Price War: Walmart vs. Amazon
Janie Xue
For years, Walmart has been unrivaled in its large basket of goods and its “Everyday Low Prices”. However, in the recent boom of online shopping, Walmart has fallen behind Amazon in sales. This has resulted in Walmart rigorously investing in their online operations and slashing their prices year-round in order to compete, with Amazon following suit. As both of these giant retail corporations rush to expand and serve as price leaders, prices may fall to dangerously low levels.
Amazon is well-known to be willing to damage profits for the sake of more sales at low prices, and Walmart now appears to be doing to the same. Last year, Walmart spent $1 billion in efforts to cut prices online, leading to a 50% growth in online sales. By November 2017, Walmart’s online prices were only 3% higher than Amazon’s, compared to the 5-12% difference in previous years. The graph from Reuter’s below displays Walmart’s prices for specific categories compared to Amazon’s in this past year.
While Walmart is doing better now thanks to its aggressive cuts, over time it may be difficult to keep prices consistently lower due to Amazon’ seniority in online retail and its advanced algorithm for price matching. To combat this disadvantage and differentiate itself, Walmart has recently placed a focus on increasing the convenience of shopping with free two-day shipping over $35 and in-store pickup. Furthermore, in 2016 Walmart bought startup company Jet for $3 billion in order to get a jump-start on its ecommerce customer base and gain a better understanding of the technology needed to run an online business. More recently, Walmart has entered a partnership with Google to increase online sales.
With online retail profits already “notoriously thin” (Forbes), this price competition does not bode well for other businesses. For Amazon and Walmart, it is clear that the quantity effect dominates the price effect; both corporations earn more total revenue by decreasing price and increasing sales. However, some companies may be unable to sacrifice their profits in such a way. Traditional stores have begun to suffer; stocks for JCPenney and Sears, for example, have already dropped 60%. Thus, the age of big retail online will likely cause a decline for businesses who are unable to create an online presence, differentiate themselves, or catch-up in the race for the lowest price.
For more examples of how retailers are trying to compete with Amazon, check out this short clip from Fox Business.
Works Cited
Bose, Nandita. “Exclusive: Cyber Monday Showdown - Wal-Mart Closes in on Amazon in Online Price War.” Reuters, Thomson Reuters, 27 Nov. 2017, www.reuters.com/article/us-walmart-onlineprices-amazon-excluisve/exclusive-cyber-monday-showdown-wal-mart-closes-in-on-amazon-in-online-price-war-idUSKBN1DR0I6.
Rogowsky, Mark. “Giants May Be Toppled As Amazon, Walmart War For Your Wallet.” Forbes, Forbes Magazine, 31 Mar. 2017, www.forbes.com/sites/markrogowsky/2017/03/31/giants-may-be-toppled-as-amazon-walmart-war-for-your-wallet/#668134ac6fe0.
Udland, Myles. “One Chart Shows Why Walmart Just Spent $3 Billion to Take on Amazon.” Business Insider, Business Insider, 8 Aug. 2016, www.businessinsider.com/walmart-vs-amazon-market-cap-2016-8.
Versaw, Rob. “The Ultimate Retail Matchup: Amazon Vs. Walmart.” Forbes, Forbes Magazine, 6 Oct. 2017, www.forbes.com/sites/forbestechcouncil/2017/09/15/the-ultimate-retail-matchup-amazon-vs-walmart/#4b74c4c227db.
Walmart's shares have soared 40% to a near record high of $100 thanks to robust growth in its online commerce operations. “Amazon vs. Walmart: The Rest of Retail Fights for Crumbs.” CNNMoney, Cable News Network, 27 Nov. 2017, www.money.cnn.com/2017/11/27/investing/cyber-monday-online-retail-stocks-amazon-walmart/index.html.
This is a perfect example of the prisoner's dilemma. Both Walmart and Amazon are given incentive to follow the dominant strategy and choose low prices, regardless on how their low prices will effect the other firm. While going low is a dominant strategy for Walmart and Amazon, they would both be able to make an increased profit if they colluded and both charged higher, but equal prices.
ReplyDeleteI like how this article incorporates the competitive dynamic that happens with these two corporations, but what I’m most curious about is the effect of walmart slashing its’ prices on similar corporations like Target, as they are essentially similar.
ReplyDeleteI agree that this represents a prisoner's dilemma. Both firms choose to use lower prices and have high competition because of it. I wonder if this situation would change if it were between Walmart and Target instead of Walmart and Amazon.
ReplyDeleteThis is a really good real-life example of the prisoner's dilemma. It's an interesting aspect to consider what happens when prices get too low because in general we only hear about the problems of prices skyrocketing. I agree with Izzy and Morgan it would be really interesting to analyze the relationship between other retail stores to see if they face the same dilemma.
ReplyDeleteIt is interesting to see how the price competition between two large corporations can inadvertently put smaller business out of business that are not able to keep up with the drops in price. This puts the market on a trend towards turning into an oligopoly and becoming increasingly monopolistic. These trends have to be monitored and potentially managed because if one company begins to stand above all the rest, prices may begin rising in order to maximize profits and obtain as much consumer surplus as profit as possible.
ReplyDeleteGreat job Janie! After conducting some research myself, I discovered that Amazon may not be the biggest retailer in terms of revenue, but it is certainly the most valuable. Within the past two years, Amazon's stock has nearly tripled in value to an astronomical $922, swelling its market cap to $439.8 billion, which far surpasses the combined valuations of rivals Walmart, Costco, Target, Macy’s, and Kohl’s. Compared to large corporations like Walmart, Amazon's stronghold in the tech world, such as cloud computing business and products like Alexa and Amazon Fire, as well as other ventures like grocery delivery, make the company a diverse financial entity. Despite Walmart’s existence since 1962, newer corporations (like Amazon which was founded in 1994) are readily advancing along with the technological world, causing a significant decline in sales for traditional corporations.
ReplyDeletePerhaps Walmart has trouble keeping up with Amazon due to Walmart's large stores that they must continue to operate. Walmart has increasingly more costs, including labor for their stores. Amazon has large headquarters and shipping facilities, but not nearly to the amount that Walmart has. Due to this, Walmart presumably has more fixed costs, leaving them with a decreased ability to lower prices (especially to that of Amazon's) and to invest in the new online market (which many consumers are turning to now). While Walmart is doing their best to keep up, I would guess that Amazon has the advantage, especially in the important online network.
ReplyDeleteI was aware that companies like Amazon and Walmart were the leading businesses for cheap items, but I never thought about them actually competing against each other online. I also never thought of this as the reason for the decline of stores like Sears or JC Penny because the items sold at these stores are different than at Walmart and Amazon. You mentioned how Amazon and Walmart were fighting and driving down prices, and I’m wondering what is the final minimum price that Walmart can cut its prices down to. At some point Walmart and Amazon can’t bring their prices any lower to be still making a profit.
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