Price Wars

A recent Forbes article compares prices between Amazon and other leading retailers going into the holiday season. The author notes that Amazon has a “relentless low price push,” which undermines the position of other retailers and forces them to go on the defensive. In sum, Amazon consistently outperformed its rivals, selling toys at lower prices 88% of the time, videogames 70% of the time, coffeemakers 70%, and tablets 59%. Apparently, the only good that Amazon did not sell at a lower price the majority of the time was T.V.s, with 48%. These prices paint a portrait of Amazon as the low price leader across a wide sample of goods.

Given these low prices, the question remains: how has Amazon managed to outperform its rivals to this extent? The obvious answer is that Amazon’s online business model is superior to other players in the market. Because Amazon does not operate physical sales locations, it is able to maintain a smaller staff, does not need to maintain as much inventory, and also doesn’t need to buy or rent property for stores. All of these contribute to Amazon’s comparative advantage, which as evidenced by the aforementioned prices is sizeable. This leads to a subsequent question, which is: can Amazon’s rival retailers survive in their present form as physical locations? The answer, which will become clearer as the internet age continues, will depend largely on consumer preferences, whether consumers prefer physical locations with tangible goods or whether they prefer shopping from home, as well as what whether physical retailers can cut costs enough to remain competitive.

http://www.forbes.com/sites/barbarathau/2013/11/28/how-amazon-stack-ups-price-wise-against-big-chains-on-5-popular-holiday-products/

2 thoughts on “Price Wars

  1. Retailers like Walmart are hedging their bets by strengthening their online shopping services. Online-only retailers like Amazon enjoy the benefit of low operating costs, but they will never enjoy the appeal of immediacy. Physical retailers like Walmart will continue to enjoy shoppers who need a good immediately and cannot wait for shipping.

  2. Lower prices may be a liability for Amazon, as opposed to a benefit. This article from the New York Times (http://www.nytimes.com/2013/10/25/technology/amazons-revenue-soars-but-no-profit-in-sight.html?_r=0) explains how the company has high revenues but cannot maintain profits. Amazon’s future is hard to determine: is it operating with an unmanageable plan or will it dominate the market? It has heavily invested in warehouses to reduce transportation costs, but the bottom line may force higher prices in the future.

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