-retailer also manufactures similar products for sale at different price points. She’s right: Amazon does that. So do most other manufacturers.

Take Ford Motors. Ford sells standard cars under the Ford line, mid-tier under the Mercury line, and premium under the Lincoln line. While marginal differences exist, the cars are in large measure the same.

The article suggests we should be shocked that Amazon makes similar products for different outlets to sell alongside its own brands. But again, this is another common practice for manufacturers.

Consider Costco. Duracell, the battery manufacturer, produces Costco’s Kirkland-brand batteries. Or take those two eerily similar furniture pieces you saw: the manufacturer of home goods for Target also makes similar ones for Crate & Barrel.

This means consumers like us are able to buy similar products at different prices. If we want premium, we can buy premium; if we want more affordable options, we have plenty to choose from. 

. . . But Thanks to Amazon’s Marketplace, Amazon Benefits Consumers Far More Than Traditional Manufacturers Do

These consumer benefits are not unique, but Amazon’s spin on retail is. Because Amazon is a one-stop-shop for products, independent sellers and small businesses are able to easily enter the manufacturing-and-distribution market. And consumers can use Amazon’s one-stop-shop to quickly compare and choose products.

In the past, a seller trying to sell competitor products would have to pay not only to manufacture the product but also to distribute them in stores. Because of Amazon’s marketplace, now sellers just need to contract with manufacturers to make the products and with Amazon to sell them to billions of potential customers.

Amazon makes it far easier for us to shop for the best deal. Using its marketplace, we have access to hundreds, if not tens of thousands, of products at different price points. We can tell from required photos and product descriptions whether something is what we’re looking for or if there’s a better alternative

Amazon suggests comparable products, even cheaper ones, so we are able to choose between a product and its alternatives. Even if physical retail stores could do that, they don’t have a vested interest in flagging cheaper competitors sold elsewhere. And assuming you got a very friendly clerk who alerted you of a cheaper alternative, you’d still have to travel elsewhere and hope it’s in stock.

Despite Amazon making it easier than ever before to help us shop intelligently, it’s not an all-out “race to the bottom”. Manufacturers still make, retailers still sell, and shoppers still buy premium name-brand products. Indeed, despite tons of cheaper alternatives, Gucci still sells for above-market prices.

Some critics still say that doesn’t explain why a manufacturer and retailer like Amazon would make similar products to sell under its own brands. Or why it makes similar products for its competitors to sell under their brands.

Mattioli suggests that Amazon does both to drive competitors out of business. According to her reporting, Amazon copies good ideas, tracks down the manufacturers who turn those ideas into products, contracts to make its own version of them, and then sells them at better prices.

But this means more choices at better prices for consumers. Like Macy’s, Target, Walmart, or even your local grocery store, Amazon looks for market opportunities to see which products could be made and sold for less.

Because almost every item sold at retail has high markups, the opportunities are nearly limitless. Costco’s entire business model is to buy and sell wholesale products at wholesale prices. And for some products, Costco goes a step further, making the product itself and selling it under its own label. The same is true of affordable clothing stores like Gap and Old Navy. 

Manufacturers understand this too. That’s why many choose to sell their products to multiple brands, even ones that compete. Duracell makes the battery that Costco sells for less than Duracell’s own name-brand battery because it makes economic sense. It already has the manufacturing capabilities and already knows that Costco’s Kirkland brand has an active customer base.

Amazon Disrupts Markets, Benefits Consumers

These are widespread manufacturing practices. But Mattioli sees something unseemly and suggests Amazon is competing too hard in too many markets. For proof, she cites the example of Pirate Trading LLC–a company that once sold more than $3.5 million a year of its Ravelli-brand camera tripods. That is, until Amazon ordered competing tripods from the same manufacturer and sold them for less. Today, Pirate Trading sells fewer tripods and earns less revenue. 

While Pirate Trading isn’t happy about this, consumers and photographers are because they can buy a tripod for less money than before. That means more money saved.

And Amazon is not alone—thousands of independent sellers enter markets ripe for disruption and compete against established brands in markets ranging from phone cases to curtains to bicycles.

This competition is good for consumers. We get more products at lower prices and sellers are forced to stay innovative. With Amazon and so many others selling similar versions, Pirate Trading could have innovated and created something entirely new or better. It didn’t. As a result, it’s seen consumers choose cheaper alternatives.

For truly original products, copyright and patent law offers adequate legal protection. Mattioli’s article cites West Elm, which sued and settled with Amazon after the latter began selling chairs similar to its own. In that case, West Elm created a truly distinct product and took advantage of the country’s patent process to protect it from competition.

In most cases, however, Amazon makes and sells products that aren’t unique and don’t get special government-granted monopoly rights.

Even so, the article still insists that Amazon is up to no good because it shows competing products next to name-brands by using search data to make recommendations. But this is a standard retail practice designed to give consumers choices. 

Brick-and-mortar retailers sell their generic products right next to name-brand products and even package them similarly. If you’re looking for headache medicine, CVS sells Advil on the same aisle as generic ibuprofen. The same is true of Amazon.

Amazon, in fact, is even more consumer-friendly because it personalizes our experience to suggest products tailored to our search–it does the work for us. When we search for specific products, it returns those products and their closest competitors. When we search more generally for “headache medicine” versus “Advil,” Amazon also returns comparable products like aspirin.

Again, this is good for us— more sellers get to compete in the market and we, consumers, get the best possible price on products that most closely match our needs.

At bottom, these practices aren’t unique to Amazon and benefit businesses and consumers across the retail sector. But because Amazon empowers so many sellers and so many consumers, its practices have an outsized benefit. 

With Christmas just around the corner, millions of Americans already know this. 

Next Post AWS & Parler’s Break-up Increases Competition in Both Social Media and Web Services: A Win for Users