Recently, Amazon had one of its big “Prime Day” sales, a two day event where a variety of products would be sold at various discounts. And while looking through some of the offers available, I was reminded of a post from co-blogger Jon Murphy from a year ago.
In this post, he examines the FTC’s case against Amazon as a monopolist. One of the things he points out is that the FTC gets a key point exactly backwards. What they considered to be evidence of monopolistic behavior on the part of Amazon is, in fact, evidence of robust competition. Discussing Nessie, a price adjusting algorithm used by Amazon, he makes the following point:
First, the goal of Nessie was to compare Amazon’s price increase to other retailers. Thus, the existence of the project shows that Amazon faced substantial competition in its ecommerce market; competition they had to monitor and adjust to. Second, the fact that Nessie was programed to reduce prices to previous levels if the other competitors didn’t increase theirs indicates that Amazon is a price-taker, not a price-maker. They have to follow the market price; they cannot just increase their prices as they wish. Amazon’s behavior is not of a monopolist but of a competitive firm. The existence of Nessie actually proves Amazon faces a highly competitive ecommerce industry.
How does this relate to the recent Amazon Prime Day sale? Well, one of the items I was interested in was a particular pair of wireless headphones. Amazon had marked them down to less than half of the normal retail price. And upon seeing that, I immediately knew, without needing to check, that both the Best Buy and the Target right around the corner from where I live would also have marked those items down to the same degree. Because the retail market (ecommerce and otherwise) is a highly competitive space, retailers are price-takers, not price-makers.
Like Jon Murphy pointed out, if you’re a price taker, you can’t raise your prices when your competition is keeping their prices low. And the other side of that coin is if your competition lowers the price of some item, you have to do so as well. So I decided to pick up those headphones, but I got them from Best Buy rather than through Amazon, because that way I didn’t have to wait for the two-day shipping to get the item. (First world problem, I know!)
I’ve seen this play out in other markets too. Steam is a popular platform for digitally distributing PC games. Every now and then, Steam will have a big sale lasting several days. (In the subculture of PC gaming, there’s an ongoing joke that these sales result in people having a massive backlog of games they purchased but still haven’t gotten around to playing yet – this might describe me as well!) As soon as one of these Steam sales goes live, Microsoft will suddenly put out a big sale for digital downloads of Xbox games on their digital market. Sony does the same for digital downloads for their PlayStation system. If one service cuts prices, they all have to cut prices. Even though gaming is dominated by just a few large companies, the market remains highly competitive.
This also explains a phenomenon I’ve noticed over the years, which I’m sure you’ve noticed as well, dear reader. The holiday shopping season has gotten much longer than it used to be. I remember when “Black Friday” really was just a one-day event taking place the Friday after Thanksgiving. But then, some retailers started doing Black Friday weekend, extending through Saturday and Sunday, and that became the norm. Now, lots of retailers start their “holiday shopping deals” well before Thanksgiving and they continue on until Christmas. As soon as one retailer decides to expand their offerings, everyone else has to do it too.
I take all of this as a good sign. Suppose you enjoy video games, but you exclusively play them on the PlayStation. Even in this case, you can benefit from competition and get PlayStation games at lower prices anytime Steam decides to offer a sale on PC games to PC gamers. Even though you’re not a customer in the PC gaming market, you still get the benefit of that competition. Even if you dislike ordering products online and prefer shopping in person, you can still get products at your preferred brick-and-mortar retailer any time Amazon lowers prices for their customers. Take a moment to appreciate this as we roll into the holiday shopping season this year – and remember, gifts are good!
READER COMMENTS
Craig
Oct 18 2024 at 1:36pm
“I immediately knew, without needing to check, that both the Best Buy and the Target right around the corner from where I live would also have marked those items down to the same degree. Because the retail market (ecommerce and otherwise) is a highly competitive space, retailers are price-takers, not price-makers.”
What’s more likely is that the sale came from the supplier.
“First, the goal of Nessie was to compare Amazon’s price increase to other retailers. Thus, the existence of the project shows that Amazon faced substantial competition in its ecommerce market”
Yes, but its not that binary. They have MAP compliance departments where if they find other retailers undercutting them they can match that price but they can also order their supplier to order the undercutting retail to raise their price.
For instance W! basically operates on an average 25% margin. W! very well may have something they want to liquidate and they may sell it off at a low price but if you’re seeing 50% off the usual ‘retail’ that’s 9/10 coming from the supplier who is taking the hit and W! is still earning a 25% gross margin.
“retailers are price-takers, not price-makers.”
They’re turning into advertising companies. For instance, HD doesn’t even own its inventory, they just give the suppliers’ space in their stores. Know those grocery store aisle end caps? They charge the suppliers like Nabisco to make sure their product is placed visibly as you walk in the store. Nevertheless they were a major reason pricing became much cheaper over the course of time, but now they are also a major reason why pricing isn’t MUCH lower.
Remember when you order something from Amazon for $100 and it shows up the next day, that’s wonderful, but its not actually cheap, they’re spending what? $95 of that sale to make that happen, W! its like $97. And that is for the $100 widget ‘delivered tomorrow’ or ‘picked up today’ but you see here’s the rub, there’s one choice you aren’t allowed to see and that’s to wait the UPS Ground Time between you and a low opex warehouse and pay $75 because Off of that $100 I only need to spend $53, but I can only get that widget to you tomorrow if you’re within the 1 day UPS Ground zone from me.
Indeed to elaborate A! third party sellers pay of the gross sale to A! If one took 15% off the top of the gross sales, A! would lose money even with AWS.
I actually DO circumvent MAP compliance departments because I see them scour my website for pricing information because they come directly into the website and based on the ip one can tell where visitors are coming from. I then have google ads placed geographically in other areas pointing to products which they cannot get to directly from the website. Basically I am a pimple on Jeff B’s a– of course. If the MAP compliance department sees it, and while its been a few years now, eventually they will I will get another email like this: “Please remove all of our items from your website until you can bring them up to compliance. You have incorrect pricing which is lower than Amazon and old product which we no longer have to sell.” <–I had those items still.
Robert EV
Oct 18 2024 at 2:32pm
I still typically hate sales as they often result in local shortages, and my grocery shopping date/time isn’t fungible to the cheapest price.
Shouldn’t a well functioning market economy result in merchants who set prices based on the costs of good sold? As this would then drive production and procurement efficiencies. How is adjusting one’s prices based on the prices of one’s competitors a marketplace good, even when the adjustment is downward? The measure seems to have been made the target.
robc
Oct 18 2024 at 3:05pm
Price is a result of both supply and demand. What you suggest is setting price based only upon supply.
steve
Oct 18 2024 at 3:11pm
Markets arent perfect but there isn’t anything found to be better. They can be fixed up around the edges and you have to deal with crime and fraud but things mostly work well. Kevin exaggerates a bit as sometimes like when a place has a true going out fo business sale they will mark prices so low competitors cant match them so they wont try and they just put up with a brief loss of sales. There are other exceptions also but the important point is that markets largely set the prices.
Steve
Jon Murphy
Oct 18 2024 at 3:55pm
Not to belabor the points of steve and robc, but cost-of-goods-sold is just one of many costs that firms face. A major one is opportunity cost of resources. From an economic point of view, it is not enough that the price is sufficient to cover the cost-of-goods-sold. Ideally, the price would also cover the opportunity cost of resources so that everyone involved in the transaction can ensure the scarce resources are bing used to satisfiy the highest valued wants and desires.
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