Senator Amy Klobuchar (D-Minn.) and Senator Chuck Grassley (R-Iowa) have unveiled their tech antitrust legislation, entitled The American Innovation and Choice Online Act. At first glance, the goals of the Klobuchar-Grassley bill seem unobjectionable, and the bill is presented as a commonsense solution to an obvious problem. As the Klobuchar press release says, the point of the legislation is to prohibit large digital platforms from “favoring their own products or services” or “disadvantaging rivals,” as well as discouraging a wide array of other discriminatory conduct.
But the bill’s combination of broad language, very high fines, and no safe harbor means that even good faith efforts to adhere to the bill’s intentions could result in a huge financial hit to major American firms such as Apple, Alphabet, and Amazon. That threat, in turn, will lead these companies to substantially reduce or alter the services they offer to minimize opportunities to be fined.
In order to understand this problem, I’m going to step through one example here in detail related to Amazon. Amazon offers its Prime customers free two-day delivery, which they love. For a price, it also offers third party sellers Fulfillment by Amazon (FBA), which gives them access to Prime delivery services for their products.
Sounds like a good deal, right? It’s highly unusual for a major retailer to give rivals access to its cutting-edge logistic operations, including handling returns. But this access was a win-win-win proposition. It was great for consumers, great for sellers, and great for workers, who Amazon has been hiring at a furious rate.
But under the Klobuchar-Grassley bill, regulators would have to ask the question: Does the price that Amazon charges for FBA discriminate against third-party sellers? Amazon has to set the price for FBA taking into account its marginal cost of handling the product, both during normal time and peak season. It also has to factor in the fixed costs of the fulfillment infrastructure—the warehouses, the robots, the trucks and the computer systems.
Setting the FBA price is a complicated calculation with no single right answer. In fact, if I lined up four economists and logistics analysts, they would likely give at least four different answers. One price might be the average cost of providing the logistic services, including all the infrastructure needed for the e-commerce peaks. Another price might be the price of buying the same fulfillment services on the open market. A third price might be Amazon’s marginal cost of handling the product during normal season. A fourth price might be zero — because, after all, some people might argue that charging third-party sellers anything for logistics services would “self-preference” Amazon.
There is no language in the bill that guides regulators about which price to use, and no safe harbor. In particular, the usual antitrust presumption in favor of consumer welfare is nowhere to be found. So as sure as the sun rises in the east, as soon as this bill is passed and signed into law, Amazon will be accused of setting the price of FBA “too high” — that is, greater than zero — exposing the company to fines as high as 15% of revenue.
Facing this threat, Amazon can choose to keep Prime in place, and run the risk of huge, business-killing fines. More likely, it could reduce the quality of its delivery promise, and offer the same lower-quality logistic service to everyone, including Prime customers. Or it could close down its third-party selling market, so it’s not exposed to fines.
But no matter what Amazon does, the loser would be consumers and workers. The legislation would break a successful business model that makes consumers happy and provides hundreds of thousands of jobs for workers, and for what purpose?
The exact same issues arise for other important services provided by large platform companies covered by the Klobuchar-Grassley legislation. The broad language, lack of safe harbor, and high fines would force them to reduce the services they provide. Consumers will be worse off, and so will be workers.