eBay Takes Price Wars To Amazon: Who Wins?

| About: Amazon.com, Inc. (AMZN)
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When Amazon (NASDAQ:AMZN) slashed its product prices, it virtually defined the end of an era for some of the retail stores in the U.S. The likes of Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) had to replicate the steps taken by Amazon in order to keep a huge chunk of their customers. Those that failed to follow the same philosophy have had a beating of the sorts in the retail arena, a good example being J.C. Penney (NYSE:JCP) as discussed earlier in another post. But what happens when a close rival goes a step further? This is the rout that eBay (NASDAQ:EBAY) has taken against its ecommerce rival.

eBay invites Amazon to more price wars

eBay is prepared to take the price wars battle to the master, Amazon, in what could mark the beginning of a pricing crises for the rest of the year. Amazon has a reputation of robbing other retailers off customers with its aggressive pricing techniques. However, it now appears that Amazon could be set to experience the same lesson, albeit from one of its main rivals in ecommerce, eBay. Price wars have driven customers to buying from online stores, making physical stores look more like exhibition centers, where customers come to assess what to buy for their next shopping basket.

eBay's target in this belated move is to capture Amazon Marketplace sellers. These are outside retailers, who also happen to contribute immensely in Amazon's revenue generation. eBay intends to slash further the fees Amazon has been charging these retailers for listing their products. Should Amazon be worried? If indeed eBay succeeds, perhaps Amazon should be worried, as the winner is likely to carry the day for the next few quarters.

Nonetheless, the eventual beneficiary of the battle would be the Marketplace sellers, as they would enjoy discounted prices for listing their products. You could also argue that the customer stands a chance of gaining from this fight, but only if, the sellers choose to transfer the gains.

Who wins?

Presumably, eBay believes that it is has what it takes to down Amazon on this one. However, according to my understanding, there are more forces at play here than just the pricing. Nothing supernatural though, but nonetheless, it would not be an immediate and direct swap as one would think. There are what we call switching costs, and I bet as much as they may not be too high, they could be significant when it comes to making that crucial decision.

Secondly, for years, Amazon has marveled itself by virtue of being referred to as the giant in online retail. Amazon's market share translates to a large customer base, which in this case is the client base of its Marketplace sellers. Even though I do admit that cost cutting is one of the major priorities for a business, sometimes the potential to make more money could easily outweigh that preference. There is no point of swapping hosts, if only for a small cut in listing fee, at the expense of high potential for revenue generation.

The reason why Amazon has managed to woo customers to its platform is because of its huge market share. It is easier for Marketplace sellers to make the decision to join Amazon, than it would be when it comes to leaving the internet giant for another aspiring online retailer.

The Bottom Line

So, here comes my answer. There is only one winner in this battle. In fact, the battle was won a long time ago, when Amazon embarked on an aggressive pricing strategy. eBay is apparently joining the dance floor when Amazon has already impressed all the judges garnering several points in the process. eBay's challenge is to try and impress judges, who might yet find it hard to dock some points off Amazon.

The customers are also winners in this battle as earlier pointed, while the shareholders are like the grass, which plays host to the battle between the two elephants. Whichever company wins, the shareholders of the other will have to suffer. To what extent is highly debatable, but there should be no call for panic for Amazon shareholders. eBay's latest events are nothing but a passing cloud. If anything, the discounted fee is likely to be more beneficial to eBay, than harmful to Amazon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.