In this post I want to riff on some ideas I have inspired by some recent conversations at the INDU parliamentary committee, abuse of dominance, and the Bureau’s investigation into Amazon.
On May 6, Vass Bednar and Denise Hern’s testified at the INDU parliamentary committee where they talked about, among other things, A report put out by the Institute for Local Self-Reliance in December 2021: Amazon’s Toll Road. One of the core points made by the report is that through its dominance on the online retail space and status as a gatekeeper, Amazon can impose steep fees on third-party sellers that operate on the platform. Vass and Denise rightly point out that this state of affairs is a problem, particularly for small and medium sized businesses striving to compete online. The recommendation put forward in the report and highlighted by Vass and Denise at the hearing was to have Amazon so that Amazon’s marketplace, retail division, AWS, and logistics operate as stand-alone companies.
I’m paraphrasing a bit, but Nathaniel Erskine-Smith (Liberal MP for Beaches-East York) asked Vass what can be done within competition law to address this Amazon problem. Among other things, Vass rightly pointed out that there isn’t evidence that the Bureau has ever taken a case on this issue, so we don’t know if the Act can tackle these issues.
Can we address Amazon’s fees under Canadian competition law?
I would put good money on the bet that the Competition Act can’t do much to directly tackle the steep fees imposed by Amazon and other platform operators. The Act can’t address this behaviour as an abuse of dominance (which I think would be the provision we would want to use) because there is no clear anti-competitive act, according to the law, tied to the tolls being charged by third party sellers. Rather, the tolls are an exercise of market power, which in itself is not a problem under the Act.
To explain this in more detail, I want to unpack the abuse of dominance provisions within the Act in a way that is simple and accessible, recognizing that there may be a trade-off here between simplicity and precision. So, if you want more details you can check out the Abuse of Dominance Enforcement Guidelines from the Competition Bureau. I’m calling my simplifications the “abuse of dominance checklist”.
Please feel free to use the checklist to test out your own Canadian abuses of dominance. That’s part of the reason why I made this. It also mirrors the list that is on the Competition Bureau website.
To have an abuse of dominance under the Competition Act, the following three items need to be checked off.
- Is there dominance? The firm that is abusing their dominance needs to be dominant. Alternatively, there can be a group of firms that are jointly dominant and jointly abuse that dominant position. In either case the dominant firm(s) needs to have a substantial degree of market power which can include the ability to influence competition in the market, “including the terms upon which it or others carry on business in the market”, according to the Competition Tribunal in the TREB case. So, dominance means that firm(s) have enough power in the market to dictate prices, product quality, or other dimensions of competition without fear that other competitors will swoop in and offer more competitive prices or product quality, thus undercutting them.
- Is there an anti-competitive act? The dominant firm needs to engage in a specific behaviour that is anticompetitive to abuse its dominant position. But, if the firm can show that the behaviour was motivated by a business justification then the act would not been seen as anticompetitive under the law. For example, if a firm was doing something that looked anticompetitive but convincingly argued that their strategy was intended to improve its operational efficiency, then the act would not be anticompetitive under the law. Generally, there are three types of anti-competitive acts:
- Predatory pricing or similar predatory conduct, where dominant firms sell at below cost to drive out competitors to then increase prices when the competitive threat is gone and recoup their losses through increased profits;
- Exclusionary behaviours – like exclusive dealing, adopting incompatible product specifications, refusals to supply, margin squeezing of a downstream competitor – which increase rival’s costs and/or reduce their revenues, leading to them being excluded form the market or otherwise less able to be effective competition; and
- Disciplinary conduct, where the dominant firm may punish or dissuade its competitors from competing more vigorously or otherwise soften competition.
- Are there anticompetitive effects? Under Canada’s competition law, it’s not enough to show that the dominant firm is engaging an anticompetitive behaviour. The Competition Bureau also needs to show that there are effects of this behaviour, like price increases. In a paper that I did with Vass and Ana Qarri, we found that its at this point in the checklist where we see cases investigated by the Competition Bureau fall apart. The Bureau can’t see to gather empirical evidence to show anticompetitive effects. This seems not to be as much of a problem in the EU, for example, because under their competition law there isn’t the same need to show effects.
Again, there is a lot of complexity and nuance in each of these three bullet lists. The aim here is to give the high-level.
So, what does this checklist mean for Amazon and its fees? I think there are a few ways the fees could be understood.
- The fees are an exclusionary behaviour intended to prevent third-party sellers from effectively participating one/being competitive on the platform. From this perspective we would see Amazon and the third-party sellers as competitors with each other, with each providing similar goods on the platform. My bet would be that this argument wouldn’t stick very well. As a platform operator, Amazon benefits from having third-party sellers on its platform, not only because of fees paid by these participants. Having third-party sellers freely enter and exit its marketplace also allows it to learn what kind of products are successful so it can copy these products and capture select product markets for itself. So, I don’t think it has a clear incentive to undermine competition by excluding third-party retailers because they are current or future competitors. Alternatively, perhaps there is an argument for Amazon using fees to discipline or soften competition somehow. However, this argument seems difficult to prove let alone show related anticompetitive effects.
- The fees are part of a predatory behaviour where, like is explained in the Amazon’s Toll Road report, Amazon offers Amazon prime at a loss, undercharges for its own Amazon retail products and recoups those costs through higher fees charged to third-party sellers. While there may be whiffs of predation here, it’s, again, not clear how this predatory behaviour prevents third-party sellers from competing in the market. There also doesn’t seem to be a clear anticompetitive act in this story that pointedly disadvantages potential platform competitors of Amazon. While Amazon may be using its market power to exploit third-party sellers and fund its expansion, its strategy doesn’t seem to be “implement a plan that will have my competitors slip on a banana peel, leaving me as the dominant player in the market and allowing me to make a bunch of money”. The latter justification would be more consistent with an abuse of dominance.
That all being said, another point that the Amazon’s Toll Road report makes is that “Amazon penalizes sellers that offer lower prices on other, less expensive shopping sites”. They explain the case of Steve, a seller on Amazon, who has tried to sell his products on other sites. While he is not barred from selling his products on different sites, under Amazon’s “fair pricing program” he is penalized for offering a lower price on competing shopping sites. This penalization includes being demoted on Amazon’s search results. This policy could fall under abuse of dominance, depending on the specifics of the policy (I haven’t researched it). But in this case, even if were found that the policy was anticompetitive and that there was no other justifiable business rationale for the policy, the Bureau would still have to find that the policy created anticompetitive outcomes in the market, which it may or may not find.
However, even if somehow the Bureau were able to successfully get Amazon to retire its fair pricing policy, I’m not totally convinced that this change alone would take away the ability for Amazon to charge excessive fees to third-party sellers. Amazon is still very dominant in the space of online retail and have market power to leverage, whether this policy exists or not. But it wouldn’t hurt to have the policy overturned if it is preventing other online platforms from effectively competing with Amazon.
What does it all mean?
So, I think the core reason why it would be very difficult to make an abuse of dominance case against Amazon based on its fees charged to third-party sellers is that its not obvious that Amazon is trying to prevent third-party sellers from competing with it through fees (although it may be doing this through other strategies). Amazon may be charging higher fees to third-party sellers in an effort to out-compete other retailers by cross-subsidizing its Prime service and Amazon-branded products. But if this is its motivation, it’s not clear how its fees charged to third-party sellers is a strategy designed to deliberately undermine Walmart or other competing or potentially competing retailers (i.e., undermine competition).
The clearer story for me from both the Amazon’s Toll Road and the thinking out loud I’ve done here is that the core problem seems to be Amazon’s dominance. Because it is dominant, it can charge higher fees to third-party retailers, and then use those fees to subsidize its own growth. Whether this dominance is a problem or not likely depends in large part on who you ask. Obviously, it’s not great for third-party retailers. I’m not sure what it means for consumers, although maybe the impact on consumers needs to be viewed through the lens of Amazon’s broader strategy to dominate the retail landscape.
Gaps in abuse of dominance
The inability of the abuse of dominance provisions to really get a grasp on the third-party seller fees charged by Amazon points to a notable gap in our abuse of dominance provisions. The provisions are designed to prevent behaviours that create barriers to entry or otherwise prevent competitors from competing in the market. The exercise of market power by Amazon, or any other dominant firm, is not seen as a problem itself. If a dominant firm is just using its market power to charge uncompetitive prices, it is assumed that competitors will enter the market and offer better prices. That’s just how free markets work, of course!
The problem with this rationale that underpins our abuse of dominance laws is that it has very little applicability in situations where there are significant barriers to entry, like the case of Amazon. And as big data and platforms increasingly become the norm of business, barriers to entry in key markets, like retail, are only going to increase. This gap highlights that we need to be rethinking the whole notion of an abuse of dominance in an era where significant barriers to entry are the norm, not the exception.
Furthermore, I think there is a deeper issue of how we define barriers to entry. Increasingly, business scale itself can be seen as a barrier to entry whereas traditionally in competition policy circles scale has been seen as efficient and a likely outcome of superior, pro-competitive business practices. But today, is there any new or emergent firm that we think could realistically go toe-to-toe with Amazon? To be an effective competitor against Amazon as a platform, and be an alternative to Amazon for third-party sellers, an entrant would need to achieve a nearly unprecedented scale of operations. Given this reality, is it realistic for competition policy folks to assume that competitive dynamics will address Amazon’s exercise of market power in either the short or medium term? How long will it take for an Amazon alternative to emerge? 10 years? 30 years? Maybe more? And are we ok with that?
What needs to change in the Act
Again, the core reason why our abuse of dominance provisions can’t tackle the high fees that Amazon charges to third-party sellers is because its not clear that these fees are designed to undermine competitors or competition. However, Amazon can get away with charging these fees because it has market power and there isn’t a competing platform or large retailer that these third-party sellers can do business with as an alternative. So, the core of the problem is Amazon’s market power and its exercise of that market power.
However, maybe competition law should do more to police abusive uses of market power. One way to do this could be to expand abuse of dominance to integrate the concept of exploitation, consistent with the EU’s laws on abuse of dominance.
Under European competition laws, businesses can be fined for abusing their dominant position in a market to exploit purchasers or sellers. This exploitation includes imposing unfair purchase or selling prices or other unfair trading conditions. Recent cases taken by the European Commission involve Aspen, a pharmaceutical company that increased the price of off-patent cancer medicines by several hundred percent in several EU countries, and Gazprom, which was accused of setting unfair gas prices in Bulgaria, Estonia, Latvia, Lithuania, and Poland.
In essence, exploitation as an abuse of dominance drives right at the use and abuse of market power. However, integrating the notion of exploitation into our abuse of dominance provisions may not be a cure all. One of the downsides of the exploitation doctrine is that it can be incredibly difficult to establish just what price level constitutes exploitation, although EU case law has refined the definition of exploitation over time.
That being said, it is telling that even with the concept of exploitation within EU abuse of dominance law, the EU has still enacted the Digital Markets Act, which specifically regulates the market power of digital platforms like Amazon. Building on the learnings of other jurisdictions, sector-specific regulation may be a more effective approach.
Keep in mind with all of this that in August 2020 the Bureau put out a call to the public asking for information about Amazon to build an abuse of dominance case. That call for information was nearly a year and a half ago. My rule of thumb is that civil cases take about 2-3 years for a full investigation. So maybe they are still looking at this conduct. Perhaps we will see in time which of the two potential outcomes I spun, if any, are right.