April 24, 2014

Is Amazon encouraging third-party sellers to mislead customers?


via littleny / Shutterstock.com

A lawsuit brought against Amazon.com alleges that the company encourages third-party vendors to raise prices on products that are eligible for free shipping. (Image via littleny / Shutterstock.com)

A lawsuit filed against Amazon in February alleges that the company encourages third-party vendors to charge more for products that are eligible for free shipping in order to recoup shipping charges and maximize profits. The lawsuit also suggests that Amazon utilizes its famous algorithm to privilege sellers with higher prices by giving them premium placement in Prime members’ searches. Amazon Prime members pay $99 (the price was recently increased from $79) for free two-day shipping, as well as access to streaming video and other benefits, including access to free ebooks. Last spring, two third-party sellers sued Amazon for withholding payments in an unrelated lawsuit.

Interestingly, the man who brought the case against Amazon, Dr. A. Cemal Ekin, wrote a blog post in 2010 alleging that Amazon was rigging prices titled “Shame on You Amazon! Your Prime Membership May be Costing you More Than You Think.” In the piece, Ekin explains how he first came to believe that Prime prices were not what they seem:

A couple of days ago I wanted to buy a memory card and the offer on the screen was not honored, neither the price nor the free shipping. On top of that, the item showed two different prices. The big price on top of the page in red was $28.10 and later on in “Frequently bought together section” the item was listed at $26. I called the phone support, and the agent tried to explain to me that the item was sold by an Amazon vendor, they don’t control the price, yada, yada, yada… I indicated my displeasure to the agent and added that they were using double pricing or allowing their participating vendors to do it….

Yet another message arrived, profusely apologizing for the inconvenience and offering me $5 credit as a goodwill gesture. Thank you, but … read on. I went back to Amazon site, searched for the same item again. This time, I found the same item at $23.11 and clicked on the link. Oh, what happened? The price went up to $28.10. Hmmmmm! I noticed that I was logged in to my account. After logging out I went to the product listing page, the $23.11 was still showing and a click on it brought me to a page where, lo and behold, the price was $23.11 and the seller was different.

Ekin, a retired professor who taught marketing at Providence College and published an article in the Journal of Consumer Marketing titled “Exploring consumer lying in information-based exchanges,” proceeded to test his hypothesis that “For Amazon Prime members the item is priced higher and a different vendor is promoted to make the sale”:

To test the hypothesis, I logged in again with my Amazon credentials, reloaded the product grid page, clicked on the $23.11 item and sure enough, the price went up to $28.10 and the vendor switched again. So the test confirmed the behavior I saw a little earlier. I seemed to be charged different prices and directed to different vendors based on my login state. In short, part or all of the shipping costs seem to be added on the price of the product.

The lawsuit, which was filed by Ekin’s attorneys from the delightfully named Seattle law firm Sirianni Youtz Spoonemore Hamburger, alleges similar deception:

During the class period: (a) Amazon advised Fulfillment by Amazon Vendors to include the amount they would have charged for shipping in their item prices in order to maximize total revenue and profit margins; and (b) FBA Vendors increased their prices to Prime Program Members by the amount they charged others for shipping without revealing that a portion of those prices was for shipping fees. Amazon disguised this price increase by giving priority to FBA Vendors, showing their items first in the results of a Prime Member’s product search.

FBA Vendors are third-party sellers for whom Amazon “warehouses goods, fills orders, boxes and ships, provides customer service and handles returns, and provides payment collection on third-party-owned goods sold on Amazon.com and other websites.”

In many ways, both the filing and Ekin’s 2010 post are compelling—at the very least, they suggest that something fishy (if maybe not quite nefarious—or even illegal) is going on over at Amazon. But the line of attack is narrow and it’s unclear if Ekin has evidence of a conspiracy beyond the experiments he conducted nearly four years ago. In a somewhat Clintonian turn, the argument seems to rest on the question of the meaning of the word “free,” which the Federal Trade Commission defines as:

“When the purchaser is told that an article is “Free” to him if another article is purchased the word “Free” indicates that he is paying nothing for that article and no more than the regular price for the other. Thus, a purchaser has a right to believe that the merchant will not directly and immediately recover, in whole or in part, the cost of the free merchandise or service by marking up the price of the article which must be purchased.”

But the “What is free, really?” argument is slippery, especially when one takes a closer look at Prime, which offers free two-day shipping, not free shipping per se. As a commenter on The Digital Reader (where I first came across this story) notes, “if I recall correctly the agreement is for free two-day shipping, not FREE shipping. So even if they are recouping some costs (and of course they are) they can easily argue that the customer isn’t just getting shipping—they’re getting two-day shipping, which can’t necessarily be compared to a lower cost item with just free regular shipping.” It’s important to note that there’s no such thing as “regular” shipping—but that doesn’t change the fact that the “this thing I was told was free may not be so free, after all” argument is straight-forward, or even immediately apparent. Ekin appears to have examples of goods that are sold at higher prices by FBA Vendors and lower prices by non-FBA Vendors, but his 2010 blog, while (again) fairly compelling, is still anecdotal.

This question—of whether Ekin and his attorneys can provide proof—affects other areas of the argument as well. Amazon routinely warns Prime customers that “This item may be available at a lower price from other sellers that are not eligible for Amazon Prime”—I don’t know if that protects them from Ekin’s allegations, but it does seem to provide a level of defense.

Finally, and perhaps most importantly, while the filing argues that “Amazon advised Fulfillment by Amazon Vendors to include the amount they would have charged for shipping in their item prices in order to maximize total revenue and profit margins,” there isn’t anything in the filing that suggests Ekin and his attorneys have documentary evidence to prove that claim. It’s possible that they do—or that they’ll try to acquire internal documents as the trial proceeds—but right now the argument doesn’t land. Of course, this is the kind of evidence that usually comes out during a trial, so it’s not terribly surprising it’s not present in the filing. It’s worth noting too, if only as an aside, that Amazon is not particularly obsessed with turning a profit—it’s a growth-based company, so risky, short-term maneuvers like this seem out of character.

The Digital Reader‘s Nate Hoffelder is similarly skeptical of the lawsuit’s chances. On Sunday, he wrote “If there were merit then the lawsuit would have been filed years ago… If Amazon were breaking the law don’t you think the state of Washington (not to mention the 49 other states) would have sued Amazon in court by now and forced Amazon to change the way Prime works?” In the abstract, at least, I don’t think that the lawsuit’s timing—Prime was unveiled nine years ago—necessarily means that it’s without merit. It’s certainly possible—albeit unlikely—for behavior like this to fly under the radar for a long time. But Hoffelder’s overall point is a good one: considering the scope of some of the charges, I’d be far more inclined to believe that Amazon was acting illegally if Washington State was suing the company, rather than an individual.

Nevertheless, Ekin’s inquiries into Amazon Prime, coupled with this CNet report that suggests Prime users pay slightly more for goods than non-Prime users, despite the $99 fee, suggest that Amazon’s beloved program may not be the cost-saver many consumers think it is. Ekin and his attorneys face an uphill battle, and there are a number of obstacles in their way (one does not expect, for instance, that the notoriously tight-lipped Amazon is going to part with any internal documents without a fight).

But the suit is still fascinating, as it not only hits at one of Amazon’s greatest success stories but also at the company’s brand itself. Jeff Bezos is many things but he built Amazon into the massively (and ruthlessly) successful company that it is by being obsessed with customer service and his company’s reputation with consumers. People keep coming back to Amazon because they know they’ll get what they want on time for a low price—Amazon Prime works not only because it’s a good value but because it also encompasses everything the company is about.

But, with Prime’s recent price increases, some customers—though far from anything resembling a critical mass—seem to be questioning the program’s value. Ekin’s suit faces an uphill battle, but if it has any merit, or even if it forces Amazon to release any sensitive documents, it could be very damaging to what Bezos cares most about: Amazon’s reputation.


Alex Shephard is the director of digital media for Melville House, and a former bookseller.