Question

The “Fire” E-Reader by Amazon sells for approximately $200. Some experts suggest that the “Fire” actually costs Amazon about $200 to produce. What is Amazon thinking? Aren’t they in business to make a profit?

Answer 1

A lot of companies price their product(s) at the product's cost of production, thereby earning no profit on the sale and artificially depressing prices. In fact a lot of firms (for example Reliance Jio an Indian Telecom Company) price their services/products so low that they make a loss on the sale. The whole intention behind products so low is to capture market share and drive out the market competition. Once, the company establishes itself as a dominant player in the market, it can raise prices in a phased manner or all at once by leveraging its pricing power which in turn comes from the company's dominant position in the market. This strategy of using low prices first to drive out competition followed by leveraging pricing power is known as predatory pricing technique. Further, a lot of firms utilize cross country manufacturing chains to leverage cheap labour, low priced raw materials and favourable government regulations to lower its production cost in the long run and keep prices permanently low, which again drives out the competition.