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We wouldn’t have ecommerce without Amazon

Allison Schrager
By Allison Schrager

Contributor

I’m innocently doing work at my desk, or to be honest, taking a mini mental break to check out my favorite gossip site and there it is, a picture of the electric toothbrush I’ve been thinking about buying. The next thing I know I’m on Amazon, obsessing over reviews and whether I should spend $20 extra for regular feedback on my brushing technique. I hit an orangey-yellow button and the next day a box is waiting for me in my lobby. A few days later I still don’t understand how the brushing feedback feature works as I wistfully recall the first electric toothbrush I bought 21 years ago. It was more primitive to be sure, and so was buying it.

Now, my toothbrush purchase happened in less than five minutes from seeing the ad (whose nagging works better than my dentist) to the lightning fast purchase. The upgrades in toothbrush technology have nothing on the upgrades in how we buy.

We often exaggerate how technology has changed our lives. But it is hard to overstate the significance of how commerce, and the economy, changed between 2000 and 2010.

It is hard to overstate the significance of how commerce changed between 2000 and 2010.

For most of human existence, with some notable exceptions, shopping usually involved leaving the house, seeing and touching the goods on offer, and having a conversation with a stranger. Now you can get almost anything—even a house—with a single click.

That shift happened in part because of a single company: Amazon. E-commerce has evolved in the last 20 years, but it was Amazon that did the most to alter how we buy, sell, and transact. It has been among the most innovative and claims most of the e-commerce market.

The result, of course, is an economy forever changed. According to survey data from Pew, in 2000 only 22% of Americans had ever shopped online, now 80% do, at least somewhat regularly. This shift has consequences not only for how we buy, but also for the labor market, and perhaps even more significantly, how the economy functions.

A history of buying stuff

Long before the internet, people shopped remotely. Soon after the creation of the printing press, along came catalogues, originally selling books or seeds, to a small population of buyers looking for specialized products.

The catalogue and the in-person department store created America’s consumer culture.

Mail-order was a small share of commerce until industrialization produced cheap mass-market goods. The creation of the railroad in the US and Europe in the mid-19th century further facilitated remote buying. The Sears Roebuck catalogue, first printed in 1888, and more than 300 pages, offered hundreds of goods from dolls to entire houses (made from a kit). Because the catalogue could reach so many people, even Americans who lived in rural areas and Black Americans in the Jim Crow south, everyone had access to what they wanted and needed, if they could afford it. The catalogue and the in-person department store created America’s consumer culture, where people bought spent a large share of their income on standardized goods (before people bought less stuff, goods were made by local artisans and were always a little different).

But mail-order’s scope was limited. It took days or weeks to get a good, and comparison shopping was difficult because catalogues were from a single merchant and there were no objective reviews. The Sears Roebuck catalogue could access more households than a single store. But it never penetrated more than 20% of households because in-person buying was still a little easier if a store was close by. Other catalogues came along over the years, from high-end luxury to cheaper fashion to agricultural equipment. But innovation in how we buy largely stalled until Amazon came along.

Paul Sakuma/AP Photo

Along came the internet

The internet was slow and spotty, which made online retail difficult and tedious until the new millennium. But it was during the 2000 to 2010 period that it transformed American retail. Delivery could take days or weeks. But as the United States adopted broadband and Amazon offered more products, it changed everything by offering what mail-order couldn’t do. It facilitated comparison shopping across retailers, offered quick and sometimes even free delivery, easy returns, and detailed product reviews.

In the same way mail order catalogues created America’s consumer culture, e-commerce is altering the American economy and its culture.

Amazon started in 1995 as a bookseller, but its ability to innovate and constantly reinvent itself made it the powerhouse that dominates the market today. Other e-commerce companies, like the first online book seller, books.com, stuck to what they knew. But Amazon diversified into other products in 1998. In the 2000s, it started selling almost everything you could ever want and opened up its platform to third-party retailers. Depending on how you count them, Amazon sells more than 12 million different products, from baby formula to rare coins. This meant it became easy to compare prices and products (and see reviews) in a way that was impossible in person. In 2005 it launched Amazon Prime, which streamlined the ordering process, offered free delivery, and created more customer loyalty. It was during this period that buying goods online became a way of life. In the same way mail order catalogues created America’s consumer culture, e-commerce is altering the American economy and its culture.

Suddenly, for the first time, it became easier to buy from home (or work) than in person. Now, everyone has similar access to a broad array of goods, no matter where they live.

In terms of value, e-commerce still makes up a fraction of purchases. The figure below is the share of transactions that occurred online between 1999 and 2019. But 10% is only the value of transactions as a share of total retail sales, which includes big ticket items, like cars, which are still bought in person.

In 2018, Amazon took in $258.22 billion in sales, half of the online market, and 5% of US total retail sales. Some of the growth came organically, and some from major acquisitions of big online retailers, like Zappos, review sites, like Goodreads, and in-person retailer, Whole Foods. Though its sales numbers are still behind Walmart, $331.67 billion (includes sales from brick and mortar). At the rate it’s growing, Amazon, and online retail, may one day surpass brick and mortar stores. Continuing to grow at this pace may not be possible; in just 25 years Amazon became one of the world’s largest retailers.

It’s hard to imagine it could get any bigger in terms of sales. It seems as though it’s picked all the low-hanging fruit. But it has not reached all international markets and there’s still scope to take a big share of that remaining 90% of the market claimed by in-person retail.  Amazon may come up with ways to simulate the best features of an in-store experience, like trying on clothes or sitting on a sofa, and to make delivery even faster and more predictable.

An economy forever changed

Amazon did more than make it easier and faster to buy things; it altered the nature of commerce and with it the US economy. It changed how and where people work and, equally important, it changed how prices are set and how often they change.

Before we bought online, merchants might only increase prices once or twice a year in response to inflation or competition. Now, to stay competitive, online retailers use algorithms, which change prices more frequently to match demand. Some online retailers, like Walmart, scrape data from their competitors to stay current on the latest market price. Research from economist Alberto Cavallo estimates that price changes have become almost twice as frequent as online transactions became more common. He also estimates that mark-downs have become more common than mark-ups. He credits more competition as the reason the price of products sold on Amazon change more frequently.

Before, goods might be cheaper in poorer areas or more expensive in certain countries. Now, prices tend to be the same everywhere—both online and in stores.

Price pressure and competition from e-commerce are big reasons why many store fronts are empty.

Mostly this has meant access to cheaper goods, which benefits all consumers—especially low-income Americans. But lower prices across geographies also squeeze retailers in high-cost areas when they can’t charge much more for their products, but still must pay higher rent and wages. Price pressure and competition from e-commerce are big reasons why many store fronts are empty and retailers like bookseller Borders no longer exist. Even large retailers with multiple chains find it difficult to survive in a more cut-throat price environment. The figure below is the number of retail employees in American department stores. After 2000, jobs started to decline, even when the economy was booming.

This has become a source of concern for policy makers. Treasury Secretary Steven Mnuchin said Amazon “destroyed retail” and wants to investigate breaking it up. Amazon is not technically a monopoly; it is still only 5% of retail and half of online sales, even though it does dominate and impact prices for the entire market. In the past, monopolies were broken up because they overcharged customers; Amazon is blamed for charging too little and squeezing out the competition. The fear is that eventually Amazon could gain even more market power and be free to increase its prices. However, that argument is speculative because online retail’s history is too short to know how competition will evolve.

But there is no doubt that Amazon is making it harder for brick and mortar retailers to survive. Traditionally, retail has been an important source of jobs for low-skilled workers, especially women. An e-commerce economy requires fewer retail jobs, and low-skill, low wage workers will bear the brunt of that transition. Jobs at wish fulfillment centers and delivering goods will replace some of the jobs, but they require fewer people: Amazon only employs 250,000 people (including corporate and executive jobs) and another 100,000 during the holidays. More than 500,000 department store jobs disappeared between 2001 and 2017. The lower-skilled Amazon and delivery jobs are also more physically demanding. On the upside, they may pay more and employees may have access to job training.

We can’t be certain what the long-term impact will be. Some in-person retail stores will continue to exist, the Walmarts and Targets will still survive because they have the scale to compete with Amazon. But it will be harder for non-chains to survive the low prices and convenience Amazon offers. Eventually, the only independently owned stores that exist will offer exceptional service and high-margin goods, which means shopping in person at a small store will become a luxury few can afford. Another way retail might go is fewer permanent stores and more pop-ups. They offer a more stimulating retail experience than a traditional store, but their transience makes it impossible to form a relationship with local merchants.

One immediate impact is social. You can buy just about anything without interacting with another human. Historically market places are where humans met and interacted; it was central to communities because it brought people together. Buying online may be easier, but it could be another factor contributing to feelings of isolation, rising anxiety, and depression. Bragging about what you buy on social media is not the same as an in-person experience—it can even add to anxiety.

But we needn’t assume it is all for the worse. Each new technology that alters the economy poses costs and benefits. Economists generally consider access to more goods, for lower prices, a net positive. There is no doubt that consumers benefit: a single, working mother no longer has to take the time to buy toilet paper from a store, and can purchase it in bulk more cheaply. As e-commerce continues to grow, much is gained, but there is also something lost.

How we buy can be just as important as what we buy, the last big innovation in retail created America’s consumer culture, where everyone—not just the rich—could buy many, and similar, goods. The result was that we prized and prioritized owning things. Now buying online will be just as transformative. We can, and are encouraged to buy every waking hour. Our credit card’s spending limit is our only constraint. Perhaps the ease of buying will make goods less novel and experiences will become even more dear people already pay a premium to get offline. Or maybe unlimited access will create a consumer culture on steroids—even more than what we see today, where nothing is ever enough and most people are constantly in debt.

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