Price Discrimination by Amazon - Case Study Example

Price Discrimination by Amazon Name Institutional affiliation Introduction Pricing is a critical decision for any multinational company. With emerging technologies, pricing structures have become very complex and most difficult. Stiff competition and changing consumers' behaviors are core business components that determine the type of price structure the company will adopt. This paper examines the economic rationale for price discrimination by Amazon Company. The first section of the paper presents the basic concepts and major types of price discrimination. Additionally, the paper discusses the economic conditions that make sellers to tag different prices for their customers. Moreover, the paper critically analyzes why Amazon Company charges their clients differently. Price Discrimination Concept (economic theory) Some factors stimulate sellers to price discriminate their customers. Firstly, if the demand of the commodity is high in one market segment compared to the other, the seller has a tendency of having different product charges in these markets (Kokolakis, et al., 2012). Secondly, price discrimination arises when the seller wants to stimulate buyers to purchase goods in large quantity. In this aspect, customers buying large quantity products they pay less compared to buyers purchasing in small units. Finally, price discrimination arises if the seller operates in diverse market segments with different economic trends. Thereby, customers from a stable financial market dealer charge them higher compared to clients from market segments with a small economy. The advantageous factor of having price discrimination technique in the market is that the firm will increase gross profit by actually balancing the supply, demand and prices (Kokolakis, et al., 2012). However, price discrimination might limit the company from competing because consumers might switch to other related products in the market quickly. According to Such et al. (2014) most of customers believe that price discrimination is illegal and unfair. If buyers discover that the company has been discriminating clients regarding prices, they switch to competitors products. PRICES Demand QUANTITY Price discrimination involves the pricing structure of selling goods and service with different prices in different or the same market segments (Hinz et al., 2011). In this aspect, price discrimination affects directly the end consumers of the product or service basing on their financial ability. For instance, a monopoly seller is a trader who sells the products uniformly across the market segments; products' prices are the same in all markets (Kumar and Kutlu, 2015). However, economic conditions and market demands drive sellers to charge buyers differently on the same product. There are three major classes of price discrimination in the standard business field: perfect price discrimination, second-degree price discrimination, and third-degree price discrimination. Perfect price discrimination arises when the customer is willing to buy the product despite high prices rather than going without it (Kumar and Kutlu, 2015). In most cases customers compete for few essential products in the market, and hence, the seller overcharges them because the consumers are willing to pay for it rather than going without it. Second-degree price discrimination is a cost structure that the seller uses to outline customers regarding the goods' quantity they are buying (Mikians, 2012). For example, if the client buys few products the seller will charge higher prices than when purchasing in dozens. Third-degree price discrimination is a pricing technique in which seller charges customers from different market segments differently (Mikians, 2012). Therefore, firms can only offer price discrimination if it has vast domination and market power over the rivals. In other words, price discrimination applies only to multinational companies in diverse geographical location. Price Discrimination by Amazon An Overview of the Company Amazon is a multinational e-company based in America. Jeffery Bezos founded the company in 1994, and today Amazon has become the world largest online retailing company selling over sixty categories of goods and services (Amazon Annual Report, 2015). Amazon is also an online advertising platform where global companies post their brand on the Company's website wall for marketing purposes. Moreover, technology drives Amazon business, and hence, innovation is one of the key operational cultures (Amazon Annual Report, 2015). Today, Amazon has become one of the largest online companies that stock the vast volume of products. Amazon Company has three primary business models: Amazon retail, Amazon Marketplace, and Amazon Web Services. Amazon deals business model constitutes electrical, books, clothing and home appliances (Amazon Annual Report, 2015). Amazon products are affordable, and the company sells products in discounts. Amazon retail is the largest business model in the entire organization. Amazon market is a third party platform where traders from different countries sell their products using the Company's profile. In other words, Amazon market is an online shopping mall where global companies from various industries stock their products (Limba, & Gulevičiūtė, 2014). Amazon Web Services is the latest business model of the Company. A web service involves online searching technological platform for both academic and business institutions. Amazon Price discrimination According to Such et al. (2014) advances in technology have given online retailers new pricing techniques including price discrimination. Customers purchasing behaviors are also changing dynamically. In other words, online retailers are using consumers' browsing behaviors to set their price structures. Amazon is among the internet retailers that use different price structures when positioning the products and services in the market. For instance, that Amazon made more than $3 million profit during December 2014 holiday and Valentine 2015 day (Amazon Annual Report, 2015). Amazon has a dynamic pricing structure: when the demand for an individual commodity is high in a particular market segment, they charge greater than the way they sell to other market segments. Additionally, economic status and the market price of other products scale the type of price structure Amazon will use. In this aspect, if some of the customers are in the favorable market with regard of economic, Amazon charges them higher than buyers from unfavorable markets. From a theoretical perspective, Amazon applies the third-degree price discrimination technique. Another dynamic pricing strategy for Amazon is that the Company keeps track of consumers' purchasing behavior (Limba, & Gulevičiūtė, 2014). The company offers discounts even by 50 percent to customers who retain their purchasing habits. From this perspective, Amazon charges loyal clients at lower prices than new clients. In other words, the company uses the information generated to set the price structures: set different prices for different consumers. Despite stocking a variety of goods online, the company has a culture of selling traditional products at lower prices those unpopular goods. From this perspective, buyers will believe that everything that the company sells is cheap, and hence, end up purchasing even unpopular products at high prices. From an economic perspective, Amazon charges buyers according to their abilities and their demographic distribution. For instance, Amazon charges less a customer from disadvantaged communities compared to customers in wealthy demography (Limba, & Gulevičiūtė, 2014). There are several factors that Amazon uses to ensure that the pricing discrimination is sufficient. Firstly, Amazon targets specific market segment, and hence, allowing the company to establish a significant market share and in turn setting pricing structure. Secondly, Amazon has learned to add value to their clients by providing what customers demand. In this aspect, the company gains power in the market leading to setting the different prices in different markets for the same commodity. Thirdly, Amazon positions specific products according to the size of the market. For example, if a product is in high demand in a particular market the charges will be greater than in markets where the demand is low (Amazon Annual Report, 2015). Finally, Amazon prices their products per use. Therefore, Amazon pricing model allows the company to match the prices to customers preferences and rising opportunities, and hence, gaining competitive advantage. Despite having an efficient and dynamic pricing strategy (price discrimination), Amazon has been facing many challenges when positioning its products in the market. From a social perspective, some consumers believe that having price discrimination strategy is illegal, and therefore, companies should charge their products fairy (comparable rates) (Nguyen et al., 2015). In this aspect, when customers find that they are paying more than others are for the same product, they tend to switch to other products (Nguyen et al., 2015). Also, Amazon has been facing lawsuits due to malpractices; exposing customers' data to the public. For instance, in 2008 Amazon faced an allegation of sharing clients' data to the third party and of being monopolistic when conducting online businesses. Due to these allegations, Amazon lost some online customers. To curb these challenges, Amazon has been focusing on providing products those demanded by customers at the particular market segment. The Company also has been assuring consumers' privacy concerning their data. Conclusion Price discrimination has become an important business technique for it involves a process of selling the same product to different customers and charging them differently. As stated above, a company can only practice price discrimination by possessing market power. In other words, if consumers are willing to pay for the products at higher prices than others are. More importantly, price discrimination arises when the company offers similar products to different market segments but with different prices structured by economic and demand trends in these market. Amazon is one of the major online retailing companies that have been using third-degree price discrimination strategy (dynamic pricing). However, price discrimination generates negative reactions from customers about unfair charges. Finally, price discrimination shapes the competition trend in the market; consumers' switching behavior is unpredictable. References Amazon Annual Report, 2015. Retrieved from http://www.annualreports.com/Company/amazoncom-inc (accessed on November 24, 2016). Hinz, O., Hann, I. H., & Spann, M. (2011). Price discrimination in e-commerce? An examination of dynamic pricing in name-your-own price markets. Mis quarterly, 35(1), 81-98. Kokolakis, S., Kalliopi, A., & Karyda, M. (2012). An analysis of privacy-related strategic choices of buyers and sellers in e-commerce transactions. In Informatics (PCI), 2012 16th Panhellenic Conference on (pp. 123-126). IEEE. Kumar, R., & Kutlu, L. (2015). Price discrimination in quantity setting oligopoly. The Manchester School. Limba, T., & Gulevičiūtė, G. (2014). E-Business Qualitative Criteria Application Model: Perspectives of Practical Implementation. New York : Springer. Mikians, J., Gyarmati, L., Erramilli, V., & Laoutaris, N. (2012). Detecting price and search discrimination on the internet. In Proceedings of the 11th ACM Workshop on Hot Topics in Networks (pp. 79-84). ACM. Nguyen, L. T., Conduit, J., Lu, V. N., & Rao Hill, S. (2015). Engagement in online communities: implications for consumer price perceptions. Journal of Strategic Marketing, 1-20. Such, J. M., Espinosa, A., & García-Fornes, A. (2014). A survey of privacy in multi-agent systems. The Knowledge Engineering Review, 29(03), 314-344. Read More