Thousands of small merchants depend on Amazon.com to reach customers who otherwise wouldn't know they exist. In some cases, following initial product introduction by these merchants, Amazon introduces competing offerings – either by selling the same product direct-to-consumers or introducing a private label competitor. Some of these sellers complain that Amazon “eats their lunch”, which has prompted antitrust investigations by the US’s Federal Trade Commission and the EU’s Directorate-General for Competition.
My research project aims to quantify the welfare implications of Amazon.com entry decisions, using scraped price and quantity data for 200 million products sold on the platform.
I begin by showing that Amazon is most likely to target successful product spaces, leaving the “long tail” for third party sellers. I then use a difference-in-difference specification that compares prices and quantities of the same product across multiple countries to study the implications of Amazon entry into a product category. Theories of monopoly power predict that prices should rise and quantities should fall when a dominant firm – like Amazon – enters a market. By contrast, Amazon’s entry leads to a decline in prices and an increase in quantities.
Why might this be? Because Amazon is not just a retailer, it is a platform. It uses its own offerings on the platform as loss leaders to attract consumers onto the platform; while charging third-parties for profits. In other words, consumers are the loss-leading side of the platform while third-party sellers are the profit-making side of the platform. To support this claim, I show that Amazon’s prices are not just lower than those of 3rd parties: they are lower than those of the same product sold on Ebay.com. By contrast, products sold by third parties are more expensive on Amazon than on Ebay.
Armed with this understanding of Amazon’s strategy, I estimate a detailed economic model of supply and demand that accounts for consumer preferences towards Amazon offerings (Sold-by-Amazon, Fulfilled-by-Amazon, and Amazon Private Labels), differences in consumer characteristics (particularly Amazon Prime vs. non-Prime customers) as well as Amazon’s pricing strategy for third-parties. Preliminary results suggest that, in the short-run, Amazon’s entry generates substantial welfare gains for consumers. The risk, however, is that Amazon’s dominant firm advantages limit third party offerings and innovation in the long-run. This is the subject of ongoing analyses.