Counterfeits: Negative Network Effects Arrive at Amazon Marketplace

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Amazon is learning these days that there is such a thing as negative network effects.

CNBC, interestingly just a few days before Prime Day:

In Amazon’s quest to be the low-cost provider of everything on the planet, the website has morphed into the world’s largest flea market — a chaotic, somewhat lawless, bazaar with unlimited inventory.

Always a problem, the counterfeiting issue has exploded this year, sellers say, following Amazon’s effort to openly court Chinese manufacturers, weaving them intimately into the company’s expansive logistics operation. Merchants are perpetually unsure of who or what may kill their sales on any given day and how much time they’ll have to spend hunting down fakers.

CNBC is referring here to Amazon’s ocean freight services, which at first are aimed at bringing Chinese sellers to the U.S. market.

The problem seems to be growing rapidly:

In early June, at an invitation-only event for about 300 of the top marketplace merchants, the company’s senior vice president of seller services Sebastian Gunningham was grilled by frustrated store owners, according to people with knowledge of the meeting. 

During a fireside chat at Amazon’s Seattle headquarters, Gunningham was asked repeatedly how the company was going to deal with the many ways that Chinese manufacturers were gaming the system, said the sources, who asked not to be named because attendees had to sign non-disclosure agreements. (…)

More than 40 percent of Amazon’s unit sales now come through its third-party marketplace. Much of the expansion has occurred since Amazon started opening the floodgates to Chinese manufacturers, who previously had to count on middlemen, brands and private labels to reach global consumers.

Sales from Chinese-based sellers more than doubled in 2015 on Amazon’s marketplaces, while the company’s total revenue increased 20 percent.

The challenge here is this: Amazon’s path towards a global marketplace with vertical integrations where ever it makes sense is, condensed like this, straight forward and to a point logical. But there is no obvious solution to bringing together such different intellectual property systems as the U.S. and China on the scale Amazon’s marketplace is aiming for.

In a way, Amazon’s marketplace is facing similar challenges as platforms for user generated content like YouTube or SoundCloud do. It is not clear wether the answer -ContentID for YouTube- can be the same. (Given the more complex nature, I doubt it.)

Also problematic from an architectural aspect is the way user reviews get clustered under the same product, even if those reviews are triggered by orders from different sellers (built for a world without counterfeits):

Judah Bergman has been selling on Amazon for two and a half years and his products include a jewelry line under the brand Steeltime. Other merchants have regularly showed up in listings for his double-sided pearl earrings, offering them for under $10, compared to the $17.99 he charges.

While he’s able to eventually get the hijackers removed, he loses sales in the process as customers opt for the lower priced option, and he’s spent valuable time sending in takedown notices to Amazon.

Making matters worse, when buyers unhappy with the cheaper alternatives leave a bad review, it drags down Bergman’s standing because the reviews are all thrown together.

Other huge marketplaces like eBay or Alibaba have obviously the same challenges. But this may hurt Amazon more than those in the long term, given the company’s position in Western markets with Prime focussing on higher income households. You need to be trusted to be your customers’ default shopping destination.

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2 comments

  1. […] Counterfeits: Negative Network Effects Arrive at Amazon Marketplace […]

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  2. […] Also, I guess private labels are one way to battle counterfeits on your marketplace. […]

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