Amazon was found to have offered 4,152 items that were deemed unsafe by federal agencies.

An investigation by The Wall Street Journal found that the world’s largest online retailer had permitted the sale of thousands of such items via Amazon Marketplace, including children’s toys and medications. According to the newspaper, nearly half the products were shipped from Amazon warehouses and some had even earned the prestigious “Amazon’s choice” badge.

Third-party sellers are the driving force behind Amazon’s retail business, accounting for 58% of physical gross merchandise sales the company made in 2018.

Amazon published a statement in response to the report, explaining the various measures it takes to moderate its marketplace. Furthermore, many of the products tagged by The WSJ have since been taken down from the site or relabeled.  

Amazon noted that it invested over $400 million in 2018 to protect its store and customers and to build programs that make sure the products sold via its Marketplace are “safe, compliant, and authentic.”

The importance of third-party merchants

Thousands of third-party merchants enable Amazon to offer an unmatched product selection to increase the likelihood consumers will shop with the company, making these sales valuable beyond the revenue they generate, which is itself considerable. 

2018 marked the fourth year in a row where third-party sellers had more sales than Amazon’s first-party retail business, and the trend is on an upward trajectory, a world away from the days when the segment made up just 3% of physical gross merchandise sales twenty years ago.

Yet the WSJ investigation noted that if the safety and legitimacy of these products comes under public scrutiny, the value of the Amazon Marketplace segment could decrease significantly. Furthermore, If Amazon and other marketplaces begin to be held liable for products sold on their marketplaces by third parties, it would damage the business model’s viability. 

Regulatory backlash

Indeed, a recent ruling by the US government could mean that Amazon is liable for defective purchases made on its marketplace, which might lead to a number of suits against the company and it being forced to regulate its platform more heavily. The ruling from the US Court of Appeals for the Third Circuit said that a consumer in Pennsylvania could sue Amazon over an allegedly unsafe product purchased from the e-tailer’s marketplace, which has been viewed by many industry observers as a landmark ruling on the issue. 

According to The WSJ, Amazon has asked the court to review the decision, but this could open the door to a number of counter-claims. To avoid such a situation, Amazon would be well advised to review all the products it currently lists from third-party retailers, which could in turn lead to its product selection shrinking substantially. 

Ultimately, if fellow marketplaces begin to face the same issues, the business model itself may become less viable, pushing the online retail industry away from third-party marketplaces and toward first-party sales.