Amazon’s logistics strategy in response to rising in demand
Analysis of https://www.ft.com/content/9cd8038e-b38c-40d6-b2db-8f6e01cd166a
External factors such as the global pandemic have caused a much higher demand for e-commerce platforms, like Amazon.com, as consumer preferences move away from physical retail shops. However, Amazon is struggling to fully capitalise on this outwards shift in demand.
Following on from their CFO’s statement that ‘we have run out of space’ (see article) there is the obvious indication that Amazon has run into a bottleneck in their business model. With little to no spare capacity, it could be assumed that Amazon has a highly inelastic supply. Firms regularly aim to increase the elasticity of their supply in order to react fast to changes in demand and prices, Amazon is not an exception. This is where their expansion strategy becomes important.
How will Amazon’s supply meet demand?
As mentioned in the article, part of their strategy is to decrease their reliance on third parties and outsourcing in general. They will do this by mass reinvestment into new capital. Their plan to receive 11 new planes to add to their fleet is a primary step towards them controlling their whole logistics process (benefitting them in the long run). The mention of their plan to build 1,000 new fulfilment centres to securing, even more, warehouse space/centres for sorting is another move taken to alleviate their limited capacity.
The global pandemic couldn’t have come at a better time for their need to increase the elasticity of supply. With changes in labour markets occurring across many countries, the labour pool which Amazon can hire out of has suddenly expanded. Labour as a factor of production is no longer a limiting factor for Amazon. Employing over 1 million employees as of September 2020 and amidst the process of hiring 30,000 corporate employees (avg salary $150,000) we can see that Amazon has not been idle in the face of these labour market developments. However, with this hiring spree comes an increase in the cost of production. Most likely with increased output, this surge in cost will be mitigated.
In addition to combating their potential bottleneck, another influencing factor which is pushing them to accelerate their expansion strategy is profit incentive. Naturally, the more the user base of Amazon increases, the more they must be able to supply in order to meet the demand.
Is Amazon Prime elastic or inelastic?
Inelastic service. People who already own Amazon Prime subscriptions will tolerate higher prices because of the perks of owning the subscription. There is also a sense of 1st world necessity in owning a Prime membership. Especially in current conditions, consumer preferences and the popularity of Amazon has really shifted the demand outwards regardless of price. Total revenue for inelastic goods increases as price rises, as visible from Amazon’s 32.6% increase in revenue by Prime subscriptions from last year, despite the 20% increase in price (from $99 → 119/year).
It can be safely assumed that consumer surplus was only marginally diminished by this rise in price.
Is Amazon a monopoly?
No. With a 49% market share, they certainly have some relative dominance but are far from a monopoly (for now). In fact Amazon behaves oppositely; they are able to leverage the immense size of their userbase to push prices down acting as a monopsony. For example, their ability to extract what they can from suppliers and their power over prices set by shipping firms like UPS and FedEx (as mentioned in the article) suggest monopsonistic behaviour. However, their greatest and most controversial use of this monopsony power is found in their paid wages. As commonly seen in monopsonies of the past, being the main employer enables the firm to lower employee wages (lowering the cost of production and increasing their profit margins). This of course allows Amazon to lower its prices, undercutting competitors and benefitting them in the short and longterm.
I should mention that I also entertain the opinion that Amazon is part of an oligopoly. With eBay, Walmart and Amazon being the few firms with large market dominance in the US and high barriers to entry to the e-commerce industry I think that that would be a fair statement.
