Both signed deals with big financial partners, Wal-mart and Amazon, trying to drive each other out of e-business in India. How long until they realize that this kind of predation rarely pays? If they don't, investors may want to step in a stop it before they lose too much money.
At some point, if Amazon believes that the price of a scorched earth battle is too high, it might sue for peace and move to merge with Flipkart. If that happens, both parties will win.
Until Wal-mart and Amazon get tired to losing money, keep shopping.
... as consumers, you would be well-advised to make the best of the big sales being run by online retailers. The sale will last only till the money lasts.
HT: Brian
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ReplyDeleteThe sequential game between Amazon and Walmart in the e-commerce battle is a prisoner’s dilemma. Walmart’s offer to match any price in response to Amazon first mover price cuts is a good move in the price war as it ensures that Walmart maintains its market share and not loose customers to amazon because of cheaper prices but only in the short run. Also, price match eliminates low price strategies by removing the incentive to lower prices since you can’t out price your opponent. A more competitive strategy would be for Wal-Mart to offer to beat Amazon or any other competitor’s price by 10%. Nevertheless, the price war between Walmart and Amazon only benefit the consumers, and not the companies’ investors, which leads you to wonder when will enough be enough and someone quit this game (Froeb, 2016). Whoever quit first in this prisoner’s dilemma will be worst off. If Amazon quits and price high its payout would be zero and Walmart would increase its market share as the consumer gravitates toward the lower prices represented by the lower left corner below. Alternatively, if Wal-Mart quits first its payout would be zero and Amazon would increase its market share represented by the upper right corner below.
ReplyDelete#######Amazon/Wal-Mart Pricing Dilemma
###########################Wal-Mart
######################Price Low##Price High
Amazon Price Low#####150, 150 ####400, 0
########Price High#### 0, 400 ####360, 360
Adapted from Froeb, McCann, Shor, & Ward, (2016)
The pricing game between Amazon and Wal-Mart creates an unconsummated wealth creating transaction. Both Amazon and Wal-Mart could make more money if both priced high, lower right corner in figure above but this is not a Nash Equilibrium. A Nash Equilibrium is a pair of strategies, one for each player, in which each strategy is a best response to the other (Froeb et al., 2016). Amazon does better by pricing low regardless of what Wal-Mart does, and Wal-Mart does better by pricing low regardless of what Amazon does. So, the Nash equilibrium occurs when both price low in the upper left corner above (Froeb et al., 2016). If Amazon and Wal-Mart collude and price high they can get out of this dilemma but Collusion is illegal as it violates the anti-trust laws in many countries even Asia.
Therefore, Amazon and Wal-Mart should try to avoid games with the logical structure of the prisoner’s dilemma. Instead they should work on developing long-run strategies that change the structure of the game to ensure that each company’s payoff is independent of their rivals’ actions. Product differentiation and or cost reduction are two stellar competitive strategies and Amazon excel at both. Amazon has a well-developed delivery network with warehouses dotting the country. Amazon regional fulfillment centers a massive investment for the retailer allow the company to cut shipping costs and to get the package to the consumer faster. Add in the fact that Amazon owns its own robot company and has deployed non-human workers in its warehouses which add to the retailer’s competitive strategies of low shipping cost and faster delivery speed, advantages that would be very tough to duplicate (Kline, 2015).
The online retailer has one last advantage that gives it an almost insurmountable edge over its competitors and any would be challengers and that is its massive number of users with credit cards on file, this speak to consumer’s trust an intangible asset and hard to duplicate. It's not impossible to compete with Amazon, Wal-Mart and other retailers could in some areas but Amazon a digital leader has a combination of sustainable competitive advantages that makes it very hard to compete with namely: Pricing, Logistics, Credit Card File, personalize shopping experience, and Its Big which gives it buying power over its suppliers. Any one of these strategy is competitive but the combination is unbeatable.