Walk away, don’t play chicken with Amazon

I do not know why businesses refuse to learn from the past and why they insist they are different from all others who came before them. Admit it now, it is okay, no business can take on Mr. Bezos and Amazon on price leadership at the low end. Don’t get into the ring. Don’t wage a war. It won’t be a war, it will be quick skirmish in which  you will be thoroughly destroyed and forced to issue statements like,

“it was an experiment and we achieved what we set out to achieve”

This time the brave new knight to get into price war with Amazon is OverStock.com. They announced a daring campaign – a promise to sell books 10% below Amazon. Not just match prices, which would have been a signal to Amazon to not drop prices but sell 10% below. And what did Amazon do? GigaOm reports

Amazon is quietly slashing its own prices on print books. In a special report over the weekend, trade publication Shelf Awareness noted that Amazon has begun “discounting many best-selling hardcover titles between 50 percent and 65 percent, levels we’ve never seen in the history of Amazon or in the bricks-and-mortar price wars of the past.”

These are far greater than the usual 40-50% discount Amazon usually does. Where does that leave OverStock.com? Is it ready to sell below the 65% discount Amazon offers?

When it comes to price setting there are two kinds of companies – Price Setters and Price Takers. Apple is a Price Setter at the high end. Amazon is the undisputed Price Setter at the low end. A rational low end Price Setter may look at cost advantages to maintain leadership. But Amazon is no rational player. At least that is what they want all of the market to think.

Amazon has adopted a deliberate irrational strategy, signaling others they are not going to play by someone’s rational expectations.  You should be careful in waging price wars with such irrational players.

if you are playing a game of chicken in cars, if you were to break the steering wheel and toss it out the window in front of your opponent then he knows you are not going to swerve. (source: Art and Science of Negotiation). That is strategic irrationality.

In the game of chicken played in retail prices, Amazon is such a strategically irrational player. Mr.Bezos has signaled to all other players that he has thrown away his steering-wheel and placed a brick on his gas pedal. They are not going to let up on lowering prices and they can keep at it as long as they can because they have the full trust of their shareholders.

Even this morning CNBC’s David Faber was talking about Amazon stock prices and investor behavior. Even after Amazon reported a loss its stock did not suffer much. Faber quipped, “may be Amazon should have reported larger loss so its stock could have gone  higher”.

In 1999 Barron’s magazine warned investors about Amazon. Then its market cap was $19B, now it is $141B.  Amazon practices strategic irrationality while investors seem to be equally irrational, strategic or not.  There is no expectation what so ever from investors on profit.

Let me repeat my advice. Don’t bother. Don’t get into price war with Amazon. Walk away. You are not going to dismantle Amazon as Price Setter at low end. Instead focus on customer segmentation, product mix and differentiation. You have far better chance of succeeding there because your competitors there are far more likely to be rational.

Finally, let me predict something for Google Nexus 7 – the next Kindl Fire is going to force it to slash prices.