Amazon.com may seem to give consumers lots of options, but its dominance often denies them the one choice that many want: the ability to not shop on Amazon.
According to a 2021 survey by Sitecore of 2,000 American consumers, 30% feel guilty after shopping on Amazon AMZN,
– yet continue to shop there. Even before the COVID-19 pandemic, in 2018, a survey of millennials who shopped at Amazon found that 77% would prefer to give up alcohol for a year than forego shopping at Amazon, and 44% would give up sex for a year before sacrificing. Amazon.
Amazon is an extreme example of the outsized power enjoyed by giant middlemen, but it is not unique. When a middleman or network of middlemen rise to dominance, their rise can transform the entire domain where they operate. This can make the cost of opting out of the dominant scheme too much for any individual to bear.
A core challenge is that middlemen often rise to dominance by designing infrastructure that makes it easier for parties to connect. Amazon’s platform provides sellers access to more buyers than they could find anywhere else, and it does the same for buyers.
Amazon’s massive network of state-of-the-art warehouses, trucks and delivery teams ensures Amazon can get consumers what they want, when they want it. The more people shop at Amazon, the more developed these networks become, and the more Amazon can invest in ensuring that it remains faster and more reliable than competitors.
In many ways, this is great news for all involved. Sellers can reach buyers, buyers can find just what they want, and goods move more quickly and efficiently. Yet Amazon’s control over this critical infrastructure can enable it to further its own aims at the expense of both buyers and sellers.
Prime real estate
The real estate market illustrates how this can happen, and how the infrastructure that make middlemen so helpful can also give them outsized power in the evolution of the market where they operate. Full-service real estate agents and the National Association of Realtors, the trade group that looks out for their collective interests, rose to power by creating multiple listing services (MLSs) across the country. The MLS compiles detailed data about all of the homes for sale in an area. Particularly in the pre-internet days, inclusion in the MLS made it far easier for sellers to get their homes in front of interested buyers and for buyers to identify homes they could afford in the neighborhood where they wanted to live.
In both instances, the infrastructure initially benefited both the middlemen and those that relied on their services. But a lot has changed since. The internet makes it much easier for buyers to find suitable homes and for sellers to get their home in front of interested buyers in other ways. Real-estate fees in many other countries, such as Canada, Australia and the United Kingdom have fallen 1.5% -3% of the value of the property sold. Americans, by contrast, typically still pay 5% to brokers, and sometimes more.
A key difference is that there is no equivalent to the MLS in Canada, Australia and the UK Without a centralized database controlled by expensive, full-service real estate agents, competition flourished. In the US, by contrast, websites such as Zillow Z,
and Redfin RDFN,
rely on the MLS, so the internet has done little to displace the dominant regime. Plus, traditional real estate agents have proven ready and willing to use their control over the MLS to penalize discount brokers and threaten competitors that seek to introduce the pricing transparency typically required for markets to function well.
The net result is that far too many people feel little choice but to play by the rules of a scheme that enriches real estate agents at the expense of homeowners. Given that housing is the primary source of wealth for the typical American family – in contrast to the rich who own financial assets including stocks and bonds – this system most harms middle-class Americans.
Similar dynamics are now at play around Amazon. Amazon’s rise has made daily life a bit easier for most of us. But it has also contributed to the closure of local stores, reducing alternatives. Amazon’s acquisition of online competitors, such as Diapers.com and Zappos, has created even fewer outside options and made it harder for buyers to go elsewhere.
The magnitude of Amazon’s power is reflected not only in conflicted shoppers, but also the increasing fees Amazon collects from sellers that rely on its platform. Research by the Institute for Local Self-Reliance reveals that Amazon has managed to squeeze more out of its sellers every year for the past eight years. In 2014, when a buyer bought a good from a third party via Amazon, 81% of the price they paid would typically reach the seller. That figure fell to 66% by 2021. This is in part because sellers are buying more services from Amazon, but Amazon also designs its platform and services so sellers feel the need to pay more to compete effectively.
“ Amazon provides remarkable conveniences, but if it is allowed to continue to grow unchecked, it will wield far more power than any private company should. ”
Innovation should be rewarded, but it should not result in a lasting shift of
power from buyers and sellers to the middlemen that connect them. It’s great
when individuals are willing to make the effort to visit a local bookstore or
take the chance on buying a home without a traditional real estate agent,
but such gestures are not enough to fix a fundamentally flawed system without
Amazon provides remarkable conveniences, but if it is allowed to continue to grow unchecked, it will wield far more power than any private company should. Amazon is already changing the entire ecosystem in which it operates, and outside options for both buyers and sellers may well continue to disappear if more is not done.
From robust antitrust enforcement that keeps power in check to public efforts to build and subsidize the infrastructure smaller players need to be competitive, public officials have a critical role to play in helping to promote healthy competition. Policies made now will be key to ensuring that buyers and sellers continue to be able to choose Amazon when they want to – and to go elsewhere when they don’t.
Kathryn Judge is the Harvey J. Goldschmid Professor of Law at Columbia Law School and the author of Direct: The Rise of the Middleman Economy and the Power of Going to the Source (Harper Business, 2022).
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