James Surowiecki from The New Yorker (and Wisdom of Crowds fame) discusses the recent ‘price war’ that broke out between Wal-Mart and Amazon:
[L]ike other price wars: all the companies involved got hurt. So you might wonder why Wal-Mart recently decided to start its own price war, taking on Amazon in the online book market. Wal-Mart began by marking down the prices of ten best-sellers—including the new Stephen King and the upcoming Sarah Palin—to ten bucks. When Amazon, predictably, matched that price, Wal-Mart went to nine dollars, and, when Amazon matched again, Wal-Mart went to $8.99, at which point Amazon rested. (Target, too, jumped in, leading Wal-Mart to drop to $8.98.) Since wholesale book prices are traditionally around fifty per cent off the cover price, and these books are now marked down sixty per cent or more, Amazon and Wal-Mart are surely losing money every time they sell one of the discounted titles. The more they sell, the less they make. That doesn’t sound like good business.
Except, of course, when the purpose of the price slashing is not to actually sell more of those particular books, but to attract more buyers to their on-line marketplace: Continue reading