Amazon’s Private Labels Don’t Threaten Competition

A recent Wall Street Journal article raises concerns about Amazon’s generics offerings and the online retailer’s business practices surrounding diaper sales. In evaluating if these claims rise to the level of illegal, it’s crucial to remember that consumer, not competitor, harm is at the heart of today’s U.S. antitrust law.

Accusations that the company consulted sales information on third-party sellers that influenced the development of private-label merchandise first arose in a Wall Street Journal article earlier this year and those claims were repeated at a House antitrust hearing this summer. At the time, Amazon released a statement that the practice is against internal policy, and that the incident is under investigation.

But internal policies aside, the reality in retail is that grocery stores, big-box sellers, and department stores often use data from branded products to inform their treatment of generics and have done so for decades. It’s a well-established business practice and there’s no reason it transforms into something alarming or illegal when done online.

Amazon generates only 1 percent of its revenue from private-label goods. Meanwhile, Kohl’s makes 46 percent and Target 33 percent of their revenue from private-label sales. While competition from generics might not thrill third-party sellers and competing brands, the practice benefits consumers. It provides more product options and often at lower prices. There’s no consumer harm in that.

The article treats Amazon’s move into selling diapers as a classic example of predatory pricing. But it’s worth noting that Amazon isn’t a major player in the diaper market; wholesale club prices for diapers are about the same price as Amazon’s. After Amazon bought Quidsi, parent company to Diapers.com, it tried for several years to run it as a profitable brand, but eventually had to close it down.

Even if Amazon had used its greater efficiency to price Quidsi out of business, that still isn’t illegal under U.S. antitrust law. As the Federal Trade Commission says:

Pricing below a competitor’s costs occurs in many competitive markets and generally does not violate the antitrust laws. Sometimes the low-pricing firm is simply more efficient. Pricing below your own costs is also not a violation of the law unless it is part of a strategy to eliminate competitors, and when that strategy has a dangerous probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses. In markets with a large number of sellers, such as gasoline retailing, it is unlikely that one company could price below cost long enough to drive out a significant number of rivals and attain a dominant position. [Emphasis in original]

So even if Amazon did deliberately drive Quidsi out of business, that wouldn’t be illegal unless Amazon was using the same tactics to try to drive BJs, Sam’s Club, Walmart, and Target out of the diaper market. That’s not happening. In fact, those big box stores are expanding their online offerings; they’re moving into Amazon’s home turf.

The Supreme Court noted in Matsushita v Zenith Radio Corp. (1986): “There is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.” To argue that there’s an antitrust violation here, you’d have to segment the market down to absurd levels to call Amazon dominant in online diaper delivery. But that’s not the market reality for consumers of diapers; they have many options.

Nothing Amazon has done in the diaper space looks like consumer harm. The Amazon email uncovered by The Wall Street Journal that says, “Beat or meet Diapers.com’s delivery speed,” isn’t the smoking gun to new parents that the article makes it out to be. That kind of competition drives progress in the marketplace, to the benefit of consumers.

Competition is rough stuff and perhaps especially so with Jeff Bezos as your competitor. But relentless innovation and price competition is the opposite of the consumer harm U.S. antitrust law requires for intervention.