Shifting Intermediaries: The Emergence of Amazon as a Dominant Trader
What happens when a dominant intermediary between a buyer and seller shifts? Or what’s more, what happens when one intermediary is cut out of the trade completely?
In class we focused on trading networks with intermediaries, with the basic requirements that:
“Our trade model reflects the constraint that trade takes place through intermediaries and that there is differential access to these intermediaries. Equilibria in our trading networks reflect the fact that buyers and sellers in intermediated markets, such as the stock market, face a bid-ask spread. In our model, as in actual intermediated markets, the size of this spread, and how much profit intermediaries make, depends on the amount of competition between intermediaries for the trade flow,” (Text, Ch. 11, Section: Reflections on Trade with Intermediaries).
Amazon’s attempt to takeover the publishing industry’s role exemplifies these concepts, as highlighted in the following news articles:
(2) http://www.nytimes.com/roomfordebate/2011/10/24/will-amazon-kill-off-book-publishers?ref=technology
Amazon is the perfect model of a disruptive innovation. Its emergence in the market place directly threatens the existing dominant intermediary in the industry: the publishers. First, Amazon disrupted the publishing industry by capitalizing on the properties of the Internet. The Internet allows for retailers to not only sell print books virtually, but also to sell books as digital, downloadable content. Both this emergence of new marketplaces and digital formatting contribute to price cuts on the content. The Internet serves as a transaction cost reducer, so that customers no longer need to spend time in a physical store to purchase products; additionally, the push from print to digital book content eliminates the cost of transportation, handling, and storage.
Publishers, like Random House, are the original traders — or intermediaries — and make a profit based on a set percentage of net sales. Thus, when book prices go down, profits go down. But publishers have leverage of their own; publishers have a stake in the content itself. For example, Random House asserted digital rights to their previously printed books, unless a contract explicitly stated otherwise. These aspects of information creation, management, and distribution will continually change as the book publishing industry navigates its integration with emerging technology.
In the e-book value network, publishers can jump directly to online retailers, and thus avoid all intermediary costs involved in the printing and distributing process. The e-book value network has the potential to shorten the time span of transferring written content into a published format for consumers to read. To that end, Internet technology — which the e-book network is linked to — is constantly advancing, whereas print book technology remains relatively stagnant. While there have been slight technological advances in the printing process, the need to print books at all is a weight on the traditional book value network that the e-book network can avoid entirely.
Perhaps the only hope for publishing houses to survive as intermediaries is to partner with the Internet based companies. In the end, the Internet — and namely, Amazon — is emerging as a new category of trader. The properties of the Internet fundamentally change how information is reproduced and distributed, which subsequently changes the bid and ask prices of book content.