How is Amazon so big?
Over the past decade, Amazon has fought its way into dominating the e-commerce market through a series of predatory pricing techniques. The company proposes a dual function: serving as a marketplace for third-party vendors as well as producing and selling their own products. Amazon allows consumers to compare prices of similar products, which increases price competition between price competitors and ultimately lowers prices. In theory, the inclusion of third-party producers is in the consumer’s best interest, however, in Amazon’s case, this is far from reality. It has been revealed that Amazon, upon agreeing to collaborate with other producers, requires them to disclose information about their production process to access the marketplace. The power and market share of the tech supergiant leaves third-party producers with little to no other choice if they wish to engage in e-commerce. Having access to production methods, Amazon can develop the same product for a lower cost, courtesy of its distinguished economies of scale, which allows them to lower average variable costs, thus allowing them to undercut third-party producers. Additionally, the company’s financial prowess with a market capitalisation of $1.56 billion, has allowed it to favour growth over profit in the short term, resulting in predatory pricing. Considering the sheer size of Amazon, the company can sustain a much bigger hit in their return than almost any other retail store. In short, it becomes a waiting game for the third-party company to pull out. To put it simply, Amazon invites third-party vendors to sell on the site, in return for their production process, which Amazon will then use against them, to produce the same good but with lower costs thus increasing Amazon’s profit margins.
Whilst, the idea of third-party vendors joining Amazon may sound illogical, due to Amazon’s magnitude and power it is the only potentially successful choice they have. For instance, the price war between Amazon and Diapers.com culminated in the sale of the company- a deal valued at $545 million. However, unlike normal competition, this is not in the best interest of the consumer. Once the competitor has been driven into bankruptcy, Amazon can now exercise its monopolistic powers by bumping up prices in light of minimal price competition. Consumers have no other choice of suppliers. Amazon, as an established monopoly, profit maximises (where marginal cost equals marginal revenue), their supernormal profits in the short run and long run, act as high barriers to entry to other firms. Firms considering joining the market see these attractive supernormal profits but are often unable to join the market as barriers to entry are too high. A huge benefit that Amazon holds through their monopolistic power and supernormal profits is the ability to reinvest some of their profits back into the business to make new and differentiated goods, improve their customer service or better their firm- Amazon is dynamically efficient. This is clearly seen through the number of different services that Amazon provide, Prime Video, Amazon itself, Audible, Amazon Assistant, Alexa, Amazon Prime, Amazon Fresh, Amazon Kindle, Amazon Music, I think you get the idea. By constantly innovating and supplying their customers with new ranges and services, they work in the consumer’s interest but more importantly ensure that their customer base remains loyal and dedicated.
Despite Amazon being dynamically efficient, they are not allocatively efficient, meaning they do not maximise consumer welfare. By producing at the profit maximisation point, Amazon is not allowing themselves to produce at allocative efficiency. Essentially, Amazon’s monopoly power and high market share allow them to exploit consumers with higher prices, in a bid to profit maximise. Amazon’s abuse of its growing monopoly power in the e-commerce sector has attracted the attention of both the European Union and the United States Congress, from which it has been undergoing investigations and will soon be facing antitrust allegations. While the giant will most likely be facing consequences, the question remains whether these will lead to actual change. Do you believe that Amazon’s growth tactics are unethical? If so, what regulations should be implemented to prevent such behaviour?
Edited and Reviewed by Tanish Bagga.