Amazon Case Study

Amazon Case:

1. In New Jersey, if there are only  two competitors of books and both sell same type of books, then the products of these two are close substitutes. Availability of perfect substitutes and close substitutes will make price elasticities of both the firms higher and elastic. So the difference created in terms of sales tax inclusion of Barnes.Noble.com will reduce their revenue, if they do not give any discounts on the base price of the books. On the other hand, Amazon’s price being quite less, there will be an increase in sales revenue due to tax imposed by their competitor. This is evident from the data provided on Amazon’s sales loss if tax is imposed on taxes. Answers must be explained in terms of diagram separately for each company.
2. From the evidence of Amazon’s expected sales loss due to sales tax, it is clear that Consumers will bear less burden of tax and Amazon has to bear more tax if online taxes are imposed. That means the difference between pre-tax price and post tax price will not be high and Amazon has to share majority of taxes. This implies that elasticity of supply is fairly inelastic as compared to elasticity of demand.
3.  Amazon has gained monopoly power in books market and it is able to sell books in large quantities but the other player which is a Brick and Mortar store could have supplied even large number of books, but their tax collection is affecting them. Part of revenue loss due to taxes is gained by Amazon but there will be some loss in revenue for Barnes which will be gained by nobody. That is overall books sales is going to go down due to Amazon taking advantage of the distorted tax policy. This is Amazon’s distorted behaviour which gives them an extra revenue of $653 million. The correction in tax policy should be that all states should impose sales tax on all retail chains whether online or brick mortar. Overall price elasticity of demand for books may not be elastic as these books are bought by people who need them and therefore inelastic for them. So if all charge same price then demand is fairly inelastic. However any imposition of sales tax is still creating some dead-weight loss so an optimal  tax that may minimize deadweight loss must be imposed not affecting revenue of firms to a large extent.