A Guide to Amazon and Google’s Antitrust Vulnerabilities

For the past week, tech media has been buzzing about broad government antitrust probes into four of the largest tech monopolies: Google, Amazon, Apple, and Facebook. The Department of Justice and the FTC have split the workload. The DOJ will probe Google and Apple, while the FTC focuses on Amazon and Facebook.

How worried should tech companies be, and about what in particular? Politicians like Elizabeth Warren, and even tech insiders like Facebook co-founder Chris Hughes have called for these companies to be broken up. While these outlandish demands grab headlines, they are far from practical. That said, there is still cause for concern as we analyze below.

While Apple has been in the news a lot recently, it seems to be the least vulnerable. The recent case brought against them was allowed to proceed on a technicality. In essence, the recent ruling suggested that all Apple has to do is change its developer license agreements to indicate that the money from consumers goes directly to developers before Apple takes its 30% cut. Right now, the payment flows from consumer to Apple to developer, so the recent Supreme Court ruling suggested that Apple is putting end customers at a disadvantage.

However, other modern monopolies face more entrenched problems. Based on what we know today, we believe Amazon and Google are the most vulnerable.

Amazon Marketplace’s Supply-side Price Gouging

On Amazon’s marketplace third-party vendors must pay a fee for the privilege of selling on the marketplace. Fair enough. Access to a large market of customers costs a price. Thus, it’s easy to argue that this access is a service that Amazon provides to third-party vendors. That’s a problem for Amazon, because the modern interpretation of antitrust law is largely centered on protecting customers.

By simply following the money, it is easy to argue that vendors on Amazon’s marketplace are another type of customer. As a result, any price gouging would pose a legal problem for Amazon.

In the holiday season, for example, Amazon has raised prices on 3rd party sellers. Yet, at the same time, Amazon has vertically integrated (i.e. sells its own products directly on the marketplace) and doesn’t subject its own products to the same pricing structure.

Amazon’s vertical integration imposes additional costs on sellers as well. Amazon will favor its private label brands in its product search results, even when the third-party products have better reviews and prices. By favoring its own products, Amazon introduces another mechanism that increases costs for sellers by forcing them to buy ads to stay at the top of product search results.

Amazon is already aware of its antitrust vulnerability when it comes to their relationship with third-party sellers, and has already started to change the contracts it has with sellers. For example, until 2019, its contracts required that sellers post the lowest price for a product on Amazon. They recently ended this practice out of fear of it being used against them in an antitrust setting.

Taken together, transaction fees + advertising expenses, it’s easy for an investigator to argue that the price of being Amazon’s customer as a third-party vendor continues to increase year over year, but not for Amazon’s own, linear products.

The Google Antitrust Hydra

Google is no stranger to antitrust probes and the United States government has already done a lot of research into Google’s anti-competitive tactics. While the DOJ has not signaled which aspect of Google’s business it will probe (and it could be more than one), Google’s firmest monopolistic grip is arguably its squeeze on search.

Google search is a platform that connects web publishers with internet browsers. Part of that connection includes Google’s page rank algorithm which determines the order in which a website is displayed for a user’s search results. However, because websites don’t pay Google to be included in Google’s search results, it’s more difficult to lay out in legal terms the business relationship between Google and web page creators.

Two of the most famous examples of page rank abuse are Yelp and TripAdvisor: niche search providers that once dominated restaurant and travel search. Both websites were disadvantaged by Google when it changed its search algorithm to make its own local content the #1 spot. In 2011, Yelp filed an antitrust complaint against Google and testified before the Senate  alleging that Google copied Yelp’s content in addition to unfairly manipulating the search results. Troubling for Google, the FTC already investigated this in 2015 and can hand over its findings to the DOJ, creating an extensive record of Google’s search manipulation practices. Like Amazon, Google’s alleged abuse of the page rank algorithm forces websites to buy advertising on Google to continue to appear at the top of the search page.

Lastly, YouTube is the most clear cut from a legal standpoint. YouTube charges a fee of 45% on creators who make ad revenue on the platform. To YouTube’s credit, they haven’t increased this fee so they haven’t violated antitrust law in the sense of raising prices on the customer. Instead, YouTube is under fire for its “demonetization policies” where creators with millions of followers are stripped from earning any revenue at all for violating YouTube’s policies, which change every few months. There are countless creators, on both ends of the political spectrum, who are very vocal about how YouTube enforces its policies and disagree with YouTube’s role as sole policy creator and enforcer. This is another example where the FTC could add oversight and create rules that regulate when a creator can be demonetized or not.

Will Amazon and Google Be Broken Up?

It’s unlikely that Amazon or Google will be broken up as a result of these probes. There are many regulations that could be put in place to address these anti-competitive practices. For example, Google could be forced to adhere to a core set of rules with its own products that prohibits it from manipulating search results. Greater transparency into how Amazon operates on its own marketplace could empower third-party sellers to bring forth anti-competitive cases.

Regardless of how the DOJ and FTC proceed with these cases, don’t expect this to be quick. Microsoft’s antitrust case in the 1990s and early 2000s took 12 years from the launch of the FTC’s investigation to the settlement approved by the court in 2002. As a result of that lengthy probe, Microsoft adjusted many of its monopolistic practices and in the future was more cautious before deploying aggressive, anti-competitive practices. Ultimately, Microsoft wasn’t broken up (just barely), but the FTC still changed Microsoft’s behavior and extracted a settlement. Today, Microsoft has a valuation of over $1 trillion.

Filed under: Platform Regulation | Topics:

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