Well, this is interesting. You know Amazon’s new Kindle Fire reader they’ve been advertising so heavily lately? Turns out that it costs a couple of bucks more to make it than they’re selling it for:
Research firm IHS say Amazon.com Inc.’s Kindle Fire tablet, which started shipping this week, costs $201.70 to make, $2.70 more than Amazon charges for it.
I doubt that they plan to make it up in volume. More likely they plan to make it up from the sales of books and movies. To be honest I can’t see how this is not predatory pricing and, considering Amazon’s position in the book business, they may be skating on thin ice.
They want to finish off the Nook and stay in the race with the iPad. That would give them a monopoly on of the low-end devices, leaving Apple the high-end.
That’s a perfect description of predatory pricing, if I’m not mistaken.
Doesn’t Gillette always give out free or significantly discounted disposable razor kits for their new brands with the expectation that you’ll switch and they’ll profit on the replacement blades? And is the pricing of inkjet printers and ink have similar features?
Merely selling below costs is not sufficient evidence of predatory pricing. The only way predatory pricing really makes sense is when a firm is trying to engage in low cost signalling. That is given imperfect information a firm is trying to convince competitors that they have a low cost of production and to either not try and compete any further, or to even leave the market. Problem here is that we know this is not the case.
And even if they did secure a monopoly there is significant questions as to the ability to raise prices. Once they did raise prices then competitors would have an incentive to re-enter the market and under-cut them. To really secure the monopoly position some sort of barrier to entry would be ideal. Drive out the competitors and rely on the barrier to keep new competitors out.
And the whole thing can flop spectacularly if they either underestimate their current competitors or new competitors enter the market as the older ones leave. In either case, it would extend the “lean times” where the predatory firm is suffering losses to establish its monopoly.