A Bee in the Bundeskartellamt’s Bonnet: Amazon Fined for its Price Control Mechanisms

On 5 February, the German competition authority announced its latest development surrounding its capture of digital market power. In its press release, it highlighted that it would be fining Amazon for its price gouging mechanisms as it considers the conduct to constitute an abuse under Section 19a(2) of the German Competition Act (GWB) as well as a violation of the general abuse provisions under Section 19 GWB and Article 102 TFEU. This post clarifies the facts of the case, the underlying theories of harm, and the potential overlaps of the case with DMA-related provisions.

Price Caps Are Not Good for Competition, Right?

The German FCO fined Amazon 59 million euros because it considered that it had been influencing the prices charged by sellers on the German Amazon Marketplace. In the wake of the publication of the competition authority’s decision, the facts of the case are quite sparsely distributed in the press release. The Bundeskartellamt remarks on Amazon’s business model first by stating the undertaking operates as the marketplace operator and holder whilst it competes as a seller (via Amazon Retail) with third-party sellers. Around 60% of the goods sold via amazon.de are sold from products offered by third-party sellers. Up until now, nothing to see here.

As in any other platform, third-party sellers are responsible for the prices they charge consumers on the marketplace, and they bear the economic risk of their own sales activities. Third-party retailers pay a commission per sale they complete on the marketplace (commonly around 15% for many categories), plus the shipping and storage costs that Amazon can charge if they wish to enjoy that particular service from the marketplace holder.

Pricing mechanisms are, however, of the essence when considering Amazon’s undue influence on its third-party sellers. According to the German FCO, Amazon influences its downstream competitors’ pricing, including through price caps. When Amazon determines through its price control mechanisms (e.g., via algorithms, statistical models, heuristics, or computational methods) that a seller’s price is too high, then the offer is either altogether removed from the marketplace or not displayed in the Featured Offer (formerly known as the Buy Box), which is prominently placed in the marketplace’s interface. These price caps apply across all product categories, impacting different prices and taking into account distinct price components of current or previous offers completed on Amazon.

Those price caps can take three different forms: i) pricing errors; ii) excessive prices; and iii) uncompetitive prices. Depending on Amazon’s categorisation of a price as one of these three categories, the result is quite different for the particular product. When the undertaking identifies an error in the pricing of a third-party seller’s product, the offer is removed from the marketplace. When Amazon spots an excessive and/or uncompetitive price, the offer will not be featured in the Featured Offer, and potential restrictions might be introduced on the product’s display on search. Amazon does not disclose the criteria it uses to disqualify offers from its marketplace, although it does disclose the possibility on the terms and conditions accepted by each third-party seller.

In the particular case of the uncompetitive prices, Amazon compares the third-party seller’s prices on its own marketplace with its prices in other online shops or marketplaces. If the Amazon price is flagged, the dominant undertaking shows a value to the third-party seller that it considers to be a competitive price, so that it can resubmit and adjust its prices to the ‘competitive’ scale.

Price comparisons are conducted with other online retailers listed on an internal list. On the FAQs document released by the Bundeskartellamt, the FCO describes the price mechanisms as dynamic. If one reads in between the lines, dynamism is set under a negative light. But that’s just how the marketplace operates in Germany: a larger seller with 44,000 products alone achieves almost 1 million price changes within 24 hours just in Germany. Sellers that do not engage in repricing have virtually no chance of adapting to the rapidly changing market situation on Amazon.

Against this background, the German competition authority interprets that Amazon restricts the visibility of its sellers’ offers in a way that can lead to a significant loss in sales. In addition, the undertaking would be influencing its competitor’s pricing, such as in the event of excessive pricing, leading to two specific harms to its competitors, both at the upstream and downstream levels. First, Amazon will be able to control the price level on its trading platform, placing it as the most prominent marketplace when it competes with online retail platforms by exploiting the business brought to it by third-party sellers.

Second, the FCO argues that, for affected sellers, Amazon’s interference in their pricing may result in them no longer being able to cover their own costs, forcing them out of the marketplace. If Amazon decides what a competitive price is, then it risks setting prices under a threshold where it might not be economically sustainable for third-party sellers to continue offering their services on its marketplace. By doing so, the dominant undertaking predominantly displaces small and medium-sized traders from the marketplace because strict price limits prevent them from covering their costs, i.e., the shipping and logistical costs that it charges to them.

To put it another way, the FCO considers that Amazon’s price caps are disproportionate and unnecessary because “there are other options available to the company (to attain) this purpose”. In this sense, the German competition authority proposes, for example, that Amazon could “offer sellers appropriate incentives by reducing the fees and commissions they have to pay” so that their prices are more competitive (and cannot be categorised as excessive or uncompetitive going forward). In short, the dominant undertaking must do everything in its power to ensure that downstream competition thrives in its marketplace. Even if that means lowering its own margin of benefit by abstaining from passing on (or reducing) the shipping costs that it provides to third-party sellers as an option.

When we translate the competition authority’s rationale to numbers, the picture the German competition authority paints in its press release lacks some nuance. Most Amazon sellers get a profit margin of 15-20%, depending on their category. For instance, products in the beauty and personal care category have a margin that spikes to 35%, whereas the sale of books (because competition is very high amongst the downstream competitors) may return 8-15% in average.

The average net margin of an Amazon seller is 12,5% for 80% of the offered products in the German marketplace, whilst 20% of the products are sold at a loss. These negative margins stem from three different reasons: i) products that sell poorly or that need to be sold to create liquidity; ii) new product listings are set at competitive prices in product launch so that they quickly rise in Amazon rankings; and iii) the selling price is simply calculated incorrectly. Therefore, there’s a part of third-party sellers that simply make mistakes in pricing (and these errors are covered by Amazon’s current policy). There are others that are forced, due to one reason or another, to sell their products at a loss. The dominant undertaking does not contest their capacity to do so, because individual prices set by third-party sellers (daily, in the million dimension!) are not tracked according to the margins in which they operate.

Having gone through all the details, the German competition authority’s decision makes less sense as a means to increase consumer welfare. Despite the FCO’s efforts in reassuring everyone that it is not taking action against Amazon’s goal of providing end consumers with better service, the end result that its decision will achieve is hardly convincing: eliminating all three price control mechanisms in their current form. In the future, Amazon will only be able to implement a price control mechanism in a very limited way in the future, i.e., if the pricing of the seller infringes applicable law when prices are usurious. In turn, that means that consumers will likely be shown products in the Featured Offer or in the German marketplace’s ranking more broadly that do not correspond with the current (and yes, dynamic!) state of the market.

A German and an Italian meet at Amazon’s marketplace

Aside from the substantive insights that one can extract from the brief explanation provided by the German competition authority so far, the FCO’s case is also entangled with procedural complexity. The Bundeskartellamt brings the decision under the Section 19a(2) GWB legal basis, so that the probative value of its reasoning is placed in a much lower threshold, economically speaking. On top of that, no one can possibly deny the overlaps that the German case against Amazon brings with regard to the application of Article 5(3) DMA, which prohibits parity clauses and those mechanisms that might bear the same effect.

At the very least, the FCO recognises in its press release that it “has worked closely with the European Commission, which is responsible for enforcing the (…) Digital Markets Act”. The avid reader will assume that the German competition authority triggered the cooperation mechanisms under Articles 37 and 38 DMA to double-check whether it is the competent authority to sanction Amazon in this particular manner. And even if it did not, the result (or, rather, the EC’s response) would have been the same: Articles 37 and 38 DMA provide cooperation mechanisms for national competition authorities and the European Commission to discuss current developments that take place at the European Competition Network. Given that the case was also brought under Article 102 TFEU, one could expect the same mechanism to be triggered under the decentralised enforcement model of Regulation 1/2003. Be that as it may, the German competition authority was forced, one way or the other, to sit down at the same table with the European Commission and discuss the repercussions of its proceedings with regard to the harmonisation of the internal market.

However, no clear sign of the discussion emerges from the press release or the FCO’s intentions. German users will see their experience on Amazon’s marketplace improved, whereas all users of the remaining 26 Member States will continue to navigate the dominant undertaking’s interface as it currently stands. Let’s assume that the German competition authority’s theory of harm brings positive impacts to consumers and downstream competitors. Why wouldn’t the European Commission want all Member States to enjoy those same advantages produced by the application of competition policy?

If I had to venture an answer to the question, I would point to the principle of prioritisation. The European Commission is not forced (not completely detached, either) to assume all cases that NCAs throw at them in the ECN, even if they can report advantages to the wider EU market. In the DMA space, that is equally true, with some fine print. The DMA acts (and is designed) as a centralised enforcement system, where all decisions about how a gatekeeper should behave with respect to the conduct under Articles 5, 6, and 7 must be taken by the only institutional actor available, the European Commission. It’s slightly worrying that the European Commission decides to let the Germans’ case slide when it comes to one of the DMA’s main promises, parity clauses.

As troubling as the abstention might be, it is not unprecedented when it comes to the European Commission’s decisions of fragmenting the internal market (if it manages to appease the NCA in the side). One must only have a look at the patchwork of decisions surrounding digital markets, notably Amazon’s MFN case or the recent imposition of interim measures against Meta at the national and EU level. The question is, however, why are some consumers more valuable than others when it comes to EU competition policy?