California Mistakes Amazon’s Strategy for Collusion

Every enterprise competes on the merits of its business strategy. If a business consistently outperforms its rivals and creates superior value for consumers, it is richly rewarded on its balance sheet.

At no time of year is the value Amazon creates more manifest than during Prime Day, its annual four-day deal event for members. Last year, Prime members saved billions of dollars, while independent sellers—most of them small and medium-sized businesses—achieved record sales. This year, Bank of America expects the 96-hour event, which began on June 23, to culminate in $21.6 billion in sales. And Amazon will undoubtedly yield substantial profits from this mutually beneficial shopping extravaganza.

Amazon’s success is proof that strategies and promotions such as Prime Day pay off. That is why 230 million Americans use the company’s services, and 1.9 million Americans sell on its platforms. The e-commerce giant, which earns double-digit profit margins, demonstrates the wider success of capitalism in making everyone better off. Bureaucrats, however, fail to recognize this basic insight.

For almost four years, California’s antitrust enforcers have sought to use legal force to reshape Amazon’s strategy, accusing Amazon of using its marketplace power and pricing policies to suppress price competition beyond its platform. The case turns on the familiar progressive reasoning that frames commercial success as evidence of anticompetitive power. California’s theory starts with Amazon’s market dominance—manifest in its vast customer base and importance to vendors—and infers from that dominance that Amazon must exploit consumers and extract the last penny from its vendors.

But that sequence reverses cause and effect.

In its e-commerce business, Amazon saves users shopping hours and—usually—money. Amazon has proven so dependable that buyers can assume, reasonably, that a better price or product cannot be found. Amazon’s platform design is largely responsible for its nine-year record as the lowest-priced online retailer, its prices averaging 14 percent below competitors’. Its delivery network, return policy, and ability to deliver everything from butter to TVs to queen-bee traps through a single order help to explain why the marketplace draws more than two billion visits per month––unparalleled traffic that reflects Amazon’s enormous consumer benefits, which California regulators fail to acknowledge.

To the contrary, regulators seem to presume that Amazon’s dominance obliges it to cater to its vendors’ needs even when they clash with its own strategic interests. Its vendors enjoy unsurpassed traffic and capitalize on Amazon’s reputation as a marketplace, all while the world’s most efficient operator handles much of their customer service and logistics. Tempting as it is to begrudge the e-commerce giant its share of its vendors’ profits, those quick to resent Amazon for its earnings forget how many businesses Amazon made possible in the first place—niche sellers of sourdough starter jars are an illuminating example. Roughly 25 percent of Amazon sellers earn over $100,000 annually, and 13 percent over $250,000.

Yet, regulators expect more. They demand that Amazon forgo the benefits of its bargaining power—made possible by its economies of scale and brand name—to set contract terms that advance its strategy. In 2022, California accused Amazon of “anticompetitive contracting practices” that require “merchants to enter into agreements that severely penalize them if their products are offered for a lower price off-Amazon.”

A price-parity policy, if included in contracts, seems integral to Amazon’s strategy: offering the lowest prices on its marketplace is part of how Amazon creates superior value for sellers and consumers alike. Vendors, after all, are free to exercise what James Otteson calls their “no, thank you” right. Moreover, Amazon has a legitimate interest in defending itself against a “free-rider” arrangement. Ted Bolema explains: “Amazon incurs the costs of providing information about a seller’s products on the Amazon site, and after shoppers learn about a product, they can turn to the seller’s website for a lower price…Amazon in effect subsidizes these sales through its promotion of the products.”

If Amazon’s actions truly amounted to anticompetitive conduct, Amazon would exhibit monopolistic behavior: higher prices, less expansion, less innovation, and weaker competition. But Amazon continues to deliver, e.g., cheap avocados, coconut milk, and coffee beans to customers’ doors within hours of ordering. Amazon now offers one-hour and three-hour shipping in markets across the U.S.,  challenging Walmart, and contends with competition from new entrants like OpenAI, which harbors its own ambitions in the e-commerce market. Amazon has expanded same-day and next-day delivery alongside new jobs and investment to more than 4,000 rural communities—including towns of about 8,000 people like Orland, California. It will soon extend its logistical network to non-Amazon businesses, entering FedEx and UPS’s domain. Amazon continues to invest heavily in new markets and technologies as well as its existing businesses.

A company’s strategy is its personality, its identity. A business strategy sets the company apart from its competitors and does much to determine whether the company succeeds or fails. California’s antitrust enforcers, arrogating to themselves the powers of market engineers, seek to alter Amazon’s strategy. They assume that the rest of Amazon’s operations—and the benefits the company generates for consumers—would remain intact. That assumption is false. Their intervention would rewrite the core business model that makes Amazon a distinctive and successful marketplace trusted by millions of Americans.

This is not just about Amazon. Overzealous “antitrust” enforcement grounded in dubious theories threatens the wider market-based order and makes innovators think twice before lowering prices or serving more consumers. This Prime Day, regulators should set their sights on the rare actual monopoly and let markets deliver prosperity for all.