Senior Fellow at The Market Institute John Tamny has a new article in Real Clear Markets highlighting the nature of Amazon’s business – not raising prices, increasing customer satisfaction, and increasing profitability.
He writes:
“It has “upended its vast logistics network to reduce how far packages travel across the U.S. in an effort to get products to customers faster and improve profitability.” If you’ve read this far, you know the company referred to.
If nothing else the title of this opinion piece gave it away. According to a report in the Wall Street Journal, Amazon continues to search for ways to serve its customers better, and more profitably. Of course, some or many who should know better might be wondering why Amazon would have “upended” a logistics network that has earned the Seattle retail giant “monopoly” status.
It’s a good question. And the question is very revealing about bigger things, things that extend beyond Amazon itself. For the longest time academics, those wedded to the laughable notion of “market power,” and those who think government must break up allegedly powerful businesses (oh well, academics it seems), have claimed that the problem with big businesses or those who achieve large size through mergers is that they’ll raise prices once in “control of the market.” No evidence of that with Amazon.
Even though it’s the face of the very internet commerce that increasingly informs how we purchase so much in the way of goods and services, Amazon plainly isn’t raising prices. Instead, it’s aggressively pursuing greater profitabiilty per delivery through improvements of its own system.
Please keep the above in mind with so-called “market power” and “pricing power” top of mind. If ever a company were theoretically positioned to charge more for its essential service, service that’s won it “market power,” that company would be Amazon. Except that Amazon is doing the exact opposite of what academics imagine it and others do “in theory.” It’s working feverishly to enhance its profits not by scrimping on customer service, but buy actually improving it.
According to the Journal report by Sebastian Herrera, Amazon is working to place the items its customers want as close as possible to customers. In Herrera’s words, “Amazon doesn’t move items outside of each region unless it has to.” What this means for customers is that what they generally order is located in a warehouse near them. This means faster delivery times. And as Amazon’s vice president of transportation, Udit Madan, explained it to Herrera, “When we offer faster speeds, customers are more likely to buy something,” only for them to “come back more often to shop with us.”
You see, while Amazon is surely the biggest name in e-commerce, the vast majority of retail sales still take place in person. Americans in particular want things fast. It’s something to think about with Amazon’s promise of free two-day delivery through Prime. While incredibly speedy relative to the past, Amazon’s efforts to improve on two-day delivery with localized warehousing is yet another market signal that the retail giant knows it must greatly improve on what’s already beloved (Prime) in order to truly meet the needs of its customers, all the while adding new ones.”
