Question

**This is for an economic analysis of the company Amazon**

What does the market for important inputs look like?

Does Amazon have many or few options from which to source important inputs?

Is the hold-up problem a concern?

Are there economies of scale?

Are there economies of scope or diseconomies of scope?

Are there large fixed costs?

How do the variable costs compare to the fixed costs in terms of relative size?

Answer 1

1.At Amazon, output matters more than input. Amazon refers to ‘output’ as the results you achieve, while ‘input’ means how hard you work to achieve these results. To put it bluntly, nobody at Amazon cares about the input. Nobody cares about how hard you work, or how late you stay, or how many emails you send per hour. Success, as an Amazonian, is defined, 100%, by results and output.

2. Amazon have few options from which to source important inputs. Amazon views inputs as a means to an end which is invariably defined by your output.

3. No, in amazon hold-up problems are not in concern.

4. Yes there are economies of scales in Amazon. They are as follows:

i )Increased dimensions: Firstly, the company invested in enormous warehouses to stock its inventory of books, DVDs, computer peripherals and the like. This allows it to benefit from the law of increased dimension. This law is also known as the Cubic Law where doubling the height and width of a tanker or building leads to a more than proportionate increase in the cubic capacity – the application of this law opens up big scale economies in storage and distribution.

ii)Buying power: A second advantage of size is that Amazon has significant monopsony power when it purchases books directly from publishers, thereby bypassing its reliance on wholesalers and giving it a higher profit margin.

iii) Learning by doing and first-mover advantage: Thirdly, Amazon is benefiting from learning by doing having been one of the first major players in the online retail sector. The unit costs of production tend to decline in real terms as a result of production experience as businesses cut waste and find the most productive means of producing output on a bigger scale.

5.There are some economies of scope. They are as follows:

economies of scope especially in terms of marketing and broadening the range of products available through the Amazon brand. Among the innovative business ideas under development we can identify: • Merchants@/Marketplace which gives independent (third party) sellers the opportunity to sell their products through the Amazon platform

• Amazon Enterprise Solutions – where Amazon provides e-commerce technology for a range of partners such as Marks and Spencer, Lacoste, Mothercare and Timex

• CreateSpace – a new self-publishing platform for books, music and video

• Amazon Kindle – a portable reader that wirelessly downloads books, blogs, magazines and newspapers to a high-resolution electronic paper display that looks and reads like real paper.

6.Yes, Amazon has large fixed fixed cost as Amazon's fixed costs dominate its operational costs as compared to nominal variable costs, its high activity drives down its fixed cost per unit, which allows it to gain a competitive advantage through cost leadership.

7.Amazon operates in the e-commerce industry meaning that most of the business is conducted online. Although it may have very low brick and mortar fixed costs the cost for data warehouses holding trillions of terabyte information is a major fixed cost for the company. Amazon is a classic fixed cost business model, it uses the Internet to get maximum leverage out of its fixed assets, and once it achieves enough volume of sales, the sum total of profits from all those sales exceed its fixed cost base, and it turns a profit. It already has exceeded this hurdle in its past. The same strategy Amazon uses to its advantage on price elasticity is the advantage the company uses to overcome its fixed costs. This same strategy is used to overcome its variable cost. Amazon also uses cross-docking shipments to minimize operational costs. Its mass customization model generates high activity with low variable costs. Even though Amazon’s fixed costs dominate its operational costs as compared to nominal variable costs, it high activity drives down its fixed cost per unit, which allows it to gain a competitive advantage through cost leadership.