Amazon Effect

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Amazon's logo for its american entity

The Amazon Effect is the powerful disruption that eCommerce has made on the retail market. The term came about as a result of Amazon's dominant role in the eCommerce market place and leading the disruptive impact of the industry.[1]. The effect has been heavily researched by numerous studies including an in-depth Harvard study by Alberto Cavallo. The Amazon Effect has been found to cause numerous changes in the retail market. Among these impacts is a increase in price flexibility and uniform pricing in traditional brick-and-mortar stores. An externality of the increasing price flexibility and uniform pricing has been a decrease in pass-through inflation.[2] Various other studies have revealed that the Amazon Effect has forced retail malls and offline retailers to create an experience around offline shopping in order to pull business away from eCommerce[3]. Finally, it has been discovered that eCommerce has pushed retailer to increase their incorporation of technology to make offline shopping more convenient and quicker.

Price Flexibility[edit]

Price flexibility can be defined as adjustable prices that can change easily based on negotiation between buyers and sellers and changes in demand and supply[4]. With the rise of e-commerce, prices have become more flexible because of the ability to electronically change prices in an instant. This has taken out the need for face-to-face negotiations and replaced it with electronic competition to attract the most buyers. As a result of the internet making flexible pricing more attainable and desirable, it has changed how demand and supply play out within the marketplace[5]. Walmart and Amazon exemplify this as it has been shown that products that are both easily found and sold online at both Walmart and Amazon have twenty percent shorter price duration than those just found online at Walmart.[2] Since prices adjust easier to changes in supply and demand both produces and consumers benefit. Consumers benefit from lower prices and producers benefit from an increase in sales especially firms with elastic demand.[6] Not all products are affect the same though as products in categories such as recreation and electronics that possess a greater online market share have prices that are less stable over time. The opposite is true for products like alcohol who possess a smaller online market share and more stable prices.[2]

Effects on Consumers[edit]

A marketplace with price flexibility allows consumers to find prices that best fit the value they receive from the product or service. Perishable goods such as airlines seats, hotel rooms, and phone plans are the best example of this as a customer can adjust their price based on what they see value in[4] . When consumers are able to find products that are priced to fit their utility for that product, overall demand goes up. When demand goes up, the overall standard of living goes up as they are able to consume more at a lower price. When prices are this transparent it results in the practice of showrooming. Showrooming is when a customer views a product within a brick and mortar then buys it online in order to prevent overpaying for a product. In the end, customers are left satisfied as they are able to test the product out in store and then end with a lower price by purchasing it online. In conclusion, price flexibility brings big advantages to consumers.

Effects on Producers[edit]

Producers are being forced to make their prices more flexible due to Amazon's ability to rapidly change prices to fit demand with little costs. This allows Amazon to price more competitively and maximize demand. Amazon's competitive prices have trickled into other markets as 80% of consumers now check online prices and compare them to the ones in store.[7] As a result firms are forced to lower price in order to stay competitive and not lose demand for their products. Firms operating at lower margins are also more sensitive to supply shocks, creating an environment of unstable prices. In a market where price flexibility is common, producers have the ability to price discriminate[4]. When a producer practices pricing discrimination, they are able to capture consumer surplus through various practices. One of the common practices used is quantity discounts. For example, goods in a market are often sold at a lower price per unit when buying in bulk. Since consumers will buy in different quantities, companies are able to capture the different prices people are willing to spend for said good. Another strategy is offering different groups different prices for the same good or service. This can be seen when kids and seniors get discounts at theme parks or on public transportation[8].

Uniform Pricing[edit]

Uniform pricing is when a company charges a universal price for its goods or service regardless of its location. An example, of this is when the price of an item of food costs the same at Walmart as any other Walmart. In the study, it is hypothesized that uniform pricing comes as a result of the openness and transparency of the internet.[2] Huge public outcry could result from consumers realizing that they are paying more for the same product than someone else. With Amazon's transparent prices it is more difficult for them to price discriminate without anyone noticing. For example, a study found that depending on what time you want, with most retailers seeing Amazon as one of their biggest competitors, they are opening an online front in order to stay relevant and compete in the online marketplace. When this happens, their prices become transparent to all consumers, making the retailer more accountable if it chooses to price discriminate. Therefore, in order to keep customers satisfied and believe they are getting a fair deal they are pushed towards uniform pricing. In the short run, producers suffer from these strategies that reduce price discrimination and bring about uniform pricing. As a result, companies can also be more sensitive to aggregate shocks when prices are uniform[9].

Inflation and Pass-through[edit]

Since 2009 the United States has only gone above an inflation rate of 2.2 percent once[10]. Alberto suggests that the Amazon effect could have had a profound role in the inflation dynamics as a result of the increase in price flexibility and uniform pricing[2]. A British study backs this as it was found that during times when prices were very flexible, the Bank of England would overestimate the impact of inflationary shocks[11]. When prices are allowed to float, it results in faster market clearing. So while prices may be hit hard initially by an aggregate shock, they will adjust back down to market equilibrium quicker. When prices adjust back down to equilibrium overall inflation will go down as a result of a decrease in prices. Another factor in domestic inflation is a term called exchange rate pass-through. Exchange rate pass-through is any effect exchange rates have on domestic inflation [12]. By looking back at the two categories, electronics (high online market share) and food and beverages (low online market share), the effect on inflation can be seen. While the results showed a relative pass-through of 83% for electronics, it only showed a 38% for food and beverages. Therefore, it is concluded that prices with a higher online presence tend to be more sensitive to fluctuations in exchange-rate [2]. As a result products are more efficiently pricing causing a reduction in inflation over time.

Shopping as an experience[edit]

As brick and mortar stores attempt to compete with the growing presence of online retailing, retailers are creating an experience around offline shopping in order to draw customers into stores. One example of this is a mall in Minnesota that features an aquarium and a dinosaur walk museum[1] . Another is the Irvine Spectrum that features a grass area to relax and sit with friends and family, a Ferris wheel, a playground for kids, an ice rink in winter, and a train for families to take around the mall. All of these features were created in order to draw customers to the mall and to offer a unique experience that cannot be found online. Another way retailers are trying to improve the shopping experience is by optimizing their store layout. Lolli and Pops was designed to allow companies to use their software to find the optimal layout of the facility to boost sales just as analytics are used to grow online sales. Oppose to fighting the online experience, some companies have tried to compliment their online website with an in-store experience such as Nordstrom Local. Nordstrom Local allows customers to order online then pick up in a store where an array of refreshments are served to them.[3] A final strategy that retailers are employing to bring value to offline shopping is showrooms and testing areas[13]. For example, living spaces has sample bedrooms that you can see in-store and compare with other setups around the store. All of these strategies are employed in order that customers continue to visit malls and see the value of in-store shopping.

Friction-less shopping as a result of technology[edit]

Numerous retailers have incorporated technology to mirror Amazon's fast-pace and smooth shopping experience. For example, both Amazon and Walmart have grocery deliver services where you can buy the products online and the respective companies will deliver them to your house. This has created a rivalry between the companies as hey both push to extend their grocery lines to more regions and streamline their services to make the services even easier to operate[14] . Walmart Grocery is one of the many ways offline retailers are creating an online front in order to stay relevant in the retail industry. HP has also found a way to stay relevant and create a friction-less experience through its "Instant Ink" service. The service allows its customers to simply click a button when they are running low on ink and HP will automatically send the company the ink they need. This service is direct competition with the Amazon Dash buttons that order a product whenever the button is pushed. While offline retailers push more online content to compete with eCommerce, Amazon is pushing into the brick-and-mortar market. Amazon Go is one way Amazon is attempting to directly with offline retailers. Amazon Go allows a customer to simply scan their phone app when they walk in, grab their groceries, and then leave. This allows customers to move at their own pace, quickly get in and out the store, and make more impulse purchases[15]

References[edit]

  1. ^ a b "What is Amazon effect? - Definition from WhatIs.com". WhatIs.com. Retrieved 2018-11-06.
  2. ^ a b c d e f Cavallo, Alberto. "More Amazon Effects: Online Competition and Pricing Behaviors". Harvard Business School & NBER.
  3. ^ a b Grosman, Lin. "What The Amazon Effect Means For Retailers". Forbes. Retrieved 2018-11-06.
  4. ^ a b c "What is flexible pricing? definition and meaning". BusinessDictionary.com. Retrieved 2018-10-30.
  5. ^ "Living Economics: Flexible Pricing". livingeconomics.org. Retrieved 2018-10-30.
  6. ^ "What is flexible pricing? Definition and examples - Market Business News". Retrieved 2018-12-09.
  7. ^ "80% of shoppers compare prices online before shopping in stores | FierceRetail". www.fierceretail.com. Retrieved 2018-11-03.
  8. ^ Tarver, Evan (2015-05-15). "What is the average debt/equity ratio of companies in the electronics sector?". Investopedia. Retrieved 2018-10-31.
  9. ^ DellaVigna, Stefano; Gentzkow, Matthew (November 2017). "Uniform Pricing in US Retail Chains". Cambridge, MA. doi:10.3386/w23996. Cite journal requires |journal= (help)
  10. ^ "U.S.: average annual inflation rate 1990-2017 | Statista". Statista. Retrieved 2018-10-31.
  11. ^ author., Petrella, Ivan, 1983-. Inflation dynamics and price flexibility in the UK. OCLC 1042342265.
  12. ^ Takhtamanova, Yelena (February 2008). Understanding Changes in Exchange Rate Pass-Through. Federal Reserve Bank of San Francisco.
  13. ^ "What is the Amazon Effect? What is its Impact on Retailers & Consumers?". MicroD, LLC. 2018-05-23. Retrieved 2018-11-06.
  14. ^ "Both Amazon and Walmart announce expanded grocery delivery operations". TechCrunch. Retrieved 2018-11-06.
  15. ^ "4 Elements of a Frictionless Shopping Experience". www.guided-selling.org. 2017-04-18. Retrieved 2018-11-06.