Amazon.com $AMZN-0.5% used an algorithm code-named "Project Nessie" to test how much it could raise prices so that competitors would follow suit, according to redacted portions of the Federal Trade Commission's monopoly lawsuit against the company.
According to people familiar with the allegations in the complaint, the algorithm helped Amazon increase profits on items across shopping categories and, given the company's strength in e-commerce, led competitors to raise prices and charge customers more. In cases where competitors did not raise their prices to Amazon's level, the algorithm - which is no longer used - automatically returned the item to its regular price.
The company also used Nessie for what employees considered a promotional spiral, where Amazon matched the discounted price of a competitor, such as Target.com, and other competitors followed suit and lowered their prices. When Target ended its sale, Amazon and other competitors remained locked in at the low price because they kept matching each other, according to former employees who worked on the algorithm and pricing team.
The algorithm helped Amazon recoup money and boost margins. The FTC's lawsuit provides an editorialized estimate of the amount the practice allegedly "extracted from American households," and also says it helped the company generate an editorialized amount of "excessive profits." According to a person familiar with the matter, Amazon generated more than $1 billion in revenue through the use of the algorithm.
"The FTC's allegations grossly misrepresent the tool," an Amazon spokesman said. "Project Nessie was a project with a simple goal - to try to prevent our price comparisons from leading to unusual results where prices became so low as to be unsustainable. The project ran for a few years on a subset of products, but it didn't work as intended, so we cancelled it a few years ago."
Project Nessie is one of a number of cases in which the FTC's complaint alleges that Amazon's monopoly position had a broad impact on raising consumer prices at retail.
The FTC declined to comment on the redacted materials in the complaint, but its spokesman Douglas Farrar said, "We again urge Amazon to promptly remove the redactions and allow the American public to see the full extent of what we believe to be its illegal monopoly practices."
David Zapolsky, Amazon's lead lawyer, said in a statement last week that the FTC misunderstands how pricing and competition works on the internet.
"If successful in this lawsuit, the outcome would be anticompetitive and anti-consumer because we would have to stop many of the things we do to offer and emphasize low prices - which would be in direct conflict with the goals of the antitrust laws," Zapolsky said.
The FTC's main argument is that Amazon's power over third-party sellers on its website leads to higher prices for consumers, even for those who buy goods from competitors.
Essentially, sellers believe they have no choice but to use Amazon because of its reach, consumer base and logistical capabilities, but the company prohibits them from offering their products at a lower price on sellers other than Amazon, where nearly 40% of all U.S. e-commerce takes place, the FTC says. If they offer lower prices elsewhere, the FTC says Amazon "punishes" them by downgrading their offerings so customers don't see them.
The FTC argues that because Amazon's cost per sale is higher than other platforms due to its fees, this creates a higher cost of goods across the retail industry because sellers must use Amazon's price as a floor.
Fees and levies for Amazon sellers have skyrocketed in recent years, and the company now collects nearly half the amount for every sale a third party makes on the platform.
Amazon's share of third-party sales will grow from 19% to 45% between 2014 and 2023, according to a new report by the Institute for Local Self-Reliance, a research and advocacy group. The report includes Amazon's fees associated with selling on the platform, advertising on it and fulfilling 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 qualify for inclusion in the Amazon Prime program, and buy advertising on Amazon.com to ensure they reach a huge number of customers.
Amazon said in a statement that it is a trusted partner to millions of sellers because it provides "the most effective set of services for creating thriving and successful businesses" and has invested billions of dollars to help sellers. It also said it provides its sellers with choice and that sellers can succeed without using the company's advertising or logistics services.