Throwing the Books at Them: Amazon's Puzzling Long Run Pricing Strategy

Abstract

Firms competing to get consumers to adopt new platforms have incentives to charge low prices to promote adoption, followed by higher prices later on. This study explores Amazon’s dynamic pricing strategy by comparing its contemporary pricing on e-books, a new product with complementary hardware, a proprietary file format, and switching costs, with its current pricing on physical books, a now-mature product without complementary hardware or switching costs. Using over 150,000 hourly observations on prices and sales ranks for electronic and physical bestseller books in late 2012 and early 2013, in conjunction with actual quantity data, we estimate the price elasticities of demand for books at Amazon. Puzzlingly, e-books appear to be priced below the static profit maximizing levels. More surprisingly, we find that physical book prices also fall substantially short of the static profit maximizing level two decades after Amazon’s launch. These findings raise questions for both policymakers and shareholders.

Keywords: retailing, pricing, strategy, predation