• FTC Chair Lina Khan defended the agency's decision to pursue Amazon in an interview on CNBC's "Squawk Box."
• Khan explained why the FTC labeled Amazon as an "online superstore" to establish its monopoly power.
• The lawsuit marks a major milestone for Khan's FTC and has been long anticipated, given Khan's own rise to prominence came from her 2017 Yale Law Journal note "Amazon's Antitrust Paradox."

One day after filing a massive antitrust lawsuit against Amazon, Federal Trade Commission Chair Lina Khan defended the agency's decision to pursue the company and explained how its use of monopoly power allowed it to leverage an effective 50% tax on sellers.

In an interview Wednesday on CNBC's "Squawk Box," Khan said that the lawsuit is "fundamentally about protecting free and fair competition" and denied suggestions that the FTC is interested in punishing large companies for their success.

The lawsuit marks a major milestone for Khan's FTC and has been long anticipated, given Khan's own rise to prominence came from her 2017 Yale Law Journal note "Amazon's Antitrust Paradox." That article detailed Khan's view of how the prevailing approach to antitrust enforcement at the time failed to account for the vast scale and network effects present in digital markets.

Khan pointed to scale on Wednesday as a way Amazon leverages its power to dampen competition.

"Given just the economies of scale and the network externalities, you need to have a critical mass of either shoppers or sellers in order to really benefit from the acceleration and momentum that digital markets can provide," Khan told CNBC's Andrew Ross Sorkin. "And what Amazon's tactics had been about is — once it itself achieved that scale — it's been focused on tactics that deprive rivals of the ability to gain that similar critical mass of customers."

Khan added that any remedies should take into account the aggregated harms that resulted from that scale in order to "fully restore competition." The FTC has yet to lay out in detail the remedies it would seek because it's focused on establishing liability, typically the first stage in a monopoly case.

In a statement, Amazon's general counsel and senior vice president of public policy, David Zapolsky, said the company will challenge the FTC's lawsuit in court, adding that the complaint is "wrong on the facts and the law."

Zapolsky said the FTC's complaint "grossly mischaracterizes the retail industry" where physical stores and online retailers "compete vigorously with each other."

Khan also explained the FTC's decision to define the market Amazon has monopolized as the online superstore.

"The idea of a superstore has actually been well established in the brick-and-mortar world," Khan said. "We've had a whole set of antitrust cases that have succeeded when defining a market as the superstore market."

This complaint applies that idea to the online world, Khan said, adding that there are functions that only an online superstore can serve through the "depth and breadth" of offerings.

In the FTC's complaint, it says online superstores are distinct from online or physical retail competitors, in that they offer an unmatched variety and selection of products that are accessible on demand and around the clock.

Amazon, however, has long argued that it competes with a wide range of retailers both online and offline. The company has downplayed its market size, saying it represents 4% of all U.S. retail sales.

Amazon dominates the U.S. e-commerce market, however. Research firm Insider Intelligence estimated last year the company captures almost 40% of Americans' online spending.

The complaint also alleges that Amazon has monopolized the market of selling services to online merchants. It said "network effects" between Amazon's online superstore and marketplace services allow it to further entrench its dominance, in that the more sellers that the company signs up, the more targeted and relevant data it can serve them — and as more merchants begin selling on the marketplace, Amazon can attract more shoppers.