Amazon at 20: A Yale economist discusses the online retail giant’s impact

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Twenty years ago, Amazon launched its online retail business. The company, which primarily sold books at its inception, has expanded into a global retail juggernaut that offers online shoppers hundreds of millions of products, including electronics, toys, clothing, sporting goods, groceries, music, and movies. It has established a lucrative side business selling Cloud-based computing services to businesses, and Amazon Studios has developed a Golden Globe-winning TV program distributed through the company’s digital streaming service.

According to the National Retail Federation, Amazon ranked ninth among U.S. retailers with $49.4 billion in sales in 2014, representing a more than 22% increase in sales over 2013. It was the only purely e-commerce company to crack the top 10.

To celebrate its anniversary, Amazon declared July 15 Amazon Prime Day. It offered an array of discounts to members of its $99-per-year Amazon Prime delivery service. With Walmart offering rival sales, Prime Day became a national summer shopping holiday. According to Amazon, customers ordered 34.4 million items, breaking previous Black Friday records. 

Dirk Bergemann, the Douglass & Marion Campbell Professor of Economics & Computer Science and chair of Yale’s Department of Economics, has studied some of Amazon’s practices, including its system for recommending products to its customers. He spoke to YaleNews about the company’s success and its prospects for continued growth.

Dirk Bergemann

How has Amazon affected consumers’ behavior?

Amazon started out selling books and other content-based material. At an instant, it could provide consumers the entire range of published books, while a typical small-sized bookstore had a very limited set of choices available. Amazon was able to make those titles instantly available to all consumers who had an Internet connection. So one way it has changed consumers behavior is by providing them a much wider set of products to choose from — one that was not available beforehand.

Also because, in terms of their value, books and cultural products are highly subjective and strongly dependent on taste, Amazon established a “recommender system” that uses data it accumulates to make statistical inferences about what kinds of books consumers might like to buy when they return to the website. Basically, Amazon observes who buys what and uses that information to make recommendations on other items they might wish to buy. These recommendations reduce uncertainty among consumers. 

Additionally, readers themselves can leave reviews and recommendations on the website to help other readers decide what products to purchase using information that they otherwise wouldn’t possess.

Amazon also has had a pervasive impact on consumer expectations in terms of speed of delivery and ease of return policies. It has forced competitors to have a much more reliable delivery service and less restrictive return policies.

Has Amazon forced Walmart to focus more on e-commerce?

Walmart has been very slow to embrace e-commerce, given the size of the chain and its importance. It is surprising that they are basically just now starting an effort to be competitive with Amazon. It is an uphill effort, as there are certain goods that are more easily made available through the Internet than others [digital goods as opposed to groceries]. What range of products are efficiently ordered and delivered online is still an open question.

After all, Amazon has not yet produced consistent profits. Its great promise is reflected in its stock price, but in terms of actually seeing returns on investment dollars, it’s still running on promise instead of profits.

How has Amazon grown so much without ever consistently turning a profit?

Its potential for being the leading brand worldwide in delivery and a global e-commerce retailer is really so large that investors will be willing to fund Amazon for quite a while. We see that Walmart is struggling to insert itself into the e-commerce market. It’s clear now that Amazon has a critical size and infrastructure advantage that will enable it to maintain its leading position for many years to come.

Interestingly, because Amazon requires a massive electronic infrastructure and a very serious Cloud infrastructure to deliver its services, it became the leading provider worldwide of Cloud infrastructure and at the moment has a larger Cloud infrastructure business than either Google or Microsoft.

How much larger can Amazon grow?

There are entire retail markets in which it is basically not yet present, and those are large and quickly developing markets. In that sense, it clearly has opportunities for growth.  In its major markets, Amazon is still just one of many players. It leads in books, electronics, and digital, but in most of the other retail categories it doesn’t lead. Its promise is that it can leverage its incredible electronic infrastructure to gain a bigger market share across a wealth of categories.

The company is starting to offer a local Amazon Prime service in which it is delivering goods within two hours in Manhattan, so you can see that there are many areas where it could still grow quite rapidly.

Who are its major competitors?

Competition can come from many areas. Google is considering competing in Cloud infrastructure and establishing a delivery service for goods. Walmart could disrupt a large part of Amazon’s share because it can act on volume and it already has the infrastructure to deliver goods widely in the United States. On the other hand, Walmart has very little infrastructure internationally. In that sense, competition is more likely to come from Google and Netflix or other digital companies that have a global footprint and can compete globally. Alibaba is in a position in China that Amazon can probably never reach. There might be places internationally that it simply cannot conquer because domestic competitors are, for one reason or another, already too well established.

What are some of Amazon’s advantages moving ahead?

Amazon primarily benefits from its data. It has an incredible source of data from its customers that allows it to know what it should store in its warehouses and what it can sell in markets. It has an enhanced ability to infer from its worldwide consumer purchase data the areas in which it should grow and to determine competitive pricing in those areas. 

It also has its unique recommender system that allows it to identify better matches between its products and consumers, and to better anticipate demand in a way that its competitors currently can’t.  Walmart is maybe 10 or 15 years behind Amazon in terms of making use of the big data that comes from having such a huge customer base.

Top photo via Shutterstock.

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Mike Cummings: michael.cummings@yale.edu, 203-432-9548