Amazon affect small business
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Fernandes 1
Treicy Fernandes
Dr. Kordylewski
Eng 112-36
03/10/22
How Amazon Affects Small Businesses
Amazon.com is the largest online retailer in the United States. According to a report by the Subcommittee on Antitrust, Commercial, and Administrative Law, Amazon controls approximately 50 percent of online retail sales in the country. Jeff Bezos founded the corporation in 1994 as a book retailer. However, the company quickly diversified into other products, including toys, electronic, and clothing. Today, Amazon sells virtually all consumer products, ranging from perishable vegetables to industrial equipment. Bezos has even referred to the corporation as the “everything store.” Crucially, Amazon’s capacity to maintain this level of diversity is attributable to its vast network of third-party sellers. In 2020, the platform had 2.3 million third-party sellers, most of whom were small businesses. Moreover, about 37 percent of these sellers relied on Amazon as their only source of income (Nadler and Cicilline 15). Amazon’s market share makes it the best option, and sometimes the
only option, for small businesses hoping to sell their products online. However, the power that Amazon has on the online retail market and its vast resources enable it to exploit the much smaller companies, particularly those that rely on its platform.
One way Amazon exploits small businesses is through charging fees for using its platform. The fees that the company charges third-party sellers comprise a significant portion of Amazon’s revenue. In the first six months of 2020, the corporation made $39 billion (Nadler and Cicilline 251). While is it understandable for an e-commerce platform to charge third-party sellers for its services, Amazon’s fees can be unbearable for the sellers. A small business that wants to sell its products on Amazon can end up paying fees for various services
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including, monthly subscriptions, high-volume listing, referrals on items sold, and closing sales. Additionally, Amazon also charges the company for order fulfilment, delivery, and advertising. For small companies selling cheap merchandise with low margins, these fees can be overwhelming. For example, a sole proprietor selling $2 dog toys may struggle to make a profit due to the many fees. To overcome this burden, small businesses may opt to increase the price of items or sell the items in bulk. However, these choices may prove harmful because customers are more likely to buy the cheaper options.
Amazon also engages in anticompetitive strategies such as stealing product ideas from
third-party sellers. Amazon operates in a dual capacity: as an operator of an online marketplace that hosts third-party sellers, and as a seller in this same marketplace. This dual role creates a conflict of interest since Amazon has real-time data on competing products that it can exploit. Indeed, recent research confirms that Amazon does exploit this conflict of interest. An investigation by Reuters in 2021 showed that the company used data from Amazon.in, its platform in India, to copy products that other companies sold, and then offered
them on its platform (Kalra and Stecklow). In addition to stealing these product ideas, Amazon rigged its search results so that its products would appear among the top three. This strategy benefits Amazon while simultaneously harming small businesses. On the one hand, customers are more likely to purchase Amazon’s products, since the company has greater brand recognition than smaller companies. Hence, the small businesses end up experiencing a
drop in sales volume because their products are no longer at the top of search results. On the other hand, Amazon avoids the initial costs and uncertainties of introducing new products by creating knockoffs only after the products’ success have been established. Another anticompetitive strategy that Amazon has used is predatory pricing. Companies that use predatory pricing drastically slash their prices to push competitors out and accrue market share (Khan 723). The strategy works when large companies that can
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afford to withstand losses for a prolonged period substantially reduce the price of a commodity. Since many consumers will gravitate to the cheaper alternative, small companies selling the same product cannot endure this price war and they exit the market. Amazon uses this strategy to edge out small businesses from a marketplace. The corporation goes a step further by selling items at a loss to ensure that competitors cannot match its prices. Khan notes that for most of its existence, Amazon has deliberately endured losses to gain market share (748). This strategy has enabled the company to push small businesses out of the market and acquire or merge with e-commerce rivals.
Amazon also arbitrarily shuts down small businesses operating on its platform without offering adequate due process. During a hearing on innovation and entrepreneurship by the Subcommittee on Antitrust, Commercial, and Administrative Law in 2019, Stacy Mitchell noted that Amazon abruptly suspends the accounts of third-party sellers without adequate explanation. She gives the example of a company that had its account closed without warning for supposed violations despite having a 98 percent positive feedback from customers (House Committee on the Judiciary). The business owners could not contact anyone at Amazon to remedy the situation or provide an explanation. However, nearly seven years later, Amazon reinstated their account. This kind of treatment harms small businesses using the online retailer’s platform, particularly those who rely entirely on Amazon. Moreover, the company also seizes the seller’s inventory and cash balance, which can cripple small businesses. Finally, Amazon uses its stronghold on the online retail market to coerce small businesses into paying more fees or agreeing to new terms. An excellent example of this behavior relates to Melville House, a small publisher that used Amazon when starting. The company’s co-owner, Dennis Johnson, noted that Amazon forced him to pay an extra fee by refusing to sell the company’s books on the platform (Packer). After paying the fee, the books
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reappeared. However, Amazon continued pressuring the company into making additional payments in the form of marketing development funds and demanding steeper discounts that deeply undermined the small publisher’s bottom line. Since these companies have limited alternatives to sell their products, if any, they end up agreeing to Amazon’s constantly changing terms. Unfortunately, it means that it is harder for the small companies to grow or invest in research and development.
Although Amazon seems like an attractive platform for small businesses due to its market share, it uses this hold on the online marketplace to exploit smaller company and perpetuate its growth. For example, the company uses its access to third-party sellers’ data to steal proprietary information to recreate products under its own brand. Amazon then promotes its products at the expense of the small businesses, thereby undermining the latter’s sales. Additionally, the massive corporation charges ever-growing fees to small companies operating on its platform, engages in predatory pricing, arbitrarily shuts down accounts, and coerces the sellers to accept new terms. These practices hinder small companies from growing and even pushes some out of the market. Clearly, Amazon prioritizes its growth and profits over the welfare of small companies that have, essentially, contributed to its growth.
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Works Cited
House Committee on the Judiciary. “Online Platforms and Market Power, Part 2: Innovation and Entrepreneurship.” YouTube,
16 July 2019, youtube.com/watch?
v=iZ0LduMwZec&t=2536s
Kalra, Aditya and Steve Stecklow. “Amazon Copied Products and Rigged Search Results to Promote its own Brands, Documents Show.” Reuters,
13 October 2021, reuters.com/investigates/special-report/amazon-india-rigging/.
Khan, Lina M. “Amazon's Antitrust Paradox.” The Yale Law Journal,
vol. 126, 2017, pp. 710-805.
Nadler, Jerrold and David N. Cicilline. “Investigation of Competition in Digital Markets.” Staff Report. 2020.
Packer, George. “Cheap Words: Amazon is Good for Customers. But is it Good for Books?” New Yorker
, 9 February 2014, newyorker.com/magazine/2014/02/17/cheap-words.