What Amazon Has Done To Us...

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The “Amazon Effect” usually refers to the way Amazon completely disrupted the retail market. It pushed some bricks-and -mortar competitors out of business and knocked others off their feet for a bit until they could regain their bearings in a changed world. It didn’t matter if a company competed directly against Amazon or not. By offering virtually frictionless online shopping -- and previously unknown convenience and customer delight -- Amazon forced nearly all retailers to rethink the customer experiences they offered online and at physical stores.

But there’s more to Amazon’s effects than just that. Amazon has reached far beyond consumer shopping. It dominates cloud computing with more than 30% market share, and is well ahead of second-place Microsoft. It took an early lead in smart speakers with Alexa before Google and Apple followed. And it keeps pushing into new markets.

NYU marketing professor Scott Galloway wrote about a year ago that we should forget about Apple, Facebook, and Google and just focus on Amazon as the “one firm that will come to dominate search, hardware and cloud computing, that will control a vast network of far-flung businesses, that can ravage entire sectors of the economy simply by announcing its interest in them.” Indeed, just think about how supermarket stocks reacted when Amazon announced buying Whole Foods, or the blip in pharmacy stocks after it announced buying internet pharmacy PillPack.

And NYU finance professor and stock valuation expert Aswath Damodaran had this to say not too long ago: “From a valuation perspective, Amazon terrifies me as a company simply because you find it overvalued but you cannot bet against it because this is a disruption machine. I’m not even sure what business the company is in anymore. It’s a platform that can be used to disrupt pretty much any business, and that is what is being priced in.”

Researchers now also are taking a look at the wider-spread economic implications of Amazon’s rise. One often discussed topic is whether the outsized power of Amazon and other dominant technology giants has been pressuring wage growth. And recently, Harvard Business School professor Alberto Cavallo presented a paper to central bankers at Jackson Hole called “More Amazon Effects.” It addresses how Amazon has been changing pricing behavior and how it might affect the future course of inflation.

It’s been widely speculated that Amazon has helped to keep inflation low by forcing competitors to reduce their markups. Cavallo says this is a possible explanation for low inflation, but it’s too hard to distinguish the Amazon Effect from other factors to be sure.

Instead of focusing on markups, Cavallo looks at pricing behavior overall. Not surprisingly, one of the things he finds after sifting through massive databases is that price differences across geographies have decreased over time. Online retailers tend to offer uniform pricing across regions, so the suggestion here is that as online shopping has grown, increased price transparency has limited the ability of local bricks-and-mortar stores to price-discriminate.

Another finding is that the frequency of pricing changes has been increasing the last 10 years, especially in sectors where online retailers have high market share -- like electronics and household goods – and in goods that can easily be found on Amazon. The suggestion here is that Amazon’s rise has led to intense monitoring of pricing among competitors and much more frequent adjustments. That means we could get ever closer to something like real-time dynamic pricing of multiple goods.

Cavallo confirms that online retailers have more pricing flexibility and can pass through higher costs more quickly than traditional bricks-and-mortar players. So here’s the kicker: The worry is that as we move toward more dynamic pricing, prices could become much more sensitive to shocks from tariffs or oil prices. If that happens, inflation could really ignite – and that is something central bankers may need to consider in the future.