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Karl Racine, Washington D.C. Attorney General, joins Yahoo Finance Live to discuss the antitrust lawsuit against Amazon.
BRIAN CHEUNG: Amazon is in hot water again, this time with Washington, DC. The attorney general filing an antitrust lawsuit last week against the tech giant for its policies around how third party companies can price their products. Karl Racine is DC's Attorney General and joins us now, as does Yahoo Finance's Jess Smith for this conversation. And I want to just address the question to the attorney general in terms of this most favored nation agreement-- that's the clause that's in question here. I guess for our viewers, can you just walk us through what that clause means, how Amazon tried to change that, and ultimately, what is the core at your lawsuit.
KARL RACINE: It's a great question, and let me walk you through that. So my team, and I, and the DC Attorney General's office filed an antitrust lawsuit against Amazon for illegally abusing and maintaining its monopoly power. It controls anywhere from 50% to 75% of the digital mall, we'll call it, by controlling prices across the online retail market.
For years, Amazon has controlled online retail prices through its restrictive contract provisions, sometimes called the most favored nations clause. Here's how it works-- Amazon requires third party sellers to agree to severe restrictions to sell their products on Amazon's online platform. Third party sellers have to agree specifically that they won't offer their products anywhere else online, including their own websites, at a lower price than it is on Amazon.
These MFN agreements are widely viewed in the antitrust space as being contrary to competition, innovation, and creating higher prices. And so here's what we have-- Amazon and a third party seller make a deal, Amazon puts in about a 40% commission on the average item sold. That increases the price. Then, that third party seller is locked and can't offer a lower price than that. So clearly, that increases prices.
And the only reason why Amazon can get away with it is because of what we allege is monopoly power on the internet-- again, 50% to 75% of the market. It's as simple as that. Let me give you two other facts that might be interesting here-- that is that the UK and Germany investigated Amazon for the same conduct back in the 2013-2014 time frame. Rather than confront those charges, Amazon ditched the practice.
Then when Congress raised the concerns in 2019, Amazon promised to change its practice, but it actually didn't. It just put the same language in another part of the third party seller agreement. We're looking to put an end to this practice that raises prices on the internet.
JESS SMITH: And, you know, I wanted to ask about Amazon's response. Amazon says that sellers can set their own prices and Amazon has the right to highlight or not highlight products that are not priced competitively. They argue that the relief you're seeking would force them to feature higher prices. So what do you say to that response from Amazon?
KARL RACINE: Well, I'm saying that Amazon is kind of speaking like a monopolist. The idea that sellers are actually free to set their prices is a myth. Because if the sellers wish to price their items at a lower price on other websites, including their own, Amazon's clause allows them to punish the seller.
And so the idea that Amazon's practices creates low prices for everyone is wrong. In fact, what it does is it creates a high cost that will not be lowered that ordinarily would be lowered if that most favored nations clause did not exist.
JESS SMITH: What have you heard from other states in the past week or so, or other entities? You expect other state attorney generals to get involved?
KARL RACINE: You know, I have had conversations with other attorneys general who've seen the reports of the suit and have reviewed the complaint. They're going to have to make their own decision at the end of the day as to whether it makes sense for their office to either join the suit or bring their own suit. I've also seen a lot of coverage on the internet as well as in print journalism really highlighting this practice of making prices higher with these most favored nation clauses. So I think the momentum is on the side of freedom on the internet, not restraint, and making the monopoly, large player play a lot more fair.
KRISTIN MYERS: So to that point, then, curious to know how concerned you are about how limited the impact might be. If you are victorious-- let's just say-- in this lawsuit, and you do win, considering that this lawsuit is being filed under DC law, it's not being brought in federal court, it's not a federal lawsuit filed by the US Attorney General, and as you just mentioned, other states are going to have to decide if they want to participate in this lawsuit-- so what will the ultimate impact be, do you think, if you do win this lawsuit?
KARL RACINE: Well, it's a very good point that we brought the suit in the District of Columbia in our terrific courts, because we're protecting DC consumers. And normally in a case, you're right-- a favorable judicial decision or a settlement is limited to the geographic area of the suit. I think here, the practice that Amazon is engaged in is so broad and the scrutiny that Amazon is under-- remember, I mentioned that Congress was really focused on this clause. Amazon, essentially, did a bait and switch on them.
I think what this lawsuit is going to eventually result in is in Amazon changing its policy just like they did when the UK and Germany investigated them for the same conduct. You'll remember that the UK and Germany did that, Amazon changed its policy, not only in those two countries, but throughout Europe. So I think that this is going to be a broad remedy in fact, whether it's by a lawsuit or by an agreement on Amazon's part, pursuant to settlement, to change its ways.
BRIAN CHEUNG: All right, well, we'll have to see. And worth mentioning, by the way, that Amazon is trying to put up that new headquarters just outside in DC's backyard in Northern Virginia. But again, AG for District of Columbia, Karl Racine, thank you so much for joining us here on Yahoo Finance this afternoon in addition to Jess Smith.