Will Efficiency Be Curse in EU?

Christian Wiediger via Unsplash

Regulatory clouds are gathering over internet platforms. The European Commission is preparing a major regulatory package called the Digital Markets Act, which will significantly regulate many aspects of how large internet companies operate. In addition, many regulators and courts across Europe are starting to investigate or fine them. Let us look at one such persecuted platform – Amazon.

Amazon provides many services. Among other things, it is an online retailer and also the creator of an online marketplace where other retailers sell. Amazon as a seller is extremely efficient and fast. To call it the logistics and distribution miracle of the 21st century is no exaggeration at all.

Amazon takes 45 minutes from the time you click on “the buy” to: process your order, locate the goods in the warehouse, then pack, scan, label and load them onto the truck. That sounds great, but it’s breathtaking when you realize the sheer scale of Amazon’s ability to process orders this way. It handles more than 10 million orders a day, that’s 115 orders every second.

Amazon is able to ensure this efficiency thanks to its sophisticated systems in logistics centers and distribution channels. It then sells these efficiencies to customers in the form of a subscription service called Prime. Its subscribers are guaranteed free delivery of goods from Amazon within 24 hours.

However, as I mentioned earlier, Amazon is not only a large retailer, but also the creator of the digital marketplace. And on that marketplace, it allows other sellers to sell for a fee. And it also allows those who are interested to do something extra. They can plug into the efficient machinery of its logistics and distribution network.

Amazon offers them a service called Fulfillment by Amazon (FBA). It allows such sellers to stock their goods directly at Amazon’s logistics centers, arranging for their delivery to customers, as well as managing inventory management, returns policy, and all customer services. In addition, the goods of these sellers will be part of Prime offers and other marketing promotions such as Black Friday or Cyber Monday on Amazon.

And this is where regulators and officials say the problems arise. For Amazon has decided to bundle the two services into one package for sellers. Or in other words, it’s only allowing sellers who use Fulfillment by Amazon access to Prime customers and marketing promotions.

And this is the kind of thing that the European Commission’s DMA regulation is fighting against or for which the Italian Antitrust Authority has fined Amazon 1.3 billion. USD.  Which is quite a lot even for a global company like Amazon, which made a net profit of 21 billion in 2020. Regulators are simply requiring Amazon to open up its premium services to sellers who don’t use Amazon logistics.

However, this is a misunderstanding of Amazon’s added value as a platform. The platform is so successful not only because of its logistical efficiency, but also because of its reputation. Even in the worst weeks during the pandemic, Amazon’s share of positive order reviews did not fall below 88% and it very quickly got back to pre-pandemic levels.

However, if Amazon had allowed sellers with their own order processing procedures and logistics network to enter its flagship Prime business, it could no longer guarantee top-notch service and fast delivery.

Thus, either it would have to reduce the quality of service or its reputation would be in the hands of people who may not care about Amazon’s brand reputation. Its reputation would then become a common pasture on which everyone would want to make a living, which would eventually lead to its gradual degradation.

Therefore, the fact that Amazon has a firm grip on the reins of quality ultimately helps everyone – the entire platform.

The best evidence is not words by an analyst, but the trend of the share of sales of sellers on Amazon’s platform on its total sales. This has grown from 40% in 2013 to 56% in 2020.  Thus, in other words, the Amazon brand umbrella under which sellers sell is becoming more and more popular for third parties. This is despite the fact that most of them do not use Prime and FBA services.

The fundamental misunderstanding of regulators, which is the source of the calls for regulation and the handing out of fines, is misconception at which level competition should take place. The Commission suffers from an entrenched notion that competition needs to be enforced within the platform. That is to say, to ensure that the platform is sufficiently open and that everyone is on a level playing field.

However, even creators of the first discos parties already knew that the success of the platform was not so much determined by ‘fair access’ but by maximizing the added value for all participants. And this can often be ensured by favoring certain platform participants.

For example, by giving the women free entry or alcoholic beverages. This is simply due to the different preferences and expectations of different platform users. After all, if the platform is well managed, the male population will not complain about the relatively more expensive entrance fees and drinks. The platform will thrive as a whole.

Thus, the key thing is not to ensure “open and fair” competition within the platform. But the functioning of competition between platforms. And that works for Amazon too. It first had to beat eBay, which had more experience with the business model in form of third-party selling platforms. And today, Amazon has a strong new competitor in the form of Shopify.

The sales volume of merchants on Shopify has already reached 40% of the sales of sellers on Amazon’s platform in 2020, up from 25% two years ago. Competition isn’t sleeping in the world of internet platforms either.

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