How Does Amazon Avoid Creating It’s Own Mini-Depression? ($AMZN, #economics)

How Does Amazon Avoid Creating It’s Own Mini-Depression? ($AMZN, #economics)

According to a new article at Slate, Amazon will soon (within the next 12 months) be offering it’s Kindle e-reader device for “free.” Here’s the part of the story that interested me the most:

Every time Amazon drops the price of the Kindle, sales of the device and sales of Kindle books increase dramatically.

This is curious. According to conventional economic views of the business-cycle, depressions occur when nominal price shocks occur in the economy which reduce the amount of aggregate spending, promoting further price decreases by businesses, which lead to even more reductions in spending as consumers become convinced that if they just wait a little bit longer, they can buy what they need at a lower price.

Next thing you know, spending has collapsed into the notorious and much-feared “death spiral” and the economy grinds to a halt. Mass unemployment, the fall of social morality and Huns impaling the babies of screaming mothers on top of their bayonets. The yooj.

But at Amazon, every time they lower prices, people spend more.

How come when Amazon does it, it creates more business and an environment where everyone (consumers and Amazon as a business) prospers, but when it happens in the economy at large, we get a death spiral and impaled babies?

Somewhere, there’s a disconnect between micro and macro. The secret (that the Keynesians never share and refuse to explain) is how and why this necessarily happens. Good luck figuring it out, I still haven’t!

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