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 as I looked at some of the offerings available, I was reminded of a post from fellow blogger Jon Murphy from a year ago.
In this article he examines the FTC’s case against Amazon as a monopolist. One of the things he points out is that the FTC is making an important point exactly backwards. What they took as evidence of monopolistic behavior by Amazon is in fact evidence of robust competition. When discussing Nessie, a price matching algorithm used by Amazon, he makes the following point:
First, Nessie’s goal was to compare Amazon’s price increases to other retailers. Thus, the existence of the project shows that Amazon faced significant competition in its e-commerce market; competition they had to monitor and adapt to. Second, the fact that Nessie was programmed to do so reduce bringing prices to previous levels if the other competitors did not increase their prices indicates that Amazon is a price taker and not a price maker. They must follow the market price; they can’t just raise their prices as they please. Amazon’s behavior is not that of a monopolist but from a competing company. Nessie’s existence basically proves that Amazon is dealing with a highly competitive e-commerce industry.
How does this compare to the recent Amazon Prime Day sale? Well, one of the items I was interested in was a certain pair of wireless headphones. Amazon had them reduced to less than half the normal retail price. And when I saw that, I knew immediately, without having to check, that both the Best Buy and the Target around the corner from where I live would have marked those items down equally as well. Because the retail market (e-commerce and otherwise) is a highly competitive space, retailers are price takers, not price makers.
As Jon Murphy pointed out, if you’re a price taker, you can’t raise your prices if your competition keeps their prices low. And the other side of the coin is that if your competition lowers the price of a certain item, you should do so too. So I decided to pick up those headphones, but I got them from Best Buy instead of Amazon because that way I didn’t have to wait for the two-day shipping to receive the item. (First world problem, I know!)
I’ve seen this happen in other markets too. Steam is a popular platform for digitally distributing PC games. Every now and then Steam will have a big sale that lasts for several days. (It’s always joked in the PC gaming subculture that these sales mean people have a huge backlog of games they’ve bought but still haven’t gotten around to playing – this could describe me too!) As soon as one of When Steam sales go live, Microsoft will suddenly have a big sale on digital downloads of Xbox games on their digital marketplace. Sony does the same for digital downloads for their PlayStation system. If one service lowers prices, they all have to lower prices. Although gaming is dominated by only a few major companies, the market remains highly competitive.
This also explains a phenomenon I’ve noticed over the years, and which I’m sure you’ve noticed too, dear reader. The holiday season has become much longer than it used to be. I remember when “Black Friday” was really just a one-day event that took place the Friday after Thanksgiving. But then some retailers started Black Friday weekendthat extended through Saturday and Sunday, and that became the norm. Now, many retailers start their “holiday shopping” deals well before Thanksgiving, and they continue until Christmas. Once one retailer decides to expand its offering, all others must do so too.
I take this all as a good sign. Let’s say you like video games, but play them exclusively on the PlayStation. Even in this case, you can take advantage of the competition and get PlayStation games at lower prices when Steam decides to sell out PC games to PC gamers. Even if you’re not a customer in the PC gaming market, you still benefit from that competition. Even if you don’t like ordering products online and prefer to shop in person, you can still get products from your preferred physical store when Amazon lowers prices for its customers. As we head into the holiday shopping season this year, take a moment to appreciate this – and remember, gifts are good!