Friday, April 1, 2022

Amazon Prime facts of the day

Matt Stoller points to the economics of Amazon Prime - Amazon gets between $10-20 bn a year in Prime fees, but delivering these services costs it upwards of $80-100 bn. So what gives?

Stoller points to three reasons,

First, Amazon acquired enough customers for its retail division to monopolize online buying and selling. It did this by offering free shipping and other benefits at a vastly subsidized rate to Prime members. For consumers, this seemed like a great deal. They got a very good reliable place to buy stuff online. But on the other side of the market, for sellers, many of whom sold 80-100% of their wares on Amazon’s Marketplace, Amazon acquired substantial market power. “[We] have nowhere else to go and Amazon knows it,” said one seller that sells products on Amazon. Second, Amazon forced these captive sellers to pay massive fees to sell on its marketplace, by making them use its fulfillment and warehousing (as well as other services). Amazon took those fees, which brought in $121 billion in 2021, to pay for its various Prime benefits, including shipping. And third, and this is where it becomes brilliant, Amazon then forced those sellers to keep their prices high through non-Amazon sales channels. If they ever sold elsewhere for less, they would be de facto kicked off Amazon.
These three steps were each pivotal. Without the subsidy of Prime, it wouldn’t have been possible for Amazon to capture control over most online buying. Without the seller fees, Amazon couldn’t afford that subsidy. And without forcing sellers to raise their prices elsewhere to ensure Amazon had the lowest prices online, you’d see signs like ‘Buy cheaper at eBay.com’ or ‘Walmart.com costs less than Amazon’ everywhere, and Amazon would be undercut in the marketplace. But you don’t see such signs.

This again underlines the problems with the prevailing ideology on competition which is narrowly focused on consumer welfare. It overlooks the important aspect of entry barriers. Such barriers, like those erected by Big Tech firms, restrict the space of possibilities or the market frontier (on price, technology, variety, access, ease etc) and gives an illusory comfort about consumer welfare. Even on consumer welfare, these entry barriers are depriving consumers off potential welfare enhancement opportunities. 

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