E-Discount Kaise?

As the heading suggests, today’s blog will discuss the phenomena, if you can call it so of the massively low prices available today at major sites like Amazon, Flipkart, Myntra and the others. But before I start off on that, it will be worthwhile noting that while e-commerce is not a new thing anymore, the issue of their discounting is (relatively). Customers are delighted at the discounts they see, online sales are reaching the size of Black Friday (not the movie) in America and retail shopkeepers are wondering whether they will soon be able to afford their next meal.

HOW IS IT SO CHEAP!?

Well that’s the question people never thought they would ask themselves, would they? The simple reason they are able to do so, is because they sell below the cost price. Thankfully, things are not so simple- otherwise this blog would not be written.

To start off, most of the mentioned sites are not direct retail sites, they are just online MARKETPLACES that connect buyers and sellers. So how are they able to coax their sellers into selling at such low prices? The answer- they pay for these discounts. Discounts offered by the sellers are re-imbursed by firms through something clever called “Promotional Funding”. Simply put, seller gives discount, buyers happily buy, Flipkart sends cheque for discount so offered and its termed promotional spending. A more detailed analysis can be found at the link below.

http://www.livemint.com/Industry/boWA7iCWJ2sa6eDrNH4YdL/How-Flipkart-Amazon-and-Snapdeal-fund-discounts.html

The tax implications of these are enough material for another blog, so moving on….

HOW DO THEY AFFORD IT?

The question that naturally arises out of this is how they can afford this and more importantly who is willing to pay for this. Flipkart by 2014 has raised upto $1 billion mainly from its three major venture capitalist firms: Tiger Global, Accel Ltd, Morgan Stanley Investment group. Snapdeal too has followed suit whereas Amazon has its parent company in America. And to the question of why they are ready to fund these discounts, it’s because these Investors do not care about profitability at this juncture, they are looking at Expected Future Value of these firms and more importantly with an increase in market share of the large firms, the VALUE of their SHARES drive up. Hence, the incentive is there to fund losses.

LET’S BRING SOME MICROECONOMICS INTO THIS

Now that we have established how they go about this, its time to look into WHY this is done and how this is even legal. Starting with the legal part first, what the e-commerce sites are essentialy doing is called PREDATORY PRICING. They are selling below costs and incurring a loss to drive out competition. There is a law in place in the form of the COMPETITION ACT that protects producers against such actions, the dilemma with this case is that all these companies are NOT Indian and also it is not them who are discounting it. All said and done though, the government is looking into this matter and will try providing a solution to this.

As to why it is done, the answer comes quite easily. Once they have a large share of the market, these companies can go back to charging the normal prices or even Monopoly ones.

(A small side note: The example given by Prof. Sneha Thayyil on the “find a lower price and we will match it” by Amazon seems perfectly applicable here)

WHAT THIS MEANS TO VARIOUS STAKEHOLDERS

OFFLINE RETAILERS: While it might seem like doomsday to offline retail stores, this is not the full case. Luckily, there are other factors other than price affecting Sales and the utility derived from offline shopping seems to generally beat the one received from online shopping. That being said, these retailers have definitely felt the pinch and must look for other ways to attract customers.

GOVERNMENT: At this point, the government seems to be stranded on this new affair and is still figuring out how to ensure healthy competition and more Importantly, TAX these companies. Since none of them are actual retailers, it becomes hard to impose normal taxes and add to that the fact that they are mostly foreign and it seems like a big problem.

CONSUMERS: While this seems like a win-win situation to consumers, there is also the fact that the methods used by them are quite ingenious and psychological. A nice example of this is Google Ads- where, if you open a site and are looking at something like Sweaters, Google saves the information in the form of cookies in your browser. The next time you are browsing, all internet ads point towards sweaters and it acts like a psychological PRIMING. More of this can be seen and the Behavioural Economics of it is for another blog (Another teaser, I know).

CONCLUSION

Hopefully, you have liked this blog and learnt something new from it. We plan on updating you as soon as possible with various economic aspects of e-commerce soon and our group is looking forward to writing the next blog as soon as possible (seriously).

Good Day!

– Narayan Sharalaya