Price Differentiation and Two Part Pricing Strategy of Amazon

Price Differentiation and Two Part Pricing Strategy of Amazon

Amazon.com is an American international e-commerce company headquartered in Seattle, Washington. It is the world's largest online retailer[1] that started as an online bookstore, but soon diversified, selling furniture, food, toys, and jewelry among other things. [2] The company also produces the popular Kindle e-book reader and the Kindle Fire tablet computer—and is a major provider of cloud computing services. [3] Amazon is considered the fourth most successful startup company of all time by market capitalization, revenue, growth and cultural impact.[4]

Amazon's e-commerce strategy is multi-level. In its annual summary, Amazon stresses that "It believes the main competitive factors in its market segments include selection, price, availability, convenience, information, discovery, brand recognition, personalized services, accessibility, customer service, reliability, speed of fulfillment, ease of use, and ability to adapt to changing conditions, as well as our customers' overall experience and trust in transactions with us and facilitated by us on behalf of third-party sellers". [5] The key to realizing and achieving all these factors lie in Amazons strategy. This paper will explore how Amazon is employing price discrimination and two- part pricing system as its strategy to realize its goals on profit.

Background

In order to maximize their revenue, Amazon has to first learn about the reservation price of each individual or groups of consumers they are selling to. Reservation Price is the most money an individual is willing to pay for the item he or she buys in the market. [6] No one pays more than this price. Price discrimination is about finding ways to get people to pay a price that comes close to their reservation price. It can be of three kinds: first degree, second degree and third degree. [6] First degree employs a tactic of charging each individual a different price according to an estimate of his/her reservation price.

Second degree, also called indirect price discrimination, offers all consumers a range of purchase options. The consumers select from the menu of choices and directly sort themselves into purchases that reflect their reservation prices. [6] Finally, in third degree price discrimination, different prices are set for different groups of consumers according to some of their identifiable traits. Most common examples include student discounts, veteran discounts and others. Amazon executes all three kinds of price discrimination. They sell their goods at basic and advanced levels indicating second degree price discrimination. [6] Amazon prime (discussed later), too, is priced differently for different consumer groups like students, moms and regulars; indicating third degree price discrimination.

Another kind of indirect