FTC: Amazon's 'Project Nessie' Manipulated Prices

Amazon's "Project Nessie" algorithm, revealed in redacted sections of a lawsuit filed by the Federal Trade Commission, reportedly boosted profits and prompted competitors to raise prices.

The algorithm also restored prices to their regular price point if rivals didn't raise prices to Amazon's level, The Wall Street Journal reported Tuesday.

Former employees said Nessie was also deployed to maintain low prices during a promotional cycle. The algorithm ensured Amazon and competitors matched discounted prices set by rivals such as Target, keeping prices low even after the sale ended, the Journal reported.

According to the lawsuit, the algorithm aided Amazon at increasing margins. Although the exact figure was redacted in the case, the Journal said a source claims Amazon's revenue surpassed $1 billion through the algorithm's use.

"The FTC's allegations grossly mischaracterize this tool," said an Amazon spokesperson. "Project Nessie was a project with a simple purpose: to try to stop our price matching from resulting in unusual outcomes where prices became so low that they were unsustainable. The project ran for a few years on a subset of products but didn't work as intended, so we scrapped it several years ago."

In a statement issued last week, David Zapolsky, a legal representative for Amazon, said, "If they were successful in this lawsuit, the result would be anticompetitive and anticonsumer because we'd have to cease many of the activities we engage in, to provide and emphasize low prices — a counterintuitive outcome that would directly contravene the objectives of antitrust law."

Sellers were compelled to use Amazon because of its extensive reach and consumer base, but the FTC contends Amazon prohibits them from offering lower prices than other sellers. If they do so, the FTC alleges that Amazon "punishes" them by downgrading their listings.

Additionally, the FTC claims Amazon's fees create a higher price point for retail goods because sellers must use their Amazon price as a baseline.

The Journal reported that according to an Institute for Local Self-Reliance report, Amazon's slice of third-party seller sales soared from 19% in 2014 to 45% in 2023. The report encompasses Amazon's fees for selling on the platform, advertising, and order fulfillment, with more than 60% of Amazon's retail sales attributed to third-party sellers.

"Amazon's one-two punch of seller punishments and high seller fees often forces sellers to use their inflated Amazon prices as a price floor everywhere else," the complaint says.

The FTC's complaint also alleged that advertising is required for sellers to be successful.

"It's become pay to play," said Brandon Fuhrmann, an Amazon merchant specializing in kitchen products. Merchants also feel compelled to invest in advertising on Amazon because the platform has allocated more space in search results to paid promotions in recent years.

Amazon's immense size and influence present a dual-edged dilemma for sellers like Jess Nepstad, who offers outdoor coffee products. Nepstad, cautious about becoming overly dependent on the retail giant, disclosed that only 40% of his sales are channeled through Amazon. He described the dynamic as a "love-hate relationship," expressing concern that Amazon can instantly end a seller's business.