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.

Bewakoof.com : A case study of Economies of Scope

Have you ever heard of Bewakoof.com? if not go and find out. They make t-shirts, mobile cases, bags, slippers, badges and a lot of stuff. But you want to know what’s the economics that they apply to market their product. Let’s find out.

Bewakoof.com has various designs but they make a various product with the same design. This is called using the same resources to produce various products. This is known as Economies of Scope.

Economies of scope occur when product share common inputs and diversification leads to cost savings. Taking the case of Bewakoof.com we can see them applying the same design(input) to produce a wide range of products.

When they apply Economies of scope they reduce their average fixed cost(AFC) which in turn reduce the average cost(AC) of the product. So a design or a template is their fixed cost which is used in various SKUs to reduce their cost. The cost of designing a new design is usually high. This is a very cost effective method and in turn, provides a higher profit margin.

Most products at Bewakoof.com is between ₹200 to ₹1000 which is very much affordable for the targeted audience i.e. the youth. Their design is trendy and edgy which is preferred by most Youth these days. They are using this to their advantage to make maximum sales and by applying Economies of Scope they are reducing their cost and increasing their profit.

The "Economics" Encounter: Shopping at M.G. Road!

It's funny that we actually apply so many theories (whether scientific, philosophical, or psychological, etc.) in our real life without even being aware of it. I recently came across such a concept in Economics. I never studied Economics prior to my PGDM classes, but I was delighted to find out a few concepts that I have applied so many times in my life, especially when it comes to shopping. Whether it is in Kolkata (Esplanade - New Market) or it is in Bangalore (M.G. Road), the notion of shopping is ingrained in me! 

And, when it comes to Ladies, who does not want to get a pair of nice sandals or beautiful accessories every time you have a party but, at the least price possible. Now even if my budget for shopping is Rs. 2000, I would be still inclined to buy things that somehow amount to less than Rs. 2000. We would want to save even in a self-approved budget of shopping. It is actually a natural tendency to feel so. We want to have it all and at the same time, spend the least!

The "Economics" Encounter at M.G. Road!

Imagine!
I need a beautiful saree for a college fest and my budget is Rs. 2000. So I go to a nice saree boutique, VijayaLakshmi Silks & Sarees in M.G. Road, Bangalore. After struggling with several choices, I finally liked a Saree, which costs around Rs. 1800. Now please understand the psychology of shopping here! Although I can spend Rs. 2000, and even though the saree costs Rs. 200 less than my budget, I am still inclined to lessen it further. So I quote the salesperson - Rs. 1500 as the cost I am willing to pay for the saree. Consequently, the salesperson and I got into some negotiation and we finally agreed to settle at Rs. 1600. I returned to my college with a big smile on my face and a fulfilling thought to have saved Rs. 400 of my budget. 

Good Bargaining Skills. That is what you would say!

But, is it really?

This is a common phenomenon that happens every time while we shop! And interestingly, this is an application of Economics in our daily life, namely, Consumer Surplus!

Consumer Surplus is basically the difference between the total amount that consumers are willing and able to pay for a good or service and the total amount that they actually pay.

So, my Consumer Surplus for the purchase of Saree amounts to Rs. (2000-1600) i.e. Rs. 400. 

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But, what we conveniently miss here is that a seller would not sell his product for a loss (in a general scenario). So, if the seller is agreeing to sell the Saree for Rs. 1600 instead of its quoted price (Rs. 1800) that must mean the Seller is gaining profits in the trade. This concept is formally called as Producer Surplus in applications of economics. 

Producer surplus is defined as the difference between the amount in which the producer is willing to sell/supply the goods and the actual amount received by him when he makes the trade. 

So, in my case, say the Producer was willing to sell the product at Rs. 1400 initially but then he realized that consumers in the market are willing to purchase it for Rs. 1800. So he quotes his Sarees for Rs. 1800. Now, even after bargaining, he received Rs. 1600 from me, which is still more than what he was willing to sell it for. Hence his Producer surplus is Rs. (1600-1400) i.e. Rs 200.

Intriguing right?!

So next time you go shopping and you convince the seller to give you a product for a lesser price than the quoted price, don't be too happy considering it an advantageous purchase! 

Credits:
https://economictimes.indiatimes.com