How Amazon keeps prices from going up

The almost perfect market of the big platforms

If there is no lack of raw materials or labour in a perfect market, prices cannot rise. The reason is straightforward: in the perfect market, there is absolute transparency of information. You always know who sells a product at the best price. Production processes can only stay the same or improve, so there will always be a manufacturer who can keep the price or lower it.

Technological deflation

Let’s say you have a shop. In it, you sell electrical appliances. A few years ago you were mainly competing with the big stores. Today you compete with the whole world. Anyone who wants to buy a particular washing machine knows the best deal in the world with their mobile phone help. Your chances of scoring a price above that offer are slim. The absolute price transparency provided by platforms such as Amazon, Alibaba and other electronic marketplaces means that any efficiency improvements made by a company in the world will spread almost immediately to the entire planet. Welcome to the perfect market. You won’t be able to raise your prices.

On a planetary scale, this means continued deflationary pressure due to platform technology. On the one hand, great:

  • It is an advantage for the consumer, who always buys the best possible price.
  • It’s an efficiency engine. The most efficient company wins in a few months and forces others to be efficient as well.
  • Efficiency frees up workforce and resources, which get available for other tasks.

But on the other hand:

  • It condemns small commerce and puts an end to intermediaries. Many jobs are disappearing.
  • Winner takes all: the company that manages to be the best in its field takes the whole market. The only limit is their production capacity. Semi-monopolies are systematically created.

Besides, another characteristic of our times: the great idle production capacity of companies. Most companies’ production is determined by the demand for the product, not by the production capacity. When talking about digital products, the marginal cost is often zero; thus, the production capacity is infinite.

The combination of a transparent market and a huge production capacity causes any product in this semi-perfect market to not rise in price.

Consequences of quasi-perfect markets on the Internet

A household appliance, a sweater and an online Russian language course have in common that they can be bought from anywhere in the world through the Internet. Therefore, they are exposed to deflationary pressure, i.e. their price will tend to fall.

Not so an apartment, a meal at the corner restaurant or an hour with a physiotherapist. They are only going to depend on local competition and therefore they will be able to raise their price.

Simplistically we can say that we are in a world with two realities: a deflationary one that makes it very difficult for prices to rise, even if there are huge amounts of money available, and an inflationary one that does respond easily to the liquidity available to people.

With technological progress, there is a transfer of products and services from inflationary to deflationary realities and this, as we shall see, has considerable consequences.

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