There is an article in the Wall Street Journal today about how Amazon promotes its own private label products above comparable search results on its site. The article dives into various internal politics in Amazon, but I want to focus on the core contention, because there are certain assumptions the article makes – about e-commerce, Amazon, private label goods, and anti-trust – that merit attention.
For context, the Journal piece notes:
“Amazon optimized the secret algorithm that ranks listings so that instead of showing customers mainly the most-relevant and best-selling listings when they search—as it had for more than a decade—the site also gives a boost to items that are more profitable for the company.”
It’s worth recognizing that Amazon is, as Scott Galloway puts it, “Google for product search.” In much the same way that Google attracts virtually any query under the sun, Amazon is more or less the equivalent starting point for product-related searches. And so a change in this algorithm has deep implications.
Foremost, I think we, as an internet-using society, should accept the fact that virtually any “feed” we encounter is optimized around whatever the primary business goal is of the site we’re using. Facebook’s Newsfeed is designed to keep us scrolling through picture of brunches and babies. Netflix’s “Watch Next” is optimized around sliding us from “Stranger Things” to “Russian Doll.” These are the preconditions that we sort of accept when we use online services — that optimal use of the site will exist at the intersection of a user’s satisfaction and the site’s business goals. We should not be surprised, then, that Amazon’s results are optimized around pushing its own products — which are often cheaper than name-brand alternatives.
The article attempts to make it seem scandalous that Amazon sells private label items on its site. It quotes presidential candidate Elizabeth Warren, who is also uncomfortable with Amazon as a retailer also functioning as a producer. But this misses the mark.
As Benedict Evans pointed out on Twitter, private label products are more than a century old. And, critically, private label goods are sold by virtually every major retailer in the United States. Costco has Kirkland Signature and Target features Up&Up (among others) and Whole Foods has 365, and so on, and so on.
And you’ve only got to walk over to your local superstore to see the real-world equivalent of Amazon’s algorithm change! Target’s own brand of paper towels is sold right underneath Brawny or Charmin paper towels. And Target has — without doubt — conducted research as to the optimal height and positioning and in-store lighting and packaging of its product, to compete with whatever the name brand option is.
In the mind of a random customer, Brawny paper towels are durable and versatile. It’s the results of decades of branding and millions of advertising dollars that have convinced customers that a Burt Reynolds-esque lumberjack will come along and clean up the orange juice that spilled on their counter.
But Target, which sells Brawny paper towels, hasn’t spent money on branding its own line of paper towels. And so it’s able to price its paper towels lower than Brawny, hoping that a customer who sees the items next to one another will choose based on price, not based on brand or a perceived difference in quality. And for an increasing number of consumers, lower prices means better overall welfare. We all just want to pay lower prices, right?
Fittingly, in America, this is more or less how anti-trust works. Regulations revolve around the “consumer harm” standard. If customers are paying lower prices, then there clearly isn’t a trust that has a stranglehold on the market, since they would have otherwise raised prices to maximize revenues. And so Amazon’s prioritization of its own products makes it seem more customer-friendly, not less, since it’s surfacing generally cheaper products — regardless of whether or not Amazon’s bottom line benefits.
But the Europeans see it differently than regulators in the States. In the European conception of anti-trust, the premise is based upon supplier competition — is the behavior of the market leader such that it drives out competition, regardless of whether or not customers pay lower prices? There are merits and drawbacks to both views.
But what I think is more interesting is Amazon’s so-called “revenue maximization” — ie, minute-to-minute price changes. We’re all, no doubt, familiar with that dynamic on airline tickets and hotel rooms. But Amazon – and many other retailers – utilize sophisticated algorithms to adjust prices on the fly, and determine – and raise! – a customer’s willingness to pay. You may have noticed the famous “this item in your cart increased $X since you added it.” This practice almost certainly touches the “consumer harm” yardstick that US regulators employ when determining anti-competitive behavior, and is far more worthy of scrutiny than Amazon adjusting the ranking of its own products in a portal that it controls.