Amazon is Indirectly Squeezing Sellers to Offer Lower Prices

Consumers love shopping on Amazon, propelling it to the position of the undisputed e-commerce leader, especially in North America and Europe. One of the major reasons for this is the myriad of available products, Amazon's customer service, the shopping and delivery experience, but, most importantly, lower prices.

One thing is certain, merchants selling on Amazon have no choice but to offer the lowest prices.

Amazon wants to ensure its leading position on the e-commerce market and to continue offering the lowest prices to consumers, and in an effort to do so, it leverages all possible means. This includes enforcing strict pricing rules on merchants selling on other channels.

Amazon’s Historical Mandatory Price Parity Requirements

Most merchants are not exclusively selling their products on Amazon. Their products can be found on other e-commerce websites as well, such as their own online store, or on other marketplaces such as eBay, Walmart, or Etsy. In its efforts to stay on top of the e-commerce food chain, Amazon has always been leveraging its dominent position by encouraging third-party merchants to raise the prices for the products listed on competitor websites, or lower them on Amazon. This practice ensures that the lowest prices and best deals can always be found on Amazon. In return, consumers keep coming back to use the platform, which, in turn, ensures Amazon sellers’ growth and retention continue raising.

Historically, these requirements used to be officially mandatory for third-party merchants who had to offer their best prices on Amazon in order to sell on the platform, as part of Amazon's so-called "most favored nation" or "price parity" provisions. In other words, Amazon used to deliberately and openly push for raising prices on competitors websites or lowering the on Amazon.

However, Amazon removed this requirement in Europe in 2013 as it had attracted the attention of regulators when it comes to competitive practices. For US merchants, the requiement was quietly removed in March 2019 after Senator Richard Blumenthal urged the Department of Justice to open an antitrust investigation into Amazon's policies following 2010 presidential candidate Senator Elizaberth Warren's announcement of her goal of breaking up big tech Cos including Amazon.

Amazon Continues Encouraging for Lower Prices but With Price Alerts

Putting an end to the price parity provisions doesn't mean Amazon won't go to great lengths to ensures its maintains its price competitiveness. Rival websites are constantly kept under Amazon’s magnifying glass. This includes an ongoing price scan. If Amazon finds out that a product listed both on Amazon and somewhere else is cheaper on the competitor’s website, its algorithm takes action. In truth, this practice is common in the e-commerce marketplace space, and is applied by many other leading e-commerce marketplaces competing with Amazon.

Since 2017, Amazon has been alerting the seller about the price discrepancy if its technology finds any on other channels. Then, Amazon makes the product harder to find on its platform, thus harder to buy. This is how Amazon directly penalizes sellers and forces them to either raise the product price on competitor websites, or decrease it on Amazon. However, with increasingly shrinking margins, and Amazon's take rate per transaction hovering in the 20% to 40% range, further driven by ever-increasing ancillary transaction costs such as advertising expenditures on Amazon, sellers will usually increase prices on other channels.

After all, sellers stand to lose a lot more if they lose sales on Amazon, which usually makes up most of their revenues. Amazon knows this and enforces sellers to make a “logical” choice. As such, and in order to maintain their sales, merchants have no choice but to abide, as notably reminded in a recent Bloomberg report, which makes it harder for them to diversify their sales channels.

How Price Alerts Work

A pricing alert is nothing fancy; it just informs merchants that they are ineligible for a featured offer. Something along the lines of: “One or more of your offers is currently ineligible for being a featured offer on the product detail page because those items are priced higher on Amazon than at other retailers.

This directly squeezes sellers for lower prices. Why?

Because for products with a single seller or where all sellers' prices are high in comparison with other channels, the “Buy Now” button disappears and consumers have to go through a few extra steps to buy products; this is the infamous "Buy Box" that usually makes up between 82% to 90% of sales on Amazon.

For products with multiple sellers, those who are not offering the best prices and certainly those offering higher prices than on other channels will lose the Buy Box, and the sale of the product would go to the seller who won the Buy Box and who usually has the best offer.

In addition to directly hurting sales and conversion rates, a product with an inactive Buy Box will be buried deep in Amazon's search results, generating way lower traffic, in turn recording much lower sales.

What is Actually The Goal Here?

Has Amazon grown so tenacious and ruthless to force sellers to do as it pleases? What is the goal here? According to Amazon’s pricing alerts, it appears that the goal is not to make sellers increase prices on other websites, but to lower prices on Amazon.

On the other hand, we have merchants who often choose to raise prices on competitor websites due to the costs associated with listing on Amazon and the revenue line already established via Amazon’s funnel.

Price Competitiveness and Legal Boundaries

Based on Amazon’s pricing alerts, search results algorithm, and Buy Box algorithm, the goal is still to make sure Amazon's offer the best prices for the end consumer, or at least prices that are at the same level as on other channels. In our opinion, this is nothing new and is nothing but an alternative to having a Price Matching policy, which Amazon actually doesn't offer as stated on its website. But one thing is clear, Amazon confirms the following "Amazon consistently works toward maintaining competitive prices on everything we carry."

The price competitiveness war is clearly raging, fuelued by technology. Walmart's notorious Price-Match offer, Savings Catcher, is being discontinued, which further shows the effectiveness of attacking the price competitiveness challenge from its roots, as done by Amazon.

Directly meddling with prices and indirectly telling merchants what to do raises a new question - does Amazon cross any legal boundaries with these practices? Some experts believe that this delicate Amazon policy will very soon attract the attention of the Federal Trade Commission and Congress. But isn't price-matching anti-competitive either?

Forcing sellers to raise prices on other websites harms consumers. And this is exactly how antitrust behavior is defined in the US. Jennifer Rie, an analyst with experience in antitrust legislation said: “Monopolization charges are always about business conduct that causes harm in a market. It could end up being considered illegal conduct because people who prefer to shop on Walmart end up having to pay a higher price.

A Complicated Issue With News to be Further Expected

As soon as the online chatter about Amazon being anti-competitive and squeezing sellers for lower prices started, Amazon decided to provide answers. In one of the emails sent by an Amazon spokesperson and as reported by Bloomberg, we can read the following: “Sellers have full control of their own prices both on and off Amazon, and we help them maximize their sales in our store by providing them insights on how to be the featured offer.

The topic is certainly complex and we should most certainly expect unfolding news over the next few months to see what Congress, the Federal Trade Commission, and European regulators will have to say about it.