A lesson in economics: why Amazon takes over everything

Spoiler alert:  Donald Trump is a liar.  The reason he hates Amazon is not that Bezos is scamming the Post Office, putting small businesses out of business, or anything like that.  He hates the fact that the Washington Post gives him unfavorable coverage, and Jeff Bezos owns both Amazon and the WaPo.

Amazon is an oddity, though.  Aside from this usage, I refuse to type the word, "disruptor."  After this post, I'm going to wash my hands.  I promise.

In conventional economic thinking, we tend to like "competitive" markets.  What is a perfectly competitive market, in basic economics?  It has the following characteristics:

1)  Many buyers
2)  Many sellers
3)  Perfect information
4)  Indistinguishable products
5)  Low entry barriers for new firms

When those conditions are met, you get an equilibrium quantity of goods sold at an equilibrium price determined by the intersection of the supply and demand curves.  Ringing any bells?  Note the second condition for a perfectly competitive market.  We don't tend to like markets with a small number of sellers.  Or just one.  If you have just one seller, you have a monopoly.  Just a few, and you have an oligopoly.  As long as entry barriers are low, even an oligopoly can be OK because the threat of entry from new firms can keep prices low, but the real problem with oligopolies is the threat of "price-fixing."  Let's say you have a market with just two firms, and high entry barriers, so nobody new can jump in the market and start competing.  What if each firm agrees to start jacking up the prices?  A little bit of business floats away because some customers stop participating in the market, but as long as each firm raises their prices by the same amount, they each retain the same market share and get to charge a higher price.  Yeah, consumers get fucked, but the price-fixing businesses make more money, so good on them, right?

This is, um... illegal.  It is also hard to arrange because not only is it illegal, each firm has an incentive to screw the other by either not raising prices and trying to take over the market with the lowest prices, or just undercutting the other firm by a little bit to get a similar effect.  Price-fixing agreements are hard to maintain.  You know what makes them hardest?  More firms in the market.  They get easier to arrange the fewer firms there are.  That's the point about Condition 2.  More firms means more competition, and consumers get lower prices.

Except when they don't.  Hi, Jeff!  What's on sale today, you devious bastard?

The glitch is a little thing called an "economy of scale."  Sometimes, the bigger a firm is, the lower its cost of production or operation on a per-unit basis.  This has been a major issue in agriculture, in which automation allows the major agricultural businesses to produce produce at a lower cost per unit than small farmers, but it works for online retail too.

Amazon's business model gives them lower costs of operation than normal brick-and-mortar stores.  They have so much information that their ads and sales are better targeted.  (Just think for a moment about how frequently you get creeped out by their prescience).  The Post Office issue that Trump raises is one of bulk sales, and Trump's dishonesty/ignorance is that Amazon's deal isn't unique.  Anyone doing bulk sales gets those rates as opposed to, say, an Etsy person trying to work outside of Amazon or eBay.  Then, there's Amazon's ability to do something like Prime.  You can't do that until you get big(ly).

Amazon's size allows it to charge lower prices per unit, when smaller and more conventional retailers need to charge higher prices.  That is an "economy of scale," and when those occur, they mess with our conventional models of economics.  We, the consumers, get lower prices, but a bunch of businesses go out of business.  There is a risk if enough competition gets put out of business that Amazon winds up unthreatened.  If there comes a point at which Amazon can start to raise prices because of that lack of existing competition and entry barriers, that's the problem.

We aren't there.  There are economic risks to something like Amazon, but there are benefits.  If you hate going out shopping (I do), are a cheapskate (I am), and know how to hit "delete" on advertisement emails, then as long as you aren't employed in retail or heavily invested in retail, the concerns right now are data privacy and the uncertain future of economic competition.

Of course, that data privacy thing is a real concern.

Those aren't Trump's concerns, though.  Obviously.

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