Why the AICO Act Will Threaten Consumers’ and Merchants’ Ability to Choose and Stifle Innovation

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Like many ordinary consumers who make multiple purchasing decisions every day, my husband must decide what he wants to buy, whether to buy online or in a local store, and from which merchant to buy it.

In addition to meeting needs for household items, he tinkers with old trucks, so his restoration projects create a seemingly endless need for automotive components.

Each purchasing decision forces him to determine the importance he places on three different criteria: faster, better, cheaper?

When he needs a standard product, the decision is based on the urgency of the demand, because the prices are competitive and the quality is known. Immediate purchases may require a trip to the local store. Or he uses Amazon Prime if he can wait a day or two. The service offers him fast and free delivery, and he enjoys the peace of mind of hassle-free returns of unwanted items.

When he needs specialized or rare parts, he turns to specialty auto parts stores – some may be nearby, but most are online. For online shopping on Amazon Marketplace, it is prepared to bear longer waits and shipping costs associated with non-Prime products. At other times, he finds them directly on the supplier’s website or hops on the phone to get their expert sales advice. He knows he has to pay more for the benefits of these services.

Prime members – about fifty percent of the US adult population – regularly make similar purchasing decisions. In addition to Prime, they sign up for other memberships and loyalty programs, and shop by choosing the marketplace that best suits their needs.

On the other hand, merchants also use several options when selling their products. They can create their own shops, locally or online. Or they can use online retailers and marketplaces. Often, they rely on multiple channels simultaneously to optimize sales. Their decisions also require the same calculation: what weight should they give to the fastest, the best, the least expensive?

Fulfillment by Amazon (FBA) is popular among merchants who offer products that have a large customer base with frequent transactions. Nearly three-quarters of Amazon’s roughly 10 million sellers are part of the FBA program, which gives them access to Prime’s warehousing, shipping, customer service and returns logistics network. They benefit from increased revenue and reduced fulfillment costs. Smaller or specialty merchants often choose to fulfill their own orders and also use alternatives such as Etsy and Ebay, depending on whether the benefits outweigh the costs.

The US Online Choice and Innovation Act (AICO) is about to take away those choices. The bipartisan Justice Department-backed bill is hailed as a modernization of antitrust. According to Senator Klobuchar, “At its core, it’s about reducing costs for consumers and helping competitive businesses…the bill is pro-competitive and that’s common sense.

Politicians are known to master the art of sound expression.

But a deeper dive into Amazon Prime’s business model reveals why the law will stifle the benefits of innovation, diminish competitiveness and increase costs for consumers and merchants.

‘Relentless innovation’ underpins Amazon Prime and Marketplace dominance

The AICO Act targets “Big Tech” based on the ideological premise that, by definition, monopolies are anti-competitive. However, as I explained earlier, Amazon’s dominance in online shopping is the result of the company leapfrogging its competitors, unlike many monopolies artificially supported by government regulation.

This difference was evident at the start of the pandemic. While Amazon rose to the challenge of providing fast, low-cost home deliveries to an entire nation under lockdown, internet providers benefiting from local monopolies by government decree weren’t as responsive to the concomitant need for broadband access in rural and low-income communities.

With a relentless focus on what Bezos calls customer “divine dissatisfaction,” Amazon Marketplace and Prime represent the greatest retail innovations in history.

Amazon is competitive, insofar as it must win every trade in its market. The sources of its competitiveness are advanced data analytics and a logistics and fulfillment network that integrates human capital, artificial intelligence and robotics. This allows each transaction to be personalized by the individual buyer or seller choosing what is in their own best interests, over their other available options.

The AICO law will hurt consumers, especially those who benefit from lower prices

The AICO Act prevents Amazon from using its market information to develop off-brand products known as AmazonBasics. Policymakers have widely criticized this practice by the company for harming competitors.

But it’s no different than what American supermarkets do when they create their own private label grocery brands. Kroger relies on market data to develop store brand staples such as soups, snacks and condiments. The same goes for Walmart and Target, which provide prime storage space for their own brands. Millions of consumers rely on these value options, especially in times of runaway inflation.

By restricting AmazonBasics, AICO would artificially support the few merchants who lose sales because consumers prefer lower prices at the expense of countless consumers impacted by the removal of cheaper options. And it would reduce competitiveness by giving an artificial advantage to Walmart and Target that are unaffected by the law.

The AICO law also prevents Amazon from noting which third-party merchants are part of their FBA program. Consumers like my husband rely on Prime designations to determine which products have guaranteed free and fast delivery. The faster, better, cheaper matrix that consumers rely on to shop would be shattered.

Without this differentiator, consumers lose valuable information and are less likely to buy from merchants on Amazon. In turn, Amazon will not be able to charge willing merchants for FBA, depriving it of the revenue and economies of scale needed to fund this revolutionary consumer program. Merchants would have to manage their own shipping without the efficiency of Amazon’s innovations.

AICO will take consumers back to the bad old days of long waits, high shipping costs and complicated return policies.

The AICO Act will hurt merchants, especially small businesses and specialty businesses

The AICO Act will reduce competitiveness by giving an artificial advantage to USPS, UPS and FedEx, the shipping companies that stand to gain the most if Amazon’s FBA is reduced. Merchants who currently rely on the efficiency of FBA will experience increased execution costs and be deprived of the flexibility to choose between faster, better or cheaper.

It will also hurt third-party merchants who don’t participate in FBA, the very merchants it’s supposed to help.

Third-party merchants account for 56% of sales on the Amazon marketplace and enjoy access to millions of customers who otherwise wouldn’t see their products. Amazon Prime Day alone boosts sales for small and medium-sized businesses. It accounted for 3.5 billion in single-day sales at the height of the pandemic.

Prohibiting Amazon from using retail practices that are otherwise common in the industry will create a fundamental shift in its business model. Amazon noted that the extreme fines associated with the potential violation of vague, broadly worded restrictions “will make it difficult to justify the risk that Amazon offers a marketplace that selling partners can participate in.”

The AICO Act will result in small specialty merchants losing access to online customers like my husband, threatening their ability to survive.

The AICO law is anti-American in its premise.

The AICO Act uses the strong, long arm of government to pick winners and losers. This represents a fundamental difference in the worldview of politicians compared to ordinary consumers and producers.

While politicians operate in a zero-sum world of win-lose in election campaigns, consumers and producers operate in voluntary markets where mutually beneficial transactions improve the situation of all parties by allowing them to choose the best among the available options.

As a country founded on the freedom to choose and excel, America has thrived on the twin engines of innovation and enterprise that drive newcomers to replace the giants of old.

In the retail industry, the dominance of Sears in the early 1900s was challenged by Walmart in the later part of the century. Itself the target of antitrust wrath, Walmart’s dominance was ultimately checked by Amazon.

When “divine dissatisfaction” from customers is accompanied by “relentless innovation” from producers, we all benefit from faster, better, and cheaper options.

This is how the market works. Policy makers should avoid throwing sand in its gears and do the opposite of what the name of the American Online Choice and Innovation Act implies.

The law is un-American because it reduces competitiveness by punishing Amazon because it is the preferred online choice of consumers and merchants, thanks to its innovative nature.

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