Jay Goltz, proprietor of a small retail store, has hit upon e-commerce’s real threat to his business which he accurately says goes beyond economies of scale or even ability to avoid sales taxes. It’s impossible to make money competing with Amazon, he says, because Amazon itself isn’t making money:
Why would a company choose to operate without a profit? Because it wants to provide great value? Check. Because it wants everyone to love the brand? Check. Because it wants to gain market share? Check. Because it wants to put everyone else out of business, so that it can one day flick a switch to raise prices and make a fortune? CHECK!
Don’t believe me? Well, here is Jeff Bezos of Amazon, explaining why making a profit isn’t important. Of course, he doesn’t say he’s planning to raise prices after he puts a lot of people out of business, but let me translate something for you: Gaining market share by not taking a profit makes the most sense if you are planning to raise prices later when you have less competition.
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But “drive the competition out and then raise prices” is very much a meatspace business strategy. In a world where physical location doesn’t matter very much, it’s hard to see how you could pull it off.
Link to the rest at Salon and thanks to Sariah for the tip.
The same accusation has been leveled at Wal-Mart at least a million times in meatspace. When Wal-Mart announces it is building a store, particularly in a small town, someone always claims that, after it drives the local merchants out of business, Wal-Mart will raise prices sky-high.
The only problem with this theory is that Wal-Mart has entered dozens (probably hundreds) of small towns, some local businesses have closed, yet Wal-Mart’s prices remain the same – lower than elsewhere, even when elsewhere is a long distance away.
Like Wal-Mart, Amazon is designed to operate over the long run with low prices. Low prices are a part of its fundamental business strategy. Better than anyone else, Amazon understands a competitor can open a retail website in a few days without spending much money and offer lower prices everywhere that Amazon sells.
PG opines that those who accuse Amazon of a devious scheme to gain dominance with low prices, then jack prices up to monopoly levels and rule as an evil king are often engaging in psychological projection wherein they’re ascribing their own inner attributes to others.