Ama­zon famous­ly bare­ly turned a prof­it in its first twen­ty years, and even today near­ly all of its oper­at­ing income comes from cloud-com­put­ing ser­vice Ama­zon Web Ser­vices. To hear CEO Jeff Bezos tell it, Ama­zon focus­es relent­less­ly on cus­tomer needs, serv­ing as a kind of char­i­ty run for the ben­e­fit of its users.

If Sussman is right, Amazon’s suppliers could use his theories to sue the company and gather evidence in discovery that could reveal illegal maneuvering.

Many crit­ics have offered a more sin­is­ter the­o­ry: Ama­zon has spent the past cou­ple decades build­ing up mar­ket share by under­pric­ing com­peti­tors, and some­day, when there are no alter­na­tives left, it will become fab­u­lous­ly prof­itable. Ama­zon is lay­ing in wait, in oth­er words, to become a monopoly.

The tech­ni­cal term for this is preda­to­ry pric­ing, and it’s actu­al­ly ille­gal under U.S. antitrust laws. You can’t drop prices with the intent to monop­o­lize. But preda­to­ry pric­ing is extreme­ly dif­fi­cult to prove in court. Plain­tiffs bring­ing suit would have to demon­strate that Ama­zon set prices below the cost of pro­duc­tion, which is dif­fi­cult with­out access to the inter­nal books. In addi­tion, plain­tiffs would have to estab­lish that Amazon’s prac­tices had a high like­li­hood of suc­cess­ful­ly cre­at­ing a lucra­tive monopoly.

The high bar is thanks to Robert Bork, the god­fa­ther of mod­ern antitrust the­o­ry, who declared preda­to­ry pric­ing schemes irra­tional in his influ­en­tial book The Antitrust Para­dox. The Supreme Court adopt­ed Bork’s the­o­ry in a 1986 case, claim­ing that it would be ​“implau­si­ble” for Japan­ese elec­tron­ics mak­ers to con­spire to hold prices low for tele­vi­sion sets export­ed to the U.S. This would ​“require the con­spir­a­tors to sus­tain sub­stan­tial loss­es in order to recov­er uncer­tain gains,” the Court ruled. Since then, preda­to­ry pric­ing cas­es have been few and far between.

But Shaoul Suss­man, a law stu­dent at Ford­ham Uni­ver­si­ty, thinks he’s come up with a roadmap to prove that Ama­zon prof­itably engages in preda­to­ry pric­ing, over­com­ing Bork’s skep­ti­cism. In a paper for the Jour­nal of Antitrust Enforce­ment pub­lished in Feb­ru­ary that has gen­er­at­ed dis­cus­sion in aca­d­e­m­ic cir­cles, Suss­man points to evi­dence that Ama­zon has already flipped the switch, mov­ing from dom­i­nat­ing the mar­ket by under­cut­ting rivals to reap­ing the prof­its from that dom­i­nance. And Amazon’s doing it, Suss­man claims, with­out rais­ing prices for cus­tomers. This strat­e­gy is even more attrac­tive because cor­po­rate account­ing rules make the con­duct vir­tu­al­ly undetectable.

If Suss­man is right, Amazon’s sup­pli­ers could use his the­o­ries to sue the com­pa­ny and gath­er evi­dence in dis­cov­ery that could reveal ille­gal maneu­ver­ing. The paper could also spur the Fed­er­al Trade Com­mis­sion to make a sim­ple rule change that would lay bare Amazon’s prac­tices. And, it could blow up a scheme that Uber, Lime, and numer­ous oth­er star­tups have been accused of undertaking.

Here’s how it works.

HID­ING EXPENSES

Ama­zon rou­tine­ly high­lights its cash flow instead of earn­ings, sig­nal­ing to investors that it’s on a road to prof­itabil­i­ty. The cash flow num­ber zoomed to over $30 bil­lion in 2018. Pos­i­tive cash flow is often used as evi­dence against preda­to­ry pric­ing; if Ama­zon has neg­a­tive cash flow, it could be sub­si­diz­ing an anti-com­pet­i­tive scheme to edge out rivals.

How­ev­er, Suss­man asserts in his paper, ​“Ama­zon uti­lizes exist­ing loop­holes in Gen­er­al­ly Accept­ed Account­ing Prin­ci­ples (GAAP) dis­clo­sure reg­u­la­tions to exclude a sig­nif­i­cant por­tion of its expenses.”

Ama­zon accom­plish­es this in part through using cap­i­tal leas­es to pur­chase equip­ment and some of its 288 mil­lion square feet of office space. Instead of pay­ing cash, Ama­zon bor­rows and finances these pur­chas­es over time. The leas­es don’t show up as expens­es in Amazon’s free cash flow cal­cu­la­tions, even though the equip­ment is list­ed as an asset. A 2017 Mot­ley Fool report showed that, when you add in cap­i­tal leas­es, Amazon’s 2017 cash flow was indeed over $1 bil­lion in the red, although more recent num­bers have bounced back.

The point, Suss­man tells In These Times, is that Ama­zon ​“can move num­bers on bal­ance sheets from one side to the oth­er to obscure the num­bers on cash flows.” Ama­zon has chron­i­cal­ly resist­ed attempts to reveal the inner work­ings of its finan­cial struc­ture. Suss­man believes that if Ama­zon gave the full pic­ture, it would show neg­a­tive cash flow.

No cur­rent account­ing rules force full dis­clo­sure of item­ized costs. Con­sid­ered high­ly con­fi­den­tial, they’re typ­i­cal­ly redact­ed from pub­lic legal doc­u­ments, even when a com­pa­ny is sued. More defin­i­tive cash flow num­bers could help prove whether Ama­zon sells items below cost.

But prov­ing that Ama­zon sells below cost is only half the battle.

HOW AMA­ZON RECOUPS ITS LOSSES

By now, Ama­zon has estab­lished its dom­i­nance, sup­ply­ing 45 per­cent of all e‑commerce pur­chas­es and boast­ing the sec­ond-largest paid dig­i­tal mem­ber­ship pro­gram behind Net­flix, with 100 mil­lion Ama­zon Prime users. We already know that Amazon’s low prices, which it achieved both by avoid­ing sales tax for years and severe­ly under­cut­ting rivals, played a major role in gain­ing customers.

But the sec­ond step to prov­ing preda­to­ry pric­ing involves lay­ing out how com­pa­nies can prof­it from the monop­oly they set out to build, by mak­ing back loss­es incurred from sell­ing below cost. Sussman’s real insight con­cerns how Ama­zon has the abil­i­ty to surge prof­its with­out relin­quish­ing its brand-defin­ing com­mit­ment to low prices. The losers in this scheme the sup­pli­ers and part­ners, who have vir­tu­al­ly no oth­er way to sell their wares.

Ama­zon doesn’t only sell its own prod­ucts, or prod­ucts it acquires from whole­salers. Third-par­ty sell­ers make up 58 per­cent of all sales on the Ama­zon mar­ket­place, accord­ing to Jeff Bezos’ most recent annu­al let­ter to share­hold­ers. These sell­ers pay fees to Ama­zon for the priv­i­lege of set­ting up shop on the web­site. Sell­ers can use ​“Ful­fill­ment by Ama­zon,” so Ama­zon han­dles stor­age and ship­ping of its prod­ucts through its vast logis­tics net­work. But Ama­zon also charges for that privilege.

These fees hap­pen to be among the fastest-grow­ing rev­enues on Amazon’s bal­ance sheet. In the fourth quar­ter of 2018, rev­enue from third-par­ty sell­ers, includ­ing mar­ket­place and ful­fill­ment fees, totaled $13.4 bil­lion, or one in every five dol­lars Ama­zon earned in the quarter.

Prof­it mar­gins on mar­ket­place fees are high: Around 20 per­cent, accord­ing to one Mor­gan Stan­ley esti­mate, as opposed to just a 5 per­cent prof­it mar­gin on Amazon’s own retail sales. It’s sim­ply more attrac­tive finan­cial­ly for Ama­zon to run the mar­ket­place than to sell their own products.

There’s noth­ing ille­gal about any of this. But in March, Bloomberg report­ed that Ama­zon had abrupt­ly stopped buy­ing direct­ly from thou­sands of whole­salers, encour­ag­ing them to instead con­vert into third-par­ty sell­ers. As the Bloomberg arti­cle notes, this not only offloads Amazon’s costs of stor­ing and ship­ping prod­ucts onto whole­salers, it also allows Ama­zon to col­lect more mar­ket­place fees.

That’s a red flag. It could mean that Ama­zon know­ing­ly sold items at a loss dur­ing its ear­ly his­to­ry, and is now reduc­ing costs on the same sales, while also tak­ing a bite out of sup­pli­ers’ prof­its through mar­ket­place fees. That’s the text­book def­i­n­i­tion of a preda­to­ry pric­ing scheme.

Amazon’s dom­i­nance makes this all work. Whole­salers who want to sell online don’t have many options beyond agree­ing to the demands of the dom­i­nant e‑commerce leader. Insta­gram recent­ly launched an in-app shop­ping tool, but Ama­zon has such a head start that every­one has to sell there. And as the com­pa­ny con­tin­ues to grow, it can force even large whole­salers into this arrange­ment, with­out fear of los­ing their business.

“The rea­son they lured every­one onto the plat­form is they were sub­si­diz­ing activ­i­ty,” Suss­man explains. ​“What­ev­er costs with ship­ping and deliv­er­ies, Ama­zon said we’re going to take care of them. But sup­pli­ers now have to incur those costs.”

Couldn’t third-par­ty sell­ers just raise prices in response? Until recent­ly, no. Ama­zon had a clause in its con­tracts pre­vent­ing sell­ers from offer­ing a low­er price on oth­er web­sites. Last month the com­pa­ny revoked that clause after Sen. Richard Blu­men­thal (D‑Conn.) warned that it risked an antitrust vio­la­tion. But Ama­zon still has numer­ous meth­ods that it can use to pre­vent third-par­ty sell­ers from pass­ing costs on to customers.

For instance, Ama­zon can the­o­ret­i­cal­ly down-rate high­er-priced sell­ers in search list­ings, a pri­ma­ry way most cus­tomers inter­act with the web­site. A sell­er on page three of Ama­zon search might as well not be sell­ing on the site at all; nobody is like­ly to see them. ​“The price has to stay the same because they’re dis­ci­plined on Ama­zon,” Suss­man suggests.

Ama­zon has also begun to effec­tive­ly force sell­ers to low­er costs if they want to adver­tise on the web­site. Only brands Ama­zon can sell at a prof­it get adver­tis­ing priv­i­leges: This is part of a strat­e­gy to push out ​“CRaP” prod­ucts, short for ​“Can’t Real­ize a Prof­it.” The rule only affects direct ven­dors, which is anoth­er way Ama­zon can pres­sure busi­ness part­ners to con­vert to third-par­ty sellers.

But think about it. Just the fact that Ama­zon had an entire group of ​“Can’t Real­ize a Prof­it” prod­ucts for sale strong­ly sug­gests that it sold items below cost. Now that the com­pa­ny is more inter­est­ed in prof­itabil­i­ty, it wants to low­er costs on CRaP items. Again, that’s pre­cise­ly what a preda­to­ry pric­ing scheme looks like: Sell below cost, become dom­i­nant, and lever­age that dom­i­nance to profit.

Adver­tis­ing is anoth­er way Ama­zon can make mon­ey with­out cus­tomers feel­ing it. Ad rev­enue dou­bled to $10.1 bil­lion in 2018. So as an Ama­zon sup­pli­er, your costs con­tin­u­al­ly go up for fees and adver­tis­ing, but you can­not raise prices to com­pen­sate. Ama­zon instead scoops up the excess rev­enue, like a more sophis­ti­cat­ed ver­sion of a land­lord in the earth’s biggest mall. ​“It’s a trans­fer to Ama­zon from sup­pli­ers,” says Peter Carstensen, a pro­fes­sor emer­i­tus at the Uni­ver­si­ty of Wis­con­sin Law School.

HOW CUS­TOMERS ARE HARMED

As Suss­man explains, if Ama­zon is recoup­ing loss­es from a preda­to­ry pric­ing scheme by reduc­ing its costs, the wind­fall prof­its aren’t being trans­ferred to cus­tomers. In addi­tion, a sup­pli­er to Ama­zon is hin­dered from improv­ing its prod­ucts, because Ama­zon is skim­ming prof­its off the top that could be put toward innovation.

Both of these out­comes reflect con­sumers fail­ing to share in Amazon’s boun­ty, which is key for cur­rent antitrust law. Right now, anti-com­pet­i­tive con­duct like preda­to­ry pric­ing is judged under the ​“con­sumer wel­fare stan­dard,” which has been inter­pret­ed to mean sim­ply whether a mar­ket dom­i­nat­ed by a sin­gle com­pa­ny results in high­er or low­er prices. But even though prices are the same on Ama­zon, con­sumers are arguably miss­ing out, Suss­man explains, because they’re not ben­e­fit­ing from Amazon’s soar­ing prof­its. ​“It’s ille­gal and even the most con­ser­v­a­tive neo­clas­si­cal thinker would agree,” he says.

Suss­man con­struct­ed his the­o­ry as some­thing a com­pa­ny harmed by Ama­zon could use to file a law­suit, even if no antitrust laws are changed. If it sur­vives an ini­tial motion to dis­miss in the courts, Ama­zon would have to reveal unit costs in a dis­cov­ery pro­ceed­ing, which would set­tle the controversy.

The con­cept has reform­ers who want to strength­en antitrust laws buzzing. ​“It’s long over­due for a rethink­ing of preda­to­ry pric­ing,” says Matt Stoller of the Open Mar­kets Insti­tute, the lead­ing pro-reform organization.

Suss­man believes that the Fed­er­al Trade Com­mis­sion should force com­pa­nies to break down their costs in con­fi­den­tial exam­i­na­tions, so reg­u­la­tors could get a bet­ter pic­ture of poten­tial preda­to­ry pric­ing, which many fear has become a fea­ture of mod­ern-day ​“uni­corns.”

Rideshare com­pa­nies like Uber and Lyft, e‑scooter firms like Bird and Lime, and co-work­ing space provider WeWork have all been accused of under­cut­ting rivals in an effort to monop­o­lize mar­kets. If any­one takes up such a case against Ama­zon, it could reveal how preda­to­ry pric­ing has become a ded­i­cat­ed busi­ness strat­e­gy in New Gild­ed Age Amer­i­ca, and how reg­u­la­tors can put a stop to it.