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

28 Pages Posted: 29 May 2014  

Imke Reimers

Northeastern University - Department of Economics

Joel Waldfogel

University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER); University of Minnesota - Twin Cities - Department of Economics

Date Written: March 4, 2014

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

Suggested Citation

Reimers, Imke and Waldfogel, Joel, Throwing the Books at Them: Amazon's Puzzling Long Run Pricing Strategy (March 4, 2014). Available at SSRN: https://ssrn.com/abstract=2442747 or http://dx.doi.org/10.2139/ssrn.2442747

Imke Reimers (Contact Author)

Northeastern University - Department of Economics ( email )

301 Lake Hall
Boston, MA 02115
United States

Joel Waldfogel

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

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