Amazon, the e-commerce behemoth, has found itself in hot water as the U.S. Federal Trade Commission (FTC) alleges that it used a clandestine algorithm, internally dubbed Project Nessie, to rake in over $1 billion in extra profit. This revelation came to light on November 2, following a lawsuit filed by the FTC and 17 states against Amazon in September. The lawsuit had many details under wraps, which were later unveiled when a version of the lawsuit with fewer redactions became public in the U.S. District Court in Seattle.
Project Nessie: The Secret Algorithm and Its Impact
According to the less redacted complaint, Amazon employed “Project Nessie” to manipulate the prices of products on its online store, thus influencing market prices overall. Knowing that numerous websites set their prices to align with Amazon’s, the company allegedly devised Nessie to artificially inflate prices, leading other retailers to follow suit.
Once other retailers matched or raised their prices, Amazon would continue to sell the product at the higher price, yielding a windfall of $1 billion in excess profit, as per the FTC’s claims. The FTC also accused Amazon of selectively enabling and disabling Project Nessie to evade public scrutiny.
Project Nessie, despite causing Amazon’s unit sales to decline, boosted the company’s profits significantly. In 2015, it reportedly led to an extra $363 million in profits, and by 2018, it contributed a staggering $334 million to Amazon’s yearly profits.
The FTC’s Allegations and Amazon’s Response
The FTC referred to the algorithm as an “unfair method of competition” because it essentially coerced other online stores into raising prices, enabling Amazon to do the same. Amazon has stated that it stopped using Project Nessie several years ago, arguing that it was intended to prevent price matching from leading to unsustainable, ultra-low prices.
However, the FTC claims that Amazon could reactivate the project at any time. Last year, Doug Herrington, CEO of Worldwide Amazon Stores, supposedly contemplated restarting Nessie to enhance Amazon’s retail unit profits in anticipation of inflation that could impact the company’s profitability.
Amazon, according to the FTC, also used anti-discounting tactics and coercive strategies with its order fulfillment service to stifle competition. These tactics, it was alleged, aimed to hinder rivals from offering lower prices and gaining market share.
Moreover, the FTC accused Amazon of pushing “pay-to-play advertisements” and “irrelevant junk ads” onto its online store, despite being aware that this negatively impacted customers by presenting less relevant search results.
Former CEO Jeff Bezos was implicated in these practices, with allegations that he encouraged his executives to “accept more defects” as increased advertising revenue outweighed any potential detriment to service quality.
Additionally, Amazon was accused of coercing sellers under its Prime feature to use its logistics and delivery services, thereby undermining competition and compelling sellers to operate their own warehouses, according to the FTC.
As this legal battle unfolds, it underscores the growing scrutiny that large tech companies face regarding their market practices, especially when it comes to competition and pricing strategies. Amazon’s response to these allegations and the eventual legal outcome will be closely watched by industry experts and the public alike.
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