Monopsony is the corollary of monopoly — it is the power of being the dominant seller in a market, able to set prices and control the other players. Amazon has leveraged its power in the retail market to rake in the lion’s share of returns from the millions of small-business retailers it hosts and provides shipping and other services for, and then uses the funds to finance its investments in tech and other sectors to ensure its ongoing dominance and vertical integration.
Jeff Bezos, Amazon’s founder and chief executive, lumps the many parts of the company into two buckets, according to the two people close to the business. One bucket is investments, or bets on the future like Alexa, its virtual assistant. The other is contributors, or the profitable businesses that provide money for Amazon’s investments.
To him, the retail operation is a contributor that can be squeezed for cash.
Billions of dollars generated from selling products online go into investments like Alexa, which has 10,000 employees working on it, and the company’s expensive Hollywood productions. And still, Amazon’s consumer businesses, including Alexa and other pricey projects, produced $5 billion in operating profit last year.
The financial success stems from a big strategy shift that was underappreciated when Mr. Bezos made it two decades ago.
From the day the company started shipping orders in 1995, Amazon offered customers products the same way as traditional retailers like Target, buying them at wholesale and reselling them at a higher price. Four years later, Mr. Bezos and his team decided that Amazon would also let companies list items on the site for a cut of the sale, more like eBay and Alibaba. The change allowed Amazon to offer a wider variety of products.
“We want to try and build a place where people can come to find and discover anything that they might want to buy online,” Mr. Bezos said that year.
The decision eventually turned Amazon into the one-stop shop it’s known as today. Shoppers could find not only well-known brands like Tide detergent, but also obscure Christmas ornaments.
From a NY Times newsletter account of one toy seller:
|Amazon is by far America’s biggest digital mall. By selling there, Viahart doesn’t have to hunt for customers on its own.|
|Viahart’s figures also show that people on Amazon are far more likely to buy, not just browse, compared with shoppers on the toy company’s own website. Hart said that he assumes Amazon Prime members are conditioned to buy and know they will usually get an order fast with no additional delivery fees.|
A complicated relationship
|But as much as Amazon has been his lifeblood, Hart has mixed feelings.|
|“It’s enormously frustrating to be tied to a company that makes decisions sometimes on a whim that may be unfair or we have no control over,” Hart told me. “But I can’t complain. I mean, I do complain, but it is what it is.”|
|One of the more eye-opening details to me was how much it costs Viahart to sell on Amazon.|
|According to Hart’s figures, for every $100 worth of products that Viahart sold last year on Amazon, his company on average kept $48.25. [Emphasis added–BDS-LA] He says that it’s far more expensive to sell on Amazon than on Walmart’s website or eBay. The cut that Viahart pays Amazon has generally increased each year, Hart says, although it declined in 2020. [He stays because Amazon provides 90% of his sales.]|