Economic theories applied in Amazon.in

Well economics is a vast subject which can be applied anywhere and anytime. Most industries and companies apply these economic theories. At various stages in the company’s life cycle some form of economic theory or principal is applied. Let us dive in some of this economic principles that are applied in the company that is known for their huge collection of commodities and has recently entered into the 1 trillion group. We are applying economics theories in Amazon.in.

1.     1.  Economies of scale

Economies of scale is an economic principle means that as the output increases the cost of fixed cost gets absorbed at a higher rate. This means as the quantity increases the AFC reduces and in turn it reduces the AC. This is a great method of increasing profit margins which is also known as profit maximization. In Amazon the quantity of SKUs is high that means they have the higher quantity to absorb the Average fixed cost. This explains why they can price their product lower than that of the offline market. They can gain higher profit by keeping their cost down on the other hand the revenue earned by them stays near the MRP or lower. By applying Economies of Scale they are maximising their profit.

2.      2. Economies of Scope

Economies of scope is a phenomenon where a single input is used to produce various output and diversification leads to cost savings. Now we can easily see this theory being applied in Amazon.in. Amazon has over 606 million products which used the online platform to sell all of its product. It’s an online shopping mall itself. By using its online platform, it can sell different products at a cheaper price as its AFC reduces and in turn, the AC also goes down providing a huge scope of profit.

3.      3. Price Discrimination by Self Selection

Amazon.in provides various offers online to attract customers. Most common offers are of cashbacks. They provide cashbacks for using a particular card or using their e-wallet Amazon pay. This causes the customers to use their e-wallet method while making payment as the price charged to them will be lower compared to others.

4.      4. People Respond to Incentives

An incentive is something that induces a person to act, such as the prospect of a punishment or a reward. They provide huge discounts which act as a reward for the customers. Thus they reach to those incentives and buy from Amazon.

5.      5.  Product Differentiation (Barriers to Entry)

In the Indian e-commerce market, we can see Amazon.in and Flipkart dominating the e-commerce market. Being the top brands they hold a certain level of brand loyalty and a certain level of power in the market. This allows them to create barriers in the e-commerce market. Though new brands try to enter this market they fail due to the difference that Amazon and Flipkart has made.