Amazon, Diapers, and the Network Effect
https://www.businessinsider.com/amazon-diapers-price-war-2010-11
Amazon, the world’s largest online retailer, did not become am international powerhouse on its own. A lot of Amazon’s success was dependent on the acquisition of various online retail stores. In other words, Amazon expanded rapidly by buying their competitors. One such competitor was in the diaper industry, Diapers.com, which was owned by Quidisi. As the article explains, Diapers.com was making $100 million in revenue, which was unacceptable to Amazon, Diapers.com was too similar to them. So, when Quidisi refused to sell, Amazon went to war to bring them down.
In class we learned that because of the network effect, there is an optimal equilibrium price a company can charge for their product that will maximize the fraction of consumers that will buy their product and thus maximize their total revenue. In this case, however, Amazon’s goal was not to maximize revenue, but to out-compete Diapers.com. Thus, Amazon began to sell diapers for, like the article says, $6 less than Diapers.com. While this may have meant that Amazon was selling the product at a loss, it also meant that a bigger fraction of consumers would buy from Amazon rather than Quidisi. The smaller price meant a huge increase in popularity of an already popular product. Thus, Quidisi was losing a large portion of their customers, making it harder and harder for them to maintain a low price (even if that price was higher than Amazon). In the end, Quidisi was forced to sell; they could not compete with such a huge, popular retail powerhouse like Amazon.
This scenario only reinforces the “rich get richer” phenomenon. Once a company begins to take off, it is hard for another similar, smaller company to compete with them. The small business cannot match the deals nor the accessibility these huge companies offer, which may ultimately lead to a monopoly. Thus, it is worth considering if popularity is ever detrimental; can something ever be too popular? Consumers seem to have an immediate direct-benefit from following the crowd and using the best technology, but it may not always be beneficial to them in the long run.