The Welfare Consequences of Regulating Amazon

Abstract

Amazon acts as both a platform operator and seller on its platform, designing rich fee policies and offering some products direct to consumers. This flexibility may improve welfare by increasing fee discrimination and reducing double marginalization, but may decrease welfare due to incentives to foreclose rivals and raise their costs. This paper develops and estimates an equilibrium model of Amazon's retail platform to study these offsetting effects, and their implications for regulation. The analysis yields four main results: (i) Optimal regulation is product- and platform-specific. Interventions that increase welfare in some categories, decrease welfare in others. (ii) Fee instruments are substitutes from the perspective of the platform. Interventions that ban individual instruments may be offset by the endogenous response of (existing and potentially new) instruments. (iii) Regulatory interventions have important distributional effects across platform participants. (iv) Consumers value both the Prime program and product variety. Interventions that eliminate either of the two decrease consumer as well as total welfare. By contrast, interventions that preserve Prime and product variety but increase competition – such as increasing competition in fulfillment services – may increase welfare.

Keywords: two-sided platform, reseller, marketplace, Amazon

JEL Classification: L1,L4,L5,L81