Stacy Mitchell of the Institute for Local Self Reliance has an excellent report that analyses Amazon's revenues and impact on small businesses. Its headline finding,
Amazon’s dominance of online retail means that small businesses have little choice but to rely on its site to reach consumers. This report finds that Amazon is exploiting its position as a gatekeeper to impose steep and growing fees on third-party sellers. Even as these exorbitant fees bankrupt sellers, they are generating huge profits for Amazon.
She describes the seller fees as the toll that Amazon imposes on businesses wanting to use its platform. This gatekeeping revenues, she writes, is used to finance business expansion.
These profits are not only the spoils of Amazon’s monopoly power. They are the essential fuel that feeds its market-domination strategies, enabling it to absorb massive, predatory losses designed to lock-in market control and fund breakneck expansion.
And it has enormous market power in extracting as high a toll as it wants,
Businesses that make or sell consumer goods and want to reach shoppers online have little choice but to sell on Amazon’s site. That’s because more than 60 percent of Americans looking to buy something online start their product search on Amazon, rather than a search engine. In 15 of 23 major product categories, the tech giant captures more than 70 percent of online transactions. Companies large and small must either sell on Amazon or forfeit access to much of the market.
This effectively means that instead of sellers "opting" to sell on Amazon, as it claims, an accurate characterisation would be that they have little choice but to be on the platform.
Amazon takes a whopping 34% out of the sales revenues of sellers on its platform. This combines referral fees (or platform fees), seller advertising costs, shipping and storage costs, and other fees.
The steep growth in this share, near doubling over a seven year period, points to exercise of market power.
The stickiness of Amazon's resellers and buyers despite its increasing the extractions is the sweet-spot that platform companies aspire for. It's the dream that everything from Uber to AirBnb are chasing, though its applicability to their respective markets may be questionable.
Amazon has created entirely new revenue lines to increase its extractions from its resellers. Advertising and shipping are two examples of captive markets from which it can maximise surplus extraction,
Sellers used to be able to rely on good customer ratings to land their products on the crucial first page of search results. But today they must pay for ads to get their products in front of customers. This year, sellers will give Amazon an average of 4.6 percent of their sales revenue to pay for ad space, we estimate. That’s up from 3.4 percent in 2020, and 1.1 percent in 2016. This additional cost is not, as Bezos claims, a service; it’s a way to extract more from sellers. It’s price-gouging.
In a similar fashion, Amazon has compelled sellers to buy its warehousing and shipping service, Fulfillment By Amazon (FBA). Amazon’s algorithms heavily favor sellers who do so, making FBA all but required in order to generate sales on the site. As a result, the share of sellers who have left other carriers and signed on to FBA has soared in recent years. By compelling this captive base of businesses to use its shipping service, Amazon has grown into a major logistics provider almost overnight. Its parcel delivery operation now rivals that of the U.S. Postal Service in scale. And, over the last few years, Amazon has steadily raised its storage and shipping fees, using FBA as yet another way to squeeze revenue from sellers.
Contrary to popular perception, it's not the AWS cloud services, but seller fees that's the cash cow for Amazon at double the revenues compared to the former. And this cash cow is growing much faster than AWS.
Amazon has a gatekeeping monopoly over its platform which it exercises through its prohibitive seller fees, and it's also a reseller on its own platform. If a government entity did the same - charge a prohibitive toll and also be a preferential user on the carriageway/platform - it's most certain that opinion makers and experts would have sought to portray the monopolistic and market distorting nature of the arrangement. Now that it's Amazon (or Apple with its 30% fees on Apple Pay) a different set of rules become applicable.
Mitchell's answer to addressing Amazon's monopoly,
An effective policy solution would separate Amazon’s marketplace, retail division, AWS, and logistics operation into stand-alone companies. This would compel these divisions to compete on their own merits, releasing Amazon’s hold over the online market and opening the way for other shopping sites to vie for both shoppers and sellers, including by offering sellers lower fees.
The topic has been a constant theme in this blog. A detailed list below.
I have compared the likes of Amazon to "a large vehicle manufacturer having the power to both prohibit someone from using the road and also make competing vehicle manufacturers unattractive (say, because of inadequate servicing options) for users". I have blogged earlier here (beginning of anti-trust actions in US and Europe), here (Google and anti-trust challenge), here (anti-trust challenge in US), here (market monopolisation), and here (Amazon's market abuse of startups) on the problems with market concentration and the need for regulation. This points to what Google founders themselves though about data monetisation and digital advertising. I have blogged here, here, and here on the problems with regulatory arbitrage and here on the market service quality problems due to limited and poor regulation. And we are not even talking about the several other distortions arising from such market concentration, especially the valuation bubbles in the financial markets - see this and this. Finally, this is a summary examining the dynamics of digital markets and how it offers a different perspective on these markets, and this is a summary of how the big technology companies have become digital gatekeepers to large and critical markets.
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