Oligopoly Market Structure: Amazon Case
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Oligopoly Market Structure: Amazon Case
Introduction
The company selected for this analysis is Amazon, which is a multinational ecommerce corporation. It was founded by Jeff Bezos on 5th July 1994 in the United States (Bhasin n.d.). Notably, Amazon is the second largest private employer company in the United States (Hall 2018). It operates in an oligopolistic market structure, which is characterized by few sellers but many buyers offering slightly differentiated products in terms of fees, payment, customer engagement, and other attributes. This market structure is also characterized by high barriers to entry related to switching costs, reputation effects, level of technology adopted, and economies of scale (Hall 2018). Although there are many firms operating in the ecommerce segment, only Amazon, Alibaba, and eBay dominate. Measured by revenue and market capitalization, Amazon is the world’s largest e-commerce, providing an effective case study to understand the operations of an oligopolistic market structure.
The market structure in which Amazon operates enjoys high level integration of technology. Consumers and suppliers of products on these platforms are highly sensitive to shifts in fees charged among other variables; there is high price elasticity. These businesses are associated with both negative and positive externalities, such as employment and environmental degradation (Newman 2015). Access to public utilities such free internet and the post office, which are key in access and delivery of products, have significantly impacted the operations of Amazon. However, the state has imposed income taxes on organization in this industry, which has reduced their profits, however, the tax revenue has boosted government delivery of services.
Just like any other market structure, the government has imposed several policies to regulate the operations of this oligopolistic market. The 2019 India’s ecommerce law is one of the regulations that is likely to affect Amazons’ operations. The law bans Amazon and Flipkar – Flipkar an Indian Amazon’s competitor – from selling items of companies in which they have shares. The regulations prohibit ecommerce firms from entering into exclusive selling agreements with sellers or offer discounts to customers based on the deals. The new rules also only allow foreign direct investments (FDI) into ecommerce firms that create marketplaces for consumers and sellers (Choudhury 2019). The rule is aimed at regulating Amazon’s operations
Specifically, this rule is aimed at curtailing the anti-competitive practices reported by local Indian retailers and wholesalers. The oligopoly market structure is known for collusions among market players with the aim of capturing huge market share and charging higher prices (Choudhury 2019). Furthermore, other than the policy being protective in nature, it is also aiming at growing the local Indian companies, especially those operating offline. The regulation aims at increasing competition between online and offline companies to improve the quality of services offered to customers.
Tools and laws of economic analysis can present several ways though which the objectives of the government intervention can be achieved. Using the principle of demand and supply, denying Amazon and Flipkar colluding rights means there will be a decline in the supply of products to these platforms (Becker 2017). The outcome would be an increase in prices or costs leading to decline in sales made by Amazon. Furthermore, the limited supply of products on the ecommerce platforms will force customer to seek for them from offline sellers. The sales of these firms will rise leading to high incomes, which will positively affect their operations. The local producers will enjoy a growth in demand of their products leading to improved productivity enhancing their ability to expand to further benefit from economies of scale (Becker 2017). The restrictive regulation will enhance competition between the different business models in the country leading to the provision of high-quality services to customers as a way to capture more market share. Furthermore, few firms will enter the Indian market allowing the local businesses a less competitive business environment and a large market share (Becker 2017). Finally, the requirement that FDI to be directed to firms that create a marketplace for buyers and sellers, will lead to increased access to information in the market, which will enhance the bargaining power of buyers and sellers. Such a market setup will be characterized by high level of efficiency (Johnson 2017). The effects of the law can be graphically demonstrated as in figure one and two below.
Figure 1: Decrease in supply leads to high price
Figure 2: Increase in price leads to low demand
The ecommerce law is likely to lead several unintended consequences. The law might crowd out investments by Amazon that could positively transform the Indian economy. The country might also experience high level of unemployment as a result of reduced Amazon’s operations as well as face international retaliations (Becker 2017).
Imposing taxes and lifting licenses for international ecommerce businesses would also enable the Indian government to achieve its objectives as those intended by the ecommerce law. The tax burden would increase the operation cost of Amazon leading to a decline in its interest in the Indian market eroding the anti-competition strategy (Becker 2017). The absence of the company in India would allow the local Indian companies to grow as they would enjoy a high market share. The local retailers and wholesalers would have access to more customers resulting in high sales and profitability (Becker 2017). However, the government would lose as the employment created by Amazon in the country would be lost and it would face international criticism and restrictions. The government of India chose to impose the ecommerce law other than the two mentioned options as it specifically targeted limiting the anti-competition strategy that the Amazon and Flipkar used to cut out local firms from the market.
In 2017, the USA imposed tariffs on china goods that was aimed at protecting the American companies. The trump administration sought the control the high inflow of Chinese goods into the USA to allow local producers to have access to a larger market. Although the move was aimed at growing the American companies, it led to trade wars between the two countries negatively affecting business relations. The tariffs have led to retaliatory trade wars between the USA and china with the latest one being the May 2019 hike of tariffs on the US goods by china (China Briefing, 2019). This example informs that in part five by exposing the need to not only focus on the theoretical aspects of a policy but rather any other real-world associated outcome of a law.
The analysis of Amazon operations indicates the usefulness of applying economic principles to analyze the impacts of policies. The principles enable understanding both the intended and untended outcomes of a regulation, which is vital in the formulation of more effective approaches. The analysis also offers an insight into the thinking behind the policy makers decisions to select a policy over others. Overall, formulating policies with an economic approach significantly increases the likelihood of achieving the intended outcomes alongside minimizing the unintended consequences, which is a key goal of any policy maker.
References List
Becker, GS 2017,Economic theory. Abingdon: Routledge.
Bhasin, H n.d., Top Amazon competitors. Marketing101. Available from: <https://www.marketing91.com/amazon-competitors/>. [16 May 2019]
China Briefing 2019, The US-China trade war: A timeline. Available from: <https://www.china-briefing.com/news/the-us-china-trade-war-a-timeline/>. [16 May 2019]
Choudhury, SR 2019, If you hold Amazon shares, here’s what you need to know about India’s e-commerce law. CNBC. Available from: <https://www.cnbc.com/2019/02/05/Amazon-how-india-ecommerce-law-will-affect-the-retailer.html>. [16 May 2019]
Hall, M 2018, Amazon.com: American company. Encyclopædia Britannica. Available from: <https://www.britannica.com/topic/Amazoncom>. [16 May 2019]
Johnson, HG 2017,Macroeconomics and monetary theory. Abingdon: Routledge.
Newman, J 2015, The grim externalities of Amazon.com. Counterpunch. Available from: <https://www.counterpunch.org/2015/08/17/the-grim-externalities-of-Amazon-com/>. [16 May 2019]
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