Regulatory Policy

Can I Speak to a Manager?

Packages at an Amazon fulfillment center in Robbinsville, N.J, November 2017. (Lucas Jackson/Reuters)
The American Innovation and Choice Online Act doesn’t live up to its name.

Earlier this month, U.S. senators Amy Klobuchar (D., Minn.) and Chuck Grassley (R., Iowa) unveiled plans for their American Innovation and Choice Online Act. The legislation would empower federal regulatory agencies to prevent the biggest platforms — namely, Amazon, Google, Facebook, Apple, and Microsoft — from giving preference to their own products and services over those of third parties. Unfortunately, the bill does not live up to its name: Allowing such companies to prefer their products over others confers value and convenience for consumers, not harm.

In an effort to transform online platforms into some sort of ideal of managed competition, the act constrains private companies in ways that would surely leave customers worse off. Consider just a few possible consequences: Amazon would not be able to offer free-shipping services on certain items; Google would not be able to display its map at the top of search results for local businesses; Facebook would be prevented from showing you a friend’s Instagram story at the top of your news feed; and Apple’s App Store wouldn’t suggest the apps that might be the best fit for users. Microsoft would even be swept up by the bill’s prohibitions, too, by no longer being allowed to integrate LinkedIn contact info with Microsoft Office 365.

This legislation is nothing more than a solution in search of a problem that doesn’t exist. Take Amazon, for instance, who makes money in two ways: first, from their cut from third-party sales on Amazon Marketplace and second, by competing against those same third-party sellers with their own generic-products line, Amazon Basics. The bill seeks to thwart Amazon’s promotion of the these private-label items, but neglects the fact that the company already must delicately balance these two revenue streams. The best way to strike that profit-maximizing balance is to let customers decide, not regulators. Whether it means suggesting an Amazon Basics product or highlighting a superior offering from a third-party seller, the market signals keep Amazon working hard to please customers. The same cannot be said for members of Congress willing to throw consumers’ interests overboard to score political points for bashing Big Tech.

Beyond that, such companies as Amazon are not doing anything online that traditional retail hasn’t been doing for decades. Brick-and-mortar grocery chains carry third-party brands, while also selling their own private-label versions of some products. Amazon generates only 1 percent of its revenue from private-label goods. Meanwhile, Kohl’s makes 46 percent and Target 33 percent  of their revenue that way. Big-box stores gather lots of information with their club cards and can use that data to make production and marketing decisions for their own brand. Amazon’s decisions about placements of third-party and generic brands in search results is a clear parallel.

In fact, Amazon has long had an internal policy prohibiting the use of third-party data to influence its product development. While its adherence to that policy has recently come under greater scrutiny, the truth is that Amazon’s alleged conduct is not sufficiently different from that of offline retailers. Generics often benefit consumers with more choices and lower prices.

And while some third-party sellers might not like to compete with Amazon’s free shipping, millions of Prime subscribers remain tickled pink about it. U.S. antitrust law is about making consumers happy, not placating one’s competitors. For the past 40 years, American antitrust law has revolved around the necessity of proving consumer harm in the form of higher prices, lessened output, or reduced innovation or quality. Where, then, is the consumer harm from Amazon generics giving buyers more choices, perks, and often lower prices? Ironically, harm can be found only in the unintended consequences of this bill.

Third-party sellers who are unhappy about competing with Amazon on the same platform are free to sell their wares elsewhere. Etsy, Shopify, eBay, Facebook’s Marketplace, a seller’s own website, or myriad offline options are all viable alternatives. If, on balance, the distribution and convenience that comes with selling through Amazon Marketplace is too beneficial for a vendor to resist, then competing with Amazon head-on is a trade-off worth making. But that calculus should be up to each third-party seller, not bureaucrats and politicians.

Antitrust mavens will note that Apple’s approach with its App Store, distinct from Amazon’s model, is also in the antitrust crosshairs these days. While Amazon competes head-to-head with some of its platform’s third-party sellers by offering its Amazon Basics generics, Apple instead takes a cut of payments made by end-users inside the third-party apps sold in Apple’s App Store, thereby reducing Apple’s incentive to make and sell competing “generic” apps. Apple spent the year defending its profit model in court and the fight will continue around the globe in multiple countries and antitrust authorities. The American Innovation and Choice Online Act calls the legality of Amazon’s alternative approach into question, too.

This uncertainty has a chilling approach for the whole industry. The message from authorities seems to be, “Don’t compete directly with third parties on your platform! But also don’t avoid direct competition with them by taking a cut of their profits!” What voluntary business arrangement will be next? The more business models that are challenged, the fewer ways platforms have to be profitable and the less the incentive to build new competitors to today’s leaders. If politicians and judicial activists are concerned with the market power of these platforms, they should consider what messages they’re sending to start-ups that could potentially challenge them.

Leaving companies the maximum freedom to use their private property as they see fit, including by trying varying revenue streams and developing new perks for customers benefits consumers and preserves competition. Micromanaging business decisions, as prescribed in the American Innovation and Choice Act, is very nearly the dead opposite.

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Jessica Melugin is the associate director of the Center for Technology and Innovation at the Competitive Enterprise Institute.

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