In an interview with an antitrust expert Sally Hubbard, we discussed what makes Amazon a monopoly, how that affects consumers, businesses relying on Amazon, and competitors, as well as what actions and regulations antitrust investigations might bring in the future.

Sally Hubbard is Director of Enforcement Strategy at the Open Markets Institute, an organization developing solutions to America’s monopoly crisis. Previously Ms. Hubbard was Senior Editor of Tech Antitrust Enforcement at The Capitol Forum, where she specialized in antitrust, data regulation and tech giants. Ms. Hubbard served as an Assistant Attorney General in the Antitrust Bureau of the Office of the New York State Attorney General under three administrations. Ms. Hubbard has testified in the U.S. House of Representatives and before the U.S. Federal Trade Commission and regularly serves as an antitrust expert for national and global news programs. Ms. Hubbard has published her views in media outlets like CNN and The New York Times.

Is Amazon a monopoly?

Sally Hubbard: Yes, monopoly power is defined as the power to control prices or exclude competition. Amazon has the power to do both. But being a monopoly on its own is not illegal under the antitrust laws. Illegal monopolization requires both 1) monopoly power and 2) that the firm acquired, enhanced, or maintained that power by using exclusionary conduct.

Exclusionary conduct includes things like predatory pricing, exclusive agreements, refusing to deal with a company, most-favored nation clauses, designing your product or service in a way that excludes competition, and more types of anticompetitive behavior.

Some have argued that Amazon’s relevant market is all of retail, that puts the company at single-digit percent market share. Doesn’t that make Amazon not a monopoly?

Sally Hubbard: Monopoly power can be proved by direct evidence: the actual exercise of control over price or the actual exclusion of competition. Defining the market and looking at market share is a form of second-best indirect evidence and shouldn’t even be necessary here because direct evidence exists.

In any event, antitrust enforcers determine the relevant product market by looking at substitutes. If Amazon were to raise prices or decrease quality by a small amount, enforcers identify what are the substitutes that consumers switch to as alternatives. Antitrust enforcers study actual switching rates – not just what companies could possibly be alternatives but rather which companies consumers actually switch to in significant numbers when prices go up a small amount. If switching occurs, only those companies that are substitutes are included in the relevant product market.

The relevant market definition is never as broad as “all retail.” For instance, the relevant product market in U.S. v. Microsoft was “operating systems for Intel-compatible personal computers.”

What anticompetitive actions has Amazon taken?

Sally Hubbard: One category of Amazon’s anticompetitive conduct falls under what I call platform privilege – the incentive and the ability of tech platforms to prioritize their own goods and services over those of competitors. Amazon gives its own private label products and first-party products an advantage over competitors in a number of ways, from algorithmic ranking, to the buy box, to premium advertising, to direct to consumer marketing, to exclusive customer reviews. All of these thumbs on the scale in favor of Amazon’s own products distort competition. Amazon is controlling the game and playing it too.

A lot of what Amazon does is “monopoly leveraging” – using its platform monopoly power in an anticompetitive manner to create a dangerous probability of monopolizing a second market. It can pick and choose what markets it wants to take over, like beauty or batteries or top-selling branded items.

Another type of anticompetitive conduct by Amazon is the actual exclusion of competitors by kicking third-party sellers off of particular listings through its brand-gating practices and through exclusive agreements with brands. One issue that came to light recently is an agreement between Apple and Amazon to remove re-sellers of Apple products from the platform. This likely violates Section 1 of the Sherman Act, which prohibits agreements that restrain trade.

Other types of exclusionary conduct Amazon has reportedly engaged in include most favored nation clauses and predatory pricing.

On the seller side of the market, Amazon likely has monopsony power, which occurs when there is a dominant buyer (rather than a dominant seller as in monopoly). Many 3rd party sellers do not consider other online marketplaces to be viable alternatives to switch to if Amazon imposes prices or terms they don’t like. This means 3rd party sellers lack bargaining power, and Amazon can dictate the terms of dealing, including the fees it takes. This is a sign of competitive harm.

We have published an in-depth report analyzing Amazon’s private label brands. We found that it has exclusive marketing channels other brands and sellers don’t and has access to more data than platform members too. However, most of its products are not successful, rendering these advantages smaller. Is it ok for Amazon to use aggregate data on the platform?

Sally Hubbard: It’s problematic for a dominant retailer, who is also a manufacturer, to be able to look inside the businesses of nearly all consumer brands. Fair competition in such a scenario is not possible. Whether its products are not successful may be a function of doing a poor job at creating private label products and does not reflect on the anticompetitive harms of being able to see inside your competitors’ businesses.

Walmart and other retailers have been successfully releasing owned brands for decades, what’s unique about Amazon private label brands?

Sally Hubbard: We’ve had a huge problem of under-enforcement of the antitrust laws for the last 2-3 decades, which is why we’ve now arrived at this monopoly moment. The antitrust laws should also have been enforced against Walmart, which has used a number of anticompetitive practices.

When a retailer that is not dominant has its own brands, like a local grocery store, it doesn’t violate the antitrust laws because it does not have monopoly power. The types of conduct that are exclusionary and illegal when a firm has monopoly power are not illegal when a firm does not have monopoly power.

Other retailers including Walmart and Target as well as social platforms like Facebook and Instagram and search engines like Google are adding marketplaces. They each have the advantages they can use to grow shopping revenues. Surely all of them have similar issues?

Sally Hubbard: It’s hard to say how these marketplaces will shake out. They will have similar issues if they grow dominant, but they could also fail (as they often do when the giants try to challenge each other in their core competencies). Facebook and Google already have their own issues stemming from their dominance in social and search, mobile, online video, and digital advertising. I am concerned about Instagram vertically integrating into purchases, for example, because it further concentrates the internet. It would be better if brands processed their own online purchases on their own websites than if Facebook/Instagram gets to extract a cut.

If one of these marketplaces emerges as a robust competitor to Amazon, that could help with Amazon’s harms. But a duopoly is still not a competitive market, and several competitors is ideal for maximizing competition, innovation, and consumer benefit.

Amazon has signed landmark deals with large brands like Apple and Nike, ensuring Amazon is the only one allowed to sell their products, blocking marketplace sellers. This was done to reduce counterfeits per an official company statement. Is this a problem?

Sally Hubbard: Amazon has ways to police counterfeits that are less restrictive to competition. Rather than counterfeits being the reason for such agreements, counterfeits appear to be the stick that Amazon uses to get brands to agree to sell to it directly. Exclusive agreements are a form of exclusionary conduct that can support a monopolization case.

Is Amazon controlling prices in other ways?

Sally Hubbard: In addition to controlling prices through brand-gating and becoming the exclusive seller of products, Amazon has required some brands sell to it first-party instead of selling their products themselves or through a 3rd party seller, which ultimately gives Amazon pricing control.

Additionally, there are concerns that Amazon can start to offer personalized pricing based on its knowledge of the consumers’ ability and willingness to pay. I have not seen concrete evidence of this occurring, but it is something enforcers will be looking out for.

Amazon’s most powerful feedback loop revolves around customers joining Prime, increasing demand for Prime products, making sellers offering Prime more successful and thus forcing other sellers to offer Prime through joining the FBA service, which grows Prime value making more customers join. Those sellers often can’t easily sell elsewhere, because their inventory is stored in Amazon warehouses. Is this a problem?

Sally Hubbard: That many sellers don’t feel like they have an option to not join FBA is a problem. It could support a case against Amazon for tying, which is a type of exclusionary conduct. Amazon ties the ability to be a 3rd party seller with the payment of FBA fees, largely by making those sellers who do not use FBA not discoverable on its platform.

Amazon has spent decades investing tens of billions of dollars into physical infrastructure, including warehouses. That investment today allows it to offer storage rates to sellers other warehousing providers cannot match, and for Amazon to provide fast shipping, few retailers can match. Didn’t Amazon achieve e-commerce dominance by investing heavily while competing retailers watched on the sidelines?

Sally Hubbard: Dominance alone does not violate the antitrust laws, as explained above. Investing in warehouses will not make Amazon run afoul of the antitrust laws. It’s only the maintenance, growth or acquisition of monopoly power through anticompetitive conduct that is problematic.

Is breaking up Amazon a solution?

Sally Hubbard: It is one solution, but it’s not the only solution. It also won’t fix all the problems. So even if Amazon was broken up into parts, it would still be important to impose non-discrimination rules that would require it to offer the same terms and prices to all sellers and brands, including itself. It’s the same idea behind net-neutrality – just because Amazon controls the infrastructure, it doesn’t mean it should be able to pick the winners and losers of commerce.

Should Amazon be forced to pick being a retailer or a platform?

Sally Hubbard: That is one solution that could help solve a lot of problems. It would remove some conflicts of interest and incentives to distort competition.

How would this increase competition? Who is that competition?

Sally Hubbard: The competition would be other brands and third-party sellers, who would not have to compete against the company that controls the platform. It would create a more level playing field for competition.

How would any action affect customers. Could it make things worse short-term?

Sally Hubbard: Customers benefit from robust competition, open markets, and a de-concentrated economy. These are the principles behind capitalism and the American Dream, where the best rise to the top because of merit, not because powerful gatekeepers control who gets to succeed. Monopolies are not good for us, so antitrust enforcement would make customers better off.

In India, the government has been trying to regulate both Amazon as well as Flipkart, owned by Walmart, to prevent them from running platforms at the same time as being retailers. Both companies have circumvented regulation so far and continue to grow. Is there a chance regulation in the U.S. would fail to be effective too?

Sally Hubbard: Regulators have to ensure that their regulations are effective. If regulated companies circumvent the rules, then regulators need to do something about it - either by suing the companies or by reforming the rules. U.S. regulators could learn from the lesson in India and prohibit such circumvention.

Based on your experience, what do you see as likely outcomes?

Sally Hubbard: I don’t think any one action or regulation is going to fix Amazon’s competitive harms, but rather the cumulative effect of many enforcers and regulators approaching the harms from different angles will ultimately have an impact. It’s hard to say how long it will take, but the current state of affairs with Amazon being able to leverage its monopoly power to distort competition is unsustainable and destined to fall apart eventually.

When can we expect actions to be taken? Will EU regulators be first? What needs to happen in the U.S., perhaps in terms of government changes, for inventions to move to actions? There seems to be an increase in activity around this topic.

Sally Hubbard: Antitrust investigations take time, usually a year or two. Currently DOJ and FTC are reportedly investigating Amazon. If they reach settlement with Amazon after their investigations, we could see changes in business practices in a couple of years. If instead they have sue Amazon, antitrust cases can take 5-10 years.

Faster relief could come in the form of regulation. The 2020 election will matter because it will determine what actions the DOJ and FTC take after their investigations and what laws could get passed to address platform harms. Elizabeth Warren, for example, has made proposals that would impact Amazon if she were elected.

The European Commission will probably be first because it began investigating Amazon before the U.S. did and it is a more aggressive enforcer of the antitrust laws.

If you are a retailer, a brand, or a seller on Amazon how one should think about the future of antitrust and Amazon?

Sally Hubbard: Antitrust enforcers like the Federal Trade Commission, the Department of Justice, and State Attorneys General are finally taking a look at some of this anticompetitive conduct and could use your input about your experiences. Enforcers finally getting involved should lead to more open and fair competition.

However, enforcers are behind the ball when it comes to new developments, like Alexa-enabled everything, everywhere. Massive surveillance through Alexa will create new opportunities for Amazon to tilt the scales in its own favor and will also create barriers to entry for potential competitors that do not have the massive amounts of data that Amazon has.

Meaningful privacy legislation could help decrease Amazon’s competitive advantage that is based on collecting data about the consumer.