Tuesday, 17 May 2016

Amazon, the copycat seller

Last week in ECON100 we covered market power, and one aspect I spent a little bit of time on was the idea of platform markets (or two-sided markets) - where the firm brings together the buyer and the seller, and charges a fee to one or both parties for linking them up. Platform markets are a special case of network externalities, where the size of the network conveys benefits to those who are part of it.

So, TradeMe provides a platform for buyers and sellers to come together to exchange goods. The platform is valuable to buyers because they know there are many sellers offering goods there. The platform is valuable to sellers because they know there are many buyers looking for goods there. TradeMe pockets a commission on all sales, and because it is the go-to place for buyers and sellers, this creates a barrier to entry for other potential online auction sites - it would be difficult for them to compete with TradeMe, because they would have to somehow entice buyers and sellers away from TradeMe. That provides TradeMe with some market power, so the auction fees are likely a little bit higher than they would be if there were many competing auction sites.

Now, it turns out that platform markets can be profitable in other ways too, in ways not related to market power. Bloomberg reports:
Rain Design has been selling an aluminum laptop stand on Amazon.com Inc. for more than a decade. A best-seller in its category, the $43 product has a 5-star rating and 2,460 customer reviews.
In July, a similar stand appeared at about half the price. The brand: AmazonBasics. Since then, sales of the Rain Design original have slipped. “We don’t feel good about it,” says Harvey Tai, the company’s general manager. “But there’s nothing we can do because they didn’t violate the patent.”
Rain Design’s experience shows how Amazon is using insights gleaned from its vast Web store to build a private-label juggernaut that now includes more than 3,000 products -- from women’s blouses and men’s khakis to fire pits and camera tripods. The strategy is a digital twist on one used for years by department stores and big-box chains to edge out middlemen and go direct to consumers -- boosting loyalty and profits.
In other words, Amazon has been mining the data on what are the most profitable items selling on its platform, and using that to develop profitable product lines for itself. Of course, consumers are happy to buy the goods from the cheapest source (AmazonBasics). And even more:
...not only can Amazon track what shoppers are buying; it can also tell what merchandise they’re searching for but can’t find, says Rachel Greer, who worked on the private label team until 2014. Then, she says, “Amazon can just make it themselves.”
The idea of using data on consumers online shopping views, purchasing behaviour and preferences also underlies a lot of personalised pricing (offering different prices to every customer, based on what firms think their willingness-to-pay is) - a form of price discrimination which I have discussed before. No one should be surprised that Amazon is using the data and tools available to increase its profitability at the expense of other sellers.

[HT: Marginal Revolution]

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