The Amazon platform used the special algorithm to set its prices in such a way that it illegally increased its profits
A secret algorithm called the “Nessie Monster” has been used by the world’s largest online trading platform to raise the prices of the goods it offers. This was revealed in an investigation by the US Federal Trade Commission in an antitrust investigation against Jeff Bezos’ platform.
The news broke in the US a week before the Black Friday shopping spree on November 24.
The software determined how much to increase specific prices so as to simultaneously increase Amazon’s profit, force the competition to do the same, and not turn away shoppers from the goods with the increased prices. It is the pressure that, in this way, through “Nessi” is exerted on competitors to raise their prices at the expense of consumers, is the main part of the investigation against Bezos’ company. In cases where competitors refused to comply with Amazon’s policy, Nessi automatically returned the old normal price of the products.
The same algorithm was used by the company and in
an unfair business practice that officials described to investigators as spiraling promotions
In this practice, “Nessi” set a price for the promotional item, which was equal to one of the major competitors of the platform, such as “Target”. This pressured the other platforms to lower the prices of the same product. And when the promotion at “Target” ended, “Amazon” and the other platforms remained at the low price, a former employee of “Amazon”, who worked in the pricing team with the “Nessie” algorithm, told the investigators.
The algorithm has helped Amazon increase its profit margins. According to estimates by the Federal Trade Commission, Bezos’ platform made $1 billion in profits thanks to the algorithm. In front of the Wall Street Journal, an investigator defined these profits as money siphoned from American households in order for Amazon to achieve excess profits.
“The FTC’s allegations are untrue and grossly misrepresent the true nature of this tool,” Amazon said in a statement. According to the company
the goal of “Nessi” was actually to stop the practice of parallel lowering of prices
from the online platforms to levels where the price becomes unsustainable. “The project was in operation for several years for some of the products, but it did not work as planned and was stopped,” Amazon’s position also states.
The Nessie Monster, however, is just one example of how Amazon has abused its monopoly position to inflate the prices of products sold through the platform, the Federal Trade Commission said. The commission is demanding that Bezos’ company withdraw its right to publish only a redacted version of the allegations.
However, the company’s general counsel, David Zapolsky, declared that the federal commission has a deep lack of understanding of how prices are determined in online platforms and how competition actually works. “If the commission wins the court case, the consequences will be anti-market and directed against consumers, because Amazon will have to give up many of the mechanisms and tools it uses to offer promotional prices. In reality, the result will be a perverse violation of antitrust legislation, the lawyer claims.
The federal commission’s main charge is that Amazon exercised its position over the manufacturers of goods offered through the platform to force them to agree to prices that were higher than the real ones. As such, it has become successful even for manufacturers who also use competing platforms for their sales.
“Amazon” holds over 40% of online trade
and thus forces sellers to use its platform regardless of terms. And if they offer lower prices somewhere, they are punished by Amazon, the investigation shows. At the same time, however, the cost of using Amazon is higher for manufacturers than the fees of other online trading platforms. In this way, with pressure from two directions, Bezos’ company raises the prices of the goods, while at the same time setting them as the minimum for the other platforms.
Between 2014 and 2023, Amazon increased spending on third-party merchants from 19 to 45%, including platform fees, advertising fees and fulfillment fees. Additionally, there is pressure to pay for using the Amazon Prime service.