Has Amazon Contradicted Economic Theory?

Traditional economic theory says that a sustained competitive advantage - that is, one that is so unique, it dominates its niche - is unrealistic. Eventually, competitors will be able to mimic strategy and replicate flagship products, so that economic party will win in the long-run.

Has Amazon broken that theory?

Amazon's unique niche is their online market: Similar audiences to other large retailers, but with competitive prices, quick and low-cost shipping (thanks to warehouses spanning the country), an accessible online market, and lower margins than a brick-and-mortar retailer... What's not to love about that?

Since ... But where does their future lie? Will economic theory play out, and Amazon will give way, or eat least equate to, another retail giant? Like WalMart?

For Amazon to maintain this competitive advantage, they need to make sure four pieces of their business remain:

1. Informally complex.

Amazon began as an online book retailer, promoting their Kindle and related products. In the following 21 years, they have grown to an enormous variety of products that users naturally follow. Their offerings are complex (everything from cloud storage to buying Nine West shoes), but the process is so informal, an average user can use it, yet still find it intriguing. For example, all it takes is an email address and password, then a credit card in order to access everything. One more simple decision is upgrading to Prime for $99/year in order to access these same offerings, but in a deeper way.

2. Require customers to know a great deal in order to use their product.

While the initial introduction of a user to the Amazon marketplace is simple (create log in information), it is important that users understand the basic values of the price of a product on Amazon versus a brick-and-mortar store, the economic value/ease of using Amazon versus other music/book/entertainment provider, and the benefit of publishing work via Amazon versus another retailer. The use of the product is simple; however, one could research for days the amount of products Amazon offers.

3. Require a great deal of research and development.

Amazon has grown by improving their warehouse spaces and location worldwide (from $477 million to $6.41 billion in a decade), their technology (increase of $208 million to $4.56 billion in the past three years), and by acquiring key companies (such as Zappos.com with their robotic warehouse technology).

Nothing says research and development more than a number one company strategically putting millions of dollars into these three key elements, right?

4. Have significant economies of scale.

Simply put, Amazon is able to offer products cheaper and faster. Isn't that the goal of every store? But has every store achieved it? For the 10th straight year Amazon.com is the biggest Top 500 retailer. As long as Amazon is around and continues to grow and scale/open more distribution centers, they will continue to be a force to be reckoned with.

Luckily, Amazon is master at all of the above. And given every leg-up Amazon has on other retailers, with more coming (drones?), it's unlikely we will see another firm try to compete with Amazon. They have too big of a head start and too much invested in their strategy to welcome any competition.

Amazon: 1994-?

Sources:

• Gaining and Sustaining Competitive Advantage by Jay B. Barney [textbook]
• Amazon's Sustainable Competitive Advantage by Daniel B. Kline [http://www.fool.com/investing/general/2015/05/18/amazons-sustainable-competitive-advantage.aspx?source=eptmsmlnk0000001]
• The Source of Amazon's Competitive Advantage by Dr. Tony Grundy [http://www.accaglobal.com/za/en/discover/cpd-articles/business-management/amazon-flow.html]
• Amaon Keeps Spending - and Growing by Mark Brohan [https://www.internetretailer.com/2013/04/30/amazon-keeps-spendingand-growing]