[WSJ] Amazon Used Secret ‘Project Nessie’ Algorithm to Raise Prices

The strategy, as described in redacted parts of FTC lawsuit, is part of agency’s case that Amazon has outsize influence on consumer prices.

Wall Street Journal Oct 3, 2023 - Dana Mattioli

Amazon used an algorithm code-named “Project Nessie” to test how much it could raise prices in a way that competitors would follow, according to redacted portions of the Federal Trade Commission’s monopoly lawsuit against the company.

The algorithm helped Amazon improve its profit on items across shopping categories, and because of the power the company has in e-commerce, led competitors to raise their prices and charge customers more, according to people familiar with the allegations in the complaint. In instances where competitors didn’t raise their prices to Amazon’s level, the algorithm—which is no longer in use—automatically returned the item to its normal price point.

The company also used Nessie on what employees saw as a promotional spiral, where Amazon would match a discounted price from a competitor, such as Target.com, and other competitors would follow, lowering their prices. When Target ended its sale, Amazon and the other competitors would remain locked at the low price because they were still matching each other, according to former employees who worked on the algorithm and pricing team.

The algorithm helped Amazon recoup money and improve margins. The FTC’s lawsuit redacted an estimate of how much it alleges the practice “extracted from American households,” and it also says it helped the company generate a redacted amount of “excess profit.” Amazon made more than $1 billion in revenue through use of the algorithm, according to a person familiar with the matter.

Amazon stopped using the algorithm in 2019, some of the people said. It wasn’t clear why the company stopped using it.

Project Nessie is one of a number of instances where the FTC’s complaint contends that Amazon’s monopoly power had broad impacts on raising consumer prices across retail.

The FTC declined to comment on the redacted material in the complaint, but FTC spokesman Douglas Farrar said: “We once again call on Amazon to move swiftly to remove the redactions and allow the American public to see the full scope of what we allege are their illegal monopolistic practices.”

In a statement last week, top Amazon lawyer David Zapolsky said the FTC is misunderstanding how online pricing and competition work.

“If they were successful in this lawsuit, the result would be anticompetitive and anti-consumer because we’d have to stop many of the things we do to offer and highlight low prices—a perverse result that would be directly opposed to the goals of antitrust law,” Zapolsky said.

A central argument the FTC makes is that Amazon’s power over third-party sellers on its website leads to higher prices for consumers, even those who are buying goods from a rival.

Essentially, sellers feel they have no choice but to use Amazon because of its reach, consumer base and logistics prowess, but the company prohibits them from offering their products at a lower price at other retailers than on Amazon, where nearly 40% of all e-commerce in the U.S. occurs, the FTC alleges. If they offer lower prices elsewhere, Amazon “punishes” them, according to the FTC, downgrading their listings so that shoppers don’t see them.

The FTC alleges that because Amazon’s cost to sell is higher than other platforms due to its fees, it creates a higher price point for goods across retail, since sellers must use their Amazon price as their floor.

Fees and charges to Amazon sellers have exploded in recent years, and the company now pockets nearly half of the dollar amount for every sale a third-party makes on the platform.

A new report from the Institute for Local Self-Reliance, a research and advocacy group, found that between 2014 and 2023, Amazon’s cut of third-party seller sales rose from 19% to 45%. The report includes Amazon’s fees related to selling on the platform, advertising on it and fulfillment of orders. More than 60% of Amazon’s retail sales come from third-party sellers.

The FTC alleges that sellers feel compelled to use Amazon’s logistics program to be eligible for inclusion in Amazon’s Prime program, and they buy advertisements on Amazon.com to ensure they reach its vast pool of customers.

“Amazon’s one-two punch of seller punishments and high seller fees often forces sellers to use their inflated Amazon prices as a price floor everywhere else,” the complaint says.

Amazon in its statement said it is a trusted partner for millions of sellers because it provides “the most effective set of services for creating thriving, successful businesses” and has invested billions of dollars to aid sellers. It also said it provides its merchants with choices, and that sellers can succeed without using the company’s advertising or logistics services.

Internally, some Amazon executives have worried about how the company’s policies affected pricing throughout retail, some said. For instance, if an Amazon seller making a hat lists it at $20 on Amazon.com to cover their shipping costs, referral fee and advertising costs, it must also charge $20 for that hat on its own website, though the cost of doing business would be much less if a buyer bought directly from them because there would be no referral fees or advertising costs

FTC Chair Lina Khan originally argued in her 2017 Yale Law Review article that Amazon hurt its rivals by heavily discounting. However, the substance of the FTC complaint is focused on Amazon’s ability to raise prices. Antitrust experts pointed out that often the behavior of a company differs when it is building a monopoly, where it may cut prices to hurt rivals and grow market share, and maintaining one, where it has the freedom to now raise prices and degrade services because there are fewer viable rivals.

The FTC’s complaint also alleged that advertising is required in order for sellers to be successful.

“It’s become pay to play,” said Brandon Fuhrmann, an Amazon merchant who sells kitchen products. Because Amazon in recent years has given more space in search results to advertising, merchants say they feel forced to pay for the advertisements.

Amazon has made improvements for sellers throughout the years. Merchants said the company has gotten better at communicating issues, and it has provided them with greater analytical tools to measure their sales performance. In online posts following the FTC suit, some sellers expressed support for the company and said the FTC claims were misguided.

The FTC complaint claimed the number of advertisements on Amazon has degraded the shopping experience for customers.

Amazon’s senior management team has internally had a similar debate inside the company about whether the amount of ads was degrading the shopping experience for customers.

In a meeting among senior Amazon executives several years ago, the company’s then-CEO of Worldwide Consumer, Jeff Wilke, complained there were too many advertisements crowding search results, according to an attendee. Jeff Bezos, who was then CEO, cut Wilke off, the person said, telling Wilke that they already had that debate too many times. Bezos described two versions of Amazon to the group. “Amazon A,” as he called it, had no advertising. Amazon B had advertisements and allowed Amazon to offer lower prices. “Which one of these companies survives?” the person said Bezos asked Wilke.

Amazon’s size and corresponding power are a double-edged sword for sellers. Jess Nepstad, who sells outdoor coffee products, said only 40% of his sales go through Amazon because he fears relying on the retailer too heavily.

“It’s a love-hate relationship,” he said. “They can turn the switch on you in a blink of an eye, and you can be out of business.”

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  1. There is going to be a major debate over whether 6% of retail sales is a monopoly.

  2. There is going to be a major debate over whether the sellers who do not raise their prices when Amazon raises their price are brain damaged.

  3. Wilte quit because he did not want to manage a cash cow.

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Amazon independently trying to game another retailer’s algorithm is not anti-competitive and it’s not collusion. If they reached out to another retailer and asked them to work together to price fix, that would be illegal. Building your own algorithm to optimize things based on another retailer’s algorithm is called competition. You don’t ALWAYS need to dump your price super low to compete.

One of the first things I do when I get on a new ASIN is dump the price and then raise it to find the other sellers’ price floors, and how they react to the price being lowered and raised, and then plan a strategy depending on the results I get. I’ve seen people indiscriminately undercut, sometimes to below FBA fees for the item (on an FBA offer).

Moved to Amazon News & Announcements, added WSJ to title

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