Should Amazon Shareholders Worry About the FTC's Monopoly Lawsuit?

Stock markets fell sharply on Tuesday, continuing the downward momentum from last week after a one-day break. The losses for the S&P 500 and the Nasdaq Composite were roughly equivalent, but even the Dow Jones Industrial Average fell more than 1%.

Data source: Yahoo! Finance.

Amazon.com (AMZN 0.58%) has seen its stock perform extremely well in 2023, as investors have been able to appreciate the dominant position in which the e-commerce and cloud computing giant finds itself. However, Amazon has lost some ground lately, and Tuesday brought news of a lawsuit from the Federal Trade Commission alleging anti-competitive practices. With litigation likely to move forward and take a long time to resolve, the question that remains is whether Amazon really needs to worry about the FTC action. Here are some of the details of the suit and thoughts about the possible ramifications.

What the FTC is alleging

The Federal Trade Commission joined 17 state attorneys general in making allegations that Amazon has monopoly power and uses many anti-competitive and unfair strategies to maintain it. The lawsuit focuses not as much on Amazon's size as on what it does that allegedly prevents competitors from being successful.

The complaint highlights a few noteworthy allegations. The FTC views Amazon's ability to adjust search results in a manner that penalizes sellers who offer better prices via distribution channels outside the Amazon platform as unfair, characterizing it as an anti-discounting measure. The FTC also takes issue with the alleged practice of Amazon requiring sellers to use the Amazon fulfillment service to qualify for Prime eligibility.

In addition, the complaint alleges that Amazon uses its monopoly power to get much larger payments from sellers than it would in a more competitive landscape. The FTC points to paid ads for favorable search results, preferences for Amazon-produced goods, and fees the Commission says can amount to half of a typical seller's gross revenue.

How Amazon responded

Amazon was quick to rebut the lawsuit and its allegations. The company called the FTC lawsuit "misguided" in that Amazon would have to do things that would hurt consumers and sellers to comply and said the FTC has a "fundamental misunderstanding of retail" that required a better explanation from Amazon.

More broadly, Amazon took a different angle on antitrust law, emphasizing the impact of its actions on end customers. As it pointed out, Amazon didn't have any third-party sellers on its platform originally, and choosing to invite them onto its site was a pro-competitive move from its perspective.

In addition, Amazon emphasized its place in both e-commerce and the retail universe more broadly. From that viewpoint, Amazon isn't nearly as much of a monopolistic threat, as the company notes that more than 80% of retail products are still purchased in brick-and-mortar stores. In other words, by including companies like Walmart and Target as peers -- peers that have built up an e-commerce presence of their own, by the way -- Amazon doesn't look nearly as much like the behemoth the FTC portrays.

Stay tuned

The two very different views from the FTC and Amazon suggest that litigation will be long and protracted. Yet, regardless of the outcome, the interesting aspect is whether consumers will appreciate it.

In many ways, consumers have flocked to embrace what appear to be anti-competitive practices. The entire value of a network effect stems from having as many people participate as possible, and Amazon is just one of many tech giants seeking to create ecosystems in which customers use multiple services.

This leaves us with a question: If people essentially want to be customers of a monopoly, can regulators stop them? Under current law, the answer is likely yes. Yet, with the spirit of antitrust law revolving around avoiding harm to consumers, that tension seems out of place. Indeed, that appears to be the essence of Amazon's defense, and it'll be interesting to see how that plays out not just in court but also in public opinion.