Application Exercise 8j: Amazon’s massive economies of scale
- Define ‘economies of scale’.
Economies of scale are the benefits that are enjoyed by firms when an increase in the volume of outputs leads to a reduction in the average costs of production (cost of production per unit).
- Identify three fixed costs and three variable costs Amazon is likely to face.
Fixed costs include: Warehouse facilities (large fulfilment centres), machinery, advertising, website maintenance
Variable costs include: labour (wages and salaries), packaging costs, postal costs
- Identify two ways in which Amazon has achieved economies of scale, and how this has helped the company reduce their cost per unit of output.
- Operating large warehouses (fulfilment centres) where they aggregate all their products in one location, and distribute from there, rather than moving smaller orders to localized sale points (sells in 180 countries but only has 120 fulfilment centres)
- Operating a small number of online marketplace where all products are available for sale – reducing overheads
- It buys large volumes of books (& other products) directly from producers / publishers, reducing their per-unit input costs through discounting from suppliers (they also have monopsony power in some markets).
- Explain how technology has helped Amazon achieve economies of scale.
The rise of ecommerce has helped Amazon achieve economies of scale by spreading the cost of its massive investment in its internet shopping engine (i.e. the cost of developing its customer interface webpage) across multiple categories because it sells so many different products.
- Critics of Amazon have accused it of using an unfair advantage to drive smaller competitors out of the market. What evidence from the case study may support that claim?
They have ‘monopsony’ power – they can force suppliers from whom they buy inputs (e.g. books,
- Pros and cons: Make a T-chart and use it to list the ways in which the arrival of Amazon in Australia may have created benefits and costs for the domestic economy.
Amazon’s impact on Australia’s domestic economy
· Creation of jobs in Amazon fulfilment centres
· Loss of jobs in more traditional ‘bricks and mortar’ retail
· Access to cheaper (and a greater diversity of) products for Australian consumers
· Pushing competitors out of the market (cost of building and maintaining a user-friendly customer online shopping interface has proved to be too high for many potential competitors to Amazon)
· Faster service (Amazon prime next day delivery)
· Fewer options for small sellers who want to sell online (monopoly power of Amazon)
· Potential over time for diversity of products to fall, as Amazon consolidates its offerings