Wednesday, February 22, 2017

Is Amazon's growth anticompetitive?

Amazon's focus on growing market share with low prices has benefited consumers but given it a big share of the online market.
  • In 2013, it sold more than its next twelve online competitors combined. 
  • By some estimates, Amazon now captures 46% of online shopping 
  • In addition to being a retailer, it is a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading provider of cloud server space and computing power. 
  • Although Amazon has clocked staggering growth—reporting double-digit increases in net sales yearly—it reports meager profits, choosing to invest aggressively instead. 
  • The company listed consistent losses for the first seven years it was in business, with debts of $2 billion. ...ts highest yearly net income was still less than 1% of its net sales.
Despite its low income, investors have bid up its stock price in anticipation that its size will eventually pay off:
  • Despite the company’s history of thin returns, investors have zealously backed it: Amazon’s shares trade at over 900 times diluted earnings, making it the most expensive stock in the Standard & Poor’s 500
  • ...critics often fumble to explain how a company that has so clearly delivered enormous benefits to consumers—not to mention revolutionized e-commerce in general—could, at the end of the day, threaten our markets. Trying to make sense of the contradiction, one journalist noted that the critics’ argument seems to be that “even though Amazon’s activities tend to reduce book prices, which is considered good for consumers, they ultimately hurt consumers.”
The linked article tries to make a case that the antitrust authorities should intervene now, but they it not address an obvious solution, if Amazon starts behaving anticompetitively, the antitrust authorities can act when it does.

HT:  Quinn


  1. Amazon has definitely done a phenomenal job leveraging technology and human resources to develop a number of competitive advantages in the internet selling space. A company with 136 billion in revenue for 2016 has nearly an unlimited research and development budget in order to protect its existing advantages and develop new ones (Kim 2017). Indeed, as far back as 2015 amazon reported spending over 13 billion for the prior twelve months on R & D ( Fox 2016).
    Some of the ways that it is protecting itself and developing new competencies has been to start investing into its own shipping infrastructure. In 2016, Amazon announced plans to lease 40 cargo airplanes as it begins to build its own shipping fleet ( Fitzpatrick 2016). Bad news for UPS and Fed Ex there. Amazon has also begun exploration into investing into ocean freight liners to save on shipping from its number one seller – China ( Chang 2017).
    Another move by Amazon to develop an additional market and protect itself from competition by others has been to facilitate direct from China sales on its site and to aggressively educate the Chinese these direct sale opportunities ( Levy 2016) As one entrepreneur recently quoted “This year, every Chinese supplier was talking to us about Amazon. Two years ago they just thought it was a river in Brazil,”( Weise 2017).
    As of 2015 China’s share of global manufacturing “is nearly a quarter. China produces about 80% of the world’s air-conditioners, 70% of its mobile phones and 60% of its shoes” ( Bacon 2015). Clearly Amazon recognizes this, hence the heavy investment into shipping and facilitation of direct from China sales. By selling so much of Chinese made products on its site Amazon has in essence turned itself into a new Silk Road, only this one connecting China with the magical land of never ending money which to Chinese manufacturers is the US.
    Amazon needs to thread carefully with its “ directly sold from China business”. When a third party American retailer sells a product on Amazon, most of the money with the exception of wholesale price paid to an overseas manufacturer stays here. For example a shirt sold for $ 20 on Amazon may cost as little as $ 2 from the overseas manufacturer. So a simple breakdown of the sale of a $ 20 shirt by where the money is going (omitting marketing and shipping costs)
    $ 3 ( 15% of sales) to Amazon
    $ 15 to an American reseller
    $ 2 ( 10%) to an overseas manufacturer.
    10% leaves the country, 90% stays here.
    Break down of where the money goes with a direct from China sale ( $ 20 shirt) (omitting marketing and shipping costs) ;
    $ 3 ( 15% of sales ) to Amazon
    $ 17 ( 85 %) to overseas
    In the scenario where Amazon applies its proven, best in class, e-marketing and e-sales techniques to successfully flood its Silk Road with direct from China sales, they are going to create a return flow of more US currency than the regulators should be comfortable with. My guess is that Amazon is playing a dangerous game where it may find itself overly regulated or spending heavily on lobbying.

    Bacon 2015

    Chang 2017

    Fitzpatrick 2016

    Fox 2016

    Kim 2017

    Levy 2016

    Weise 2017

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  3. “Amazon is strongly committed to conducting its business in a lawful and ethical manner, including engaging with suppliers that are committed to the same principles. They require suppliers in their manufacturing supply chain to comply with their Supplier Code of Conduct1 ("Supplier Code"). Amazon also expects their suppliers to hold their suppliers and subcontractors to the standards and practices covered by our Supplier Code. Their products must be manufactured in a manner that meets or exceeds the expectations of Amazon and their customers as reflected in our Supplier Code.” This is why Amazon’s customers are so loyal to them.

    Amazon has done a great job on branding themselves. Branding is another area that Amazon has emphasized to their target market. They have push to their customers that they stand out from competitors by using a differentiation strategy. They have shown their customers how they are constantly being innovative to keep their customers satisfied. Customers know Amazon and are very loyal. Branding helps identify and helps differentiate the services of one seller from another. What also keeps Amazon on top is they are always ahead of their competitors because they are not afraid to try something different and innovative. They have invested in unmanned vehicles. They probably looked at the opportunities and/or threats derived from the firm’s present and future environment. They probably looked at what demographics, social, technological, political, economic, and natural trends are significant. How will this trend affect their target market, competitors, suppliers, and channel intermediaries. Which opportunities/threats emerge from within the firm? In the case of marketing unmanned vehicles, they probably looked at the opportunities and/or threats for marketing this product.


  4. Amazon’s focus on growth in lieu of profits is a strategy, that in the short term, produces thin margins. Long term, however, it’s paying off in what might be the most important strategy: creation of a sustainable competitive advantage. Firms have a competitive advantage when they can either deliver the same product or service cheaper than their competitors or deliver, at the same cost, a higher quality product (Froeb, McCann, Shor, & Ward, 2016).

    Looking a bit more closely, it’s obvious that Amazon is also pursuing a platform strategy with their Amazon Marketplace. For those interested in selling, Amazon provides fulfillment, advertising and payment solution services – charging fees to do so (Sell on Amazon, n.d.). “By building a digital platform, other businesses can easily connect their business with yours, build products and services on top of it, and co-create value” (Bonchek & Choudary, 2013).

    The “co-create value” is interesting. Khan (2017) certainly feels that through their platform and being the middle man, Amazon is exploiting information collected on companies using its services to undermine them as competitors. From an antitrust perspective, this could be problematic for the company. Amazon could argue that their platform is not unique (Wal-Mart offers a similar service) and that companies could take their business elsewhere. This might be true on paper but in reality, Amazon’s aggressive growth in this area almost makes it the only game in town. The “almost” could be significant, though, especially when trying to argue that Amazon is not in violation of antitrust rules.


    Bonchek, M., & Choudary, S. P. (2013, January 31). Three Elements of a Successful Platform Strategy. Retrieved March 26, 2017, from Harvard Business Review:

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial Economics: A Problem Solving Approach. Boston, Massachusetts: Cengae Learning.

    Khan, L. M. (2017, January). Amazon's Antitrust Paradox. The Yale Law Journal, 126(3), 710-805. Retrieved March 26, 2017, from The Yale Law Journal:

    Sell on Amazon. (n.d.). Retrieved March 26, 2017, from Amazon:

  5. I love Amazon. I am an Amazon Prime customer and I have the Amazon charge card that provide points for purchases so that one can buy more Amazon stuff. I probably purchase 70% of what I need from the company. Of course, my purchasing from Amazon is derailing the big box industry. In my mother’s town outside of Pittsburgh, K-Mart, Sears and JC Penney’s have either closed or will be closing. She blames me, an Amazon shopper. According to the New York Times, Amazon accounts for half of all online shopping and has reshaped the retail industry (Abrams, 2016). Due to Amazon’s diversified business model, it is difficult to evaluate antitrust concerns. Who are they really? Are they a bookseller, Vitamin shop, grocer, office supplies vendor? Actually, the list is quite long. Just last week I bought a new kitchen sink and a stove vent from Amazon. The prices were 25% lower than Home Depot and both were delivered through my Amazon Prime delivery promise within 2 days. In the old days, I would have spent days driving around town. These days, I spend a few minutes at The selection of my sink took about 10 minutes and it was perfect.

    Abrams, Rachel., Antitrust in the Age of Amazon. The New York Times. May 12, 2016.

  6. I will admit I am addicted to Amazon. I have every perk they can offer from the Prime membership, to the credit cards through chase that gives me Amazon cash. Amazon is my go to shopping experience for anything I need from school books to Advocare products or anything else I can find cheaper with free shipping. Amazon gives the consumer the one stop shop they we are all looking for that we can’t get in the actual retail world. Amazon has partnered with thousands of manufactures to have a wide variety of products to offer. Amazon continues to reinvest in their revenues into the company by continuing to offer the consumers new products and services. With the constant reinvesting into the company is why they are showing staggering growth and continuous increase of consumer usage. Amazon now has other companies like Wal-Mart, Target and Sears looking at them to see how they can move their e-commerce business to be more enticing than Amazon. The stock for Amazon will continue to grow as the company continues to grow into new phases. By moving into the cloud service industry they are enticing businesses to use them as a backup server. Although, Amazon show a very low profit or a loss annual they have a great business strategy that clearly shows the stock holder why should keep believing in Amazon and the future path that its taking. I don’t foresee any business coming along any time soon to take the top spot away from Amazon so the stakeholders feel they have very little risk at this point and time. I love reading articles about Amazon and their business plans for the future and love watching a company successfully grow and get better each and every year.