Federal agencies found third-party merchants selling thousands of unsafe, mislabeled, and banned products on Amazon (AMZN)

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The platform was found to have 4,152 items that were deemed unsafe by federal agencies, labeled misleadingly, or banned by federal regulators by a report from The Wall Street Journal.

These listings, many of which were changed or taken down after The WSJ alerted Amazon of them, included categories like toys and medications where unsafe products can be particularly dangerous. Nearly half of the products were said to be shipped from Amazon warehouses, and some had even earned the "Amazon’s Choice" badge.

Here’s what it means: Third-party sellers are the driving force behind Amazon’s retail business, but if it’s unable to effectively moderate their listings, it could damage Amazon’s reputation.

Third-party merchants accounted for 58% of physical gross merchandise sales on Amazon in 2018. This marked the fourth year in a row where third-party sellers had more sales than Amazon’s first-party retail business, and it’s on an upward trajectory, tracing back to when the segment made up just 3% of physical gross merchandise sales in 1999. Housing listings from thousands of merchants enables Amazon to offer an unmatched product selection to increase the likelihood consumers shop with it, making these sales valuable to it even if it doesn’t capture all of their revenue.
But if the safety and legitimacy of products on Amazon comes into question, the value of its network of third-party sellers could be greatly diminished. If consumers aren’t confident in the quality and safety of products they find on Amazon, they may choose to start shopping elsewhere. And given the wide array of sellers on Amazon, consumers may even become concerned about products sold directly from Amazon or other established brands, which would significantly hurt Amazon’s sales volume.

The bigger picture: 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.

A recent ruling in the US could mean that Amazon is liable for defective purchases made on its marketplace, which might lead to a number of suits against Amazon and it having 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, differing from previous rulings on the topic. Amazon has asked the court to review the decision, per The WSJ, but this could open the door to a number of suits against Amazon. To avoid the potential deluge, Amazon might need to closely review all of the products sold on its platform, which would likely lead to its product selection shrinking significantly, hurting its performance. If all marketplaces face the same issues, the business model itself may become less viable overall, pushing the retail industry away from third-party marketplaces and toward first-party sales.

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