Amazon is facing scrutiny after the Federal Trade Commission (FTC) revealed the existence of a secret algorithm, known as “Project Nessie,” that the e-commerce giant allegedly used to manipulate prices. The FTC has included these allegations in its monopoly lawsuit against Amazon, claiming that the algorithm aimed to test the elasticity of price increases and observe if competitors would follow suit, reported The Verge.
According to the Wall Street Journal, the algorithm, which is no longer in use, played a significant role in enhancing Amazon’s profits across various product categories. It was so effective that it not only boosted Amazon’s margins but also led competitors to inflate their prices. In cases where rivals didn’t match Amazon’s prices, Project Nessie would revert the prices to their original points.
The algorithm was not limited to raising prices; it also played a role in a promotional spiral. When competitors like Target Corp (TGT) offered discounts, Amazon would match these lower prices. However, even after the competitors’ sales ended, Amazon and others remained at reduced prices, locked in a cycle of low pricing. This algorithm had the power to inflate and deflate prices depending on the market scenario.
While the exact figures have not been disclosed by the FTC, it is indicated that Project Nessie “extracted” a significant amount from American households and generated an undisclosed amount of “excess profit” for Amazon. The algorithm reportedly contributed over $1 billion in revenue for the e-commerce giant. However, the specifics remain under wraps as Amazon and the FTC continue their legal battle.
Amazon ceased using Project Nessie in 2019, although the reasons for its discontinuation remain unclear. The company’s top lawyer, David Zapolsky, has rebutted the FTC’s claims, arguing that the regulatory body misunderstands the dynamics of online pricing and competition. Zapolsky asserts that halting Amazon’s pricing strategies, as sought by the FTC, would be “anticompetitive and anti-consumer.”
The FTC’s lawsuit against Amazon is part of a larger narrative of regulatory bodies scrutinizing tech giants for alleged anticompetitive practices. Companies like Apple Inc (AAPL) and Microsoft have also faced similar challenges.
In response to the allegations, Amazon’s spokesperson stated, “The FTC was wrong on the facts and the law, and we look forward to making that case in court.”
This news comes as regulatory bodies continue to investigate and challenge the practices of major tech companies. The FTC’s complaint against Amazon highlights the company’s alleged use of various methods to maintain its market dominance, including burying listings to deter sellers from offering lower prices on competing platforms.
The FTC spokesperson, Douglas Farrar, called on Amazon to remove the redactions in the complaint, allowing the public to see the full scope of the alleged illegal monopolistic practices.
Source: The Verge