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The ‘Amazon Effect’ Is Changing Online Price Competition—and the Fed Needs to Pay Attention | HBS Working Knowledge

It’s no secret that fierce competition from Amazon puts downward pressure on prices charged by Walmart and other big multichannel retailers for the same items. However, the bigger “Amazon effect” relates not to the prices themselves but to the pricing behaviors of these more traditional retailers, according to Alberto Cavallo, the Edgerley Family Associate Professor at Harvard Business School.

Cavallo, who bases his findings on a decade’s worth of pricing data, sees two notable changes with large multichannel retailers: faster price increases and more uniform pricing between disparate locations.

“It’s not about just the markup, which, to some extent, is just a temporary effect,” Cavallo says. “If competition with Amazon changes the way firms such as Walmart or Best Buy make pricing decisions, it can have much longer-lasting effects on inflation dynamics and other macroeconomic phenomena.”

“IN A WORLD WITH ONLINE COMPETITION, WE NEED TO RECONSIDER WHAT MAKES PRICES STICKY, NOT JUST ACROSS TIME BUT ALSO ACROSS LOCATIONS.”

Cavallo focuses on multichannel retailers—those that have an online presence but sell most goods offline—because they are common data sources for statistical agencies. In 2010, these retailers would keep prices constant for about nine months on average. Today, that timeframe has narrowed to just three months, he says. That acceleration was especially true for categories like electronics and furniture with larger online market shares.

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The ‘Amazon Effect’ Is Changing Online Price Competition—and the Fed Needs to Pay Attention – HBS Working Knowledge – Harvard Business School.

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