Competition Snuffed Out: Stacy Mitchell Testifies at FTC Workshop on Predatory Pricing

In December, Stacy Mitchell spoke at the Federal Trade Commission’s workshop, “Competition Snuffed Out: How Predatory Pricing Harms Competition, Consumers, and Innovation.” The workshop was designed to showcase new scholarship and fresh thinking about the widespread problem of predatory pricing — where dominant firms slash prices below cost to drive smaller competitors out of the market. Think of Uber offering ultra-cheap rides to undercut local taxi companies, only to hike prices once these competitors are gone.

For the workshop, Mitchell shared expert testimony on how companies like Amazon engage in predatory pricing, how algorithms have supercharged the tactic, and why current antitrust interpretations fail to address the problem.

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Thank you, Chair Khan and members of the commission, for the opportunity to speak today.

I’d like to briefly do three things: 

1. Provide a real-world example of how a monopoly achieved dominance through long-term predatory pricing.
2. Highlight an underappreciated consequence of allowing predatory pricing to go unchecked.
3. Examine how modern pricing algorithms have supercharged predatory pricing, making it more effective and difficult to regulate.

First, I’ll begin with the real-world example of an effective long-term predatory pricing strategy that fueled a monopoly. The example is Amazon. Across its 30 year history, Amazon has repeatedly sold products below cost to crush competitors and dominate markets. In its first 6 years, Amazon lost a staggering $3 billion selling books below cost, a strategy that wiped out countless bookstores. The investment paid off: Not only did Amazon capture the book market — today it controls half of all book sales and more than three-quarters of the e-books market — but it was able to leverage that early dominance in books to take over e-commerce more broadly.

In the 2000s, Amazon targeted popular e-commerce rivals with similar tactics. After the shoe retailer Zappos doubled its sales between 2004 and 2007, Amazon attempted to buy the company. When Zappos executives refused to sell, Amazon began selling shoes at a loss. Straining to keep its customers, Zappos matched the discounts and began losing money on every sale. All told, Amazon reportedly lost a $150 million in the gambit. It worked: Zappos, bleeding red ink, agreed to be acquired.  Amazon used a similar strategy to topple Diapers.com, losing perhaps as much as $100 million to force yet another competitor into a shotgun merger. Such tactics not only eliminated competitors but likely discouraged future challengers from entering e-commerce altogether.

Today, there is good reason to believe that Amazon is continuing to sell particular products and services below cost, with the losses financed, not by external investors, but by profits from the fees Amazon charges third-party sellers. In 2023, third-party sellers on Amazon’s marketplace paid Amazon about $170 billion in fees. Analysts believe that this revenue stream is highly profitable; that the costs Amazon incurs for fulling third-party orders are much lower than the fees it charges sellers, resulting in substantial profits.   

Yet, if we look at Amazon’s public financials, while it’s become a much more profitable company in recent years, we don’t see the scale of profits that analysts believe Amazon gets from seller fees showing up on its bottom line. This raises the possibility that Amazon uses profits from seller fees to subsidize below-cost selling in other areas of its business. Selling particular products or services at a loss may be a way that Amazon holds competitors at bay and maintains its monopoly in e-commerce. 

What’s notable here is that, unlike the way courts have viewed predatory pricing, where a company sells below cost at one point in time and then at a later point in time recoups its losses through inflated prices, in this scenario, the below-cost selling and the recoupment are occurring simultaneously in different parts of the company. Selling particular goods below cost enables Amazon to maintain monopoly, while lucrative fees from captive sellers are the fruits of that monopoly. There’s no reason that this can’t go on forever. Amazon founder Jeff Bezos, in talking about Amazon’s strategy, has used the metaphor of a flywheel, a perpetual motion machine. And that’s exactly what this looks like.   

Second, I wanted to highlight one of the underappreciated consequences of allowing predatory pricing to go unchecked. When large, multi-product retailers or conglomerates can sell an entire category of products below-cost, it makes it difficult for businesses that specialize in that product to survive. A specialty business has no other product lines to rely on. If you’re a book retailer and a dominant multi-product firm decides to sell books at a loss, what do you do? You can’t lose money on the one thing that you sell. Or say you make smart speakers and Amazon decides to sell its own smart speakers at a loss in order to make Alexa the dominant voice assistant. As Patrick Spence, the CEO of Sonos, testified before a Congressional committee in 2020, these pricing tactics, “hamstring[] those companies that have better products that cannot be sold at a loss.”

From the standpoint of competition, the problem here is that specialty firms provide distinct benefits to consumers and the markets in which they operate. Specializing often entails a deep level of expertise, which pays off for consumers in multiple ways. Intendent bookstores, for example, account for only about 10 percent of the market, but they play a wildly disproportionate role in product discovery. Staffed by voracious readers, they discover new books and new authors that are worth reading and promote them to their customers. Many important books and authors owe their careers to discovery by an independent bookstore. 

Or, as the Sonos example illustrates, in the case of specialty manufacturers, they often bring a deep expertise and commitment to a product that leads to innovation and quality improvements that we would not otherwise get.  

Finally, I’d like to highlight that the pricing algorithms companies deploy today can help to facilitate predatory pricing, making it more feasible and effective, less expensive, and harder to detect. Algorithmic pricing enables companies to carry out predatory pricing strategies with extraordinary precision and finesse. Consider that Amazon’s algorithms make millions of price adjustments every day. By drawing on Amazon’s vast cache of real-time data about individual consumers and about rival retailers, Amazon’s pricing algorithms can identify opportunities to selectively target competitors’ customers. On the recoupment side, algorithms also determine which products show up in a search results and which are chosen for the buy box, suggesting opportunities to selectively steer customers to higher priced products. 

Algorithms make the current legal doctrine, which views predatory pricing as implausible, all the more out-of-step with the realities of today’s markets. 

Thank you.