Recently, Amazon had one of its big “Prime Day” sales, a two day event where a variety of products would be sold at various discounts. And while looking through some of the offers available, I was reminded of a post from co-blogger Jon Murphy from a year ago.
In this post, he examines the FTC’s case against Amazon as a monopolist. One of the things he points out is that the FTC gets a key point exactly backwards. What they considered to be evidence of monopolistic behavior on the part of Amazon is, in fact, evidence of robust competition. Discussing Nessie, a price adjusting algorithm used by Amazon, he makes the following point:
First, the goal of Nessie was to compare Amazon’s price increase to other retailers. Thus, the existence of the project shows that Amazon faced substantial competition in its ecommerce market; competition they had to monitor and adjust to. Second, the fact that Nessie was programed to reduce prices to previous levels if the other competitors didn’t increase theirs indicates that Amazon is a price-taker, not a price-maker. They have to follow the market price; they cannot just increase their prices as they wish. Amazon’s behavior is not of a monopolist but of a competitive firm. The existence of Nessie actually proves Amazon faces a highly competitive ecommerce industry.
How does this relate to the recent Amazon Prime Day sale? Well, one of the items I was interested in was a particular pair of wireless headphones. Amazon had marked them down to less than half of the normal retail price. And upon seeing that, I immediately knew, without needing to check, that both the Best Buy and the Target right around the corner from where I live would also have marked those items down to the same degree. Because the retail market (ecommerce and otherwise) is a highly competitive space, retailers are price-takers, not price-makers.
Like Jon Murphy pointed out, if you’re a price taker, you can’t raise your prices when your competition is keeping their prices low. And the other side of that coin is if your competition lowers the price of some item, you have to do so as well. So I decided to pick up those headphones, but I got them from Best Buy rather than through Amazon, because that way I didn’t have to wait for the two-day shipping to get the item. (First world problem, I know!)
I’ve seen this play out in other markets too. Steam is a popular platform for digitally distributing PC games. Every now and then, Steam will have a big sale lasting several days. (In the subculture of PC gaming, there’s an ongoing joke that these sales result in people having a massive backlog of games they purchased but still haven’t gotten around to playing yet – this might describe me as well!) As soon as one of these Steam sales goes live, Microsoft will suddenly put out a big sale for digital downloads of Xbox games on their digital market. Sony does the same for digital downloads for their PlayStation system. If one service cuts prices, they all have to cut prices. Even though gaming is dominated by just a few large companies, the market remains highly competitive.
This also explains a phenomenon I’ve noticed over the years, which I’m sure you’ve noticed as well, dear reader. The holiday shopping season has gotten much longer than it used to be. I remember when “Black Friday” really was just a one-day event taking place the Friday after Thanksgiving. But then, some retailers started doing Black Friday weekend, extending through Saturday and Sunday, and that became the norm. Now, lots of retailers start their “holiday shopping deals” well before Thanksgiving and they continue on until Christmas. As soon as one retailer decides to expand their offerings, everyone else has to do it too.
I take all of this as a good sign. Suppose you enjoy video games, but you exclusively play them on the PlayStation. Even in this case, you can benefit from competition and get PlayStation games at lower prices anytime Steam decides to offer a sale on PC games to PC gamers. Even though you’re not a customer in the PC gaming market, you still get the benefit of that competition. Even if you dislike ordering products online and prefer shopping in person, you can still get products at your preferred brick-and-mortar retailer any time Amazon lowers prices for their customers. Take a moment to appreciate this as we roll into the holiday shopping season this year – and remember, gifts are good!
