Old world: you need a part for your dishwasher and locally you have one hardware store, one price that you can take or leave. But only if it is in stock, otherwise you have to call the manufacturer for help.
New world: Amazon gives you instant ability to shop multiple dealers throughout the world to shop for the best price, quality and availability.
You just saved a lot of money and time. It’s called consumer surplus, and Amazon is king.
In plain English, consumer surplus is an economic concept that assigns value to the difference between what you paid for a product and what you were willing to pay. You had budgeted for the part to cost around $40, but you only paid $19. That’s $21 in real wealth that doesn’t show up in GDP but does appear in your household budget.
Set aside time for now, let’s just focus on money. What Amazon mastered, but many other online retailers also provide, is the ability for consumers to compare prices across a vast ocean of products and sellers. This price transparency enables sellers to easily check the competition’s prices and force them to keep prices competitive.
This competition creates other advantages as well. Walmart, Target and Best Buy cut prices and match delivery speed because Amazon exists, meaning even non-Amazon customers enjoy the benefits. And since inventory is no longer limited by showroom size, consumers have access to a much wider product availability, gaining surplus from products not in stock to now available.
Without knowing what consumers were willing to spend, it’s very hard to come up with a good estimate of Amazon’s consumer surplus. However, what has been studied is noteworthy.
In one important study, researchers found that the surplus the median consumer receives from digital goods and services is five to ten times what they actually pay for them. When the results isolated e-commerce, the median American said they’d need to be paid roughly $842 a month to give it up entirely. That’s e-commerce broadly, but Amazon is, by revenue, the largest single reason it’s that high.
Amazon’s book selection alone dwarfed the size of competitor Barnes & Noble’s average selection – estimated 23 times larger. The variety, plus the low prices, was a major reason for the surplus.
The deeper reason this wealth goes uncounted is that GDP measures what we actually pay at the cash register, while consumer surplus is explicitly what we don’t pay.
But there’s a second surplus: Time, in an era where people are increasingly wanting more of it.
Again, Amazon didn’t necessarily create industry trends that save time, but it did perfect them. The Dijulius Group, a consulting firm, estimates that Amazon saves the average consumer around 75 hours a year.
Amazon’s pivot from book retailer to retailer of seemingly everything under the sun cut back on search cost. What could have been an entire weekend of shopping for multiple goods can now be done on a smoke break from a smartphone.
Product and dealer vetting is nearly instantaneous with reviews (or lack thereof) – consumers no longer need to worry about whether a dealer is legit, especially with Amazon’s generous return policy.
Amazon revolutionized shipping and returns, making both so fast and easy that it can seem silly to shop anywhere else (unless you, like me, really like the ritual of going in person). In fact, Amazon dragged the entire industry’s logistics forward, though that’s a topic for another day.
And yet somehow, Amazon is seen as a villain. The public has soured on billionaires and put Amazon’s Jeff Bezos on the Mount Rushmore of hated rich guys. And Amazon, along with countless other online retailers, has relegated in-person shopping to a quaint relic of the past. Bookstores closed. Malls emptied out. We don’t always like change.
But now millions of households have extra time and money to enjoy, which is why consumers made Amazon the winner by morphing their habits to fit Amazon’s business model.
Hating billionaires for being billionaires is silly, but Amazon has its critics — its warehouse labor practices draw real scrutiny. And because of its market power it could someday claw back the surplus it’s created.
But as Adam Smith noted in 1776: it’s because of the butcher’s self-interest, not his benevolence, that we get dinner from him. Amazon offered low prices and fast shipping because competition demanded it, not because it’s kind.
So when you hear someone condemn Amazon, check your order history. You’ll find a surplus of time and money if you look close enough.