A new study argues that the growth of Amazon and other online retailers has kept inflation and prices low in the U.S. Will Israel and other Middle Eastern economies follow suit and allow e-commerce to take off?
In the realm of commerce, the U.S. is frequently the experimenter and trend-setter for new ways of doing business. One of the most “disruptive” developments has been the rise of e-commerce. For the last few years, more Americans than ever are opting to do their buying and selling online.
Alberto Cavallo, an economist at the Harvard Business School, recently argued in a much touted academic report that the “Amazon effect” is having a big impact on the behemoth that is the American economy.
Cavallo contends that the rapid growth of e-commerce is keeping inflation at unexpectedly low levels, and causing greater price changes as traditional “brick-and-mortar” retailers compete with online sellers. This means that prices for items are becoming more consistent across a range of online and traditional sellers. And with competition rising—given the rapid growth of the sector as well as Amazon’s huge market presence—the trend has thus far translated into lower prices for consumers.
“In the past 10 years online competition has raised both the frequency of price changes and the degree of uniform pricing across locations,” Cavallo wrote in the report. “The transparency of the web imposes a constraint on brick-and-mortar retailers’ ability to price discriminate across locations.”
Analysts are now wondering if economic conditions are ripe for a similar effect in the Middle East, where e-commerce has been on the rise.
For example, Amazon has been considering opening up distribution centers in Israel and Saudi Arabia. In the UAE, the company has already launched a website called Souq.com, an English-Arabic language e-commerce platform geared to local consumers.
To gauge demand in Israel, Amazon is currently offering free shipping on certain items totaling $70 to buyers in the country. One catch is that products must be purchased from Amazon Global and not from other sellers using the company’s platform. Another is that if consumers stay below $75, they do not have to pay Israel’s value-added tax (VAT), also known as a tax on goods and services.
As more shoppers in the Middle East familiarize themselves with online buying, they can begin to compare prices on products sold in other markets. If online retailers like Amazon can establish a foothold in the region, consumers might be enticed to buy through them if their prices are more competitive than what the local market affords, although they might not be willing to wait lengthy amounts of time for products to arrive by mail.
Dr. Alex Coman, a researcher at the Interdisciplinary Center Herzliya’s Adelson School of Entrepreneurship, told The Media Line that in Israel “we have big players basically charging monopoly prices.”
He explained that Amazon is currently looking for a location to build its logistics center in Israel, which, he contented, will make shipments much cheaper and more rapid. The “Amazon effect” would be felt in Israel, Coman added. “It introduces very welcome competition into the market. Many bad players who are used to very hefty margins will now have to cut down them.
“We see that shopping malls are in trouble in the U.S., but in Israel as well. Part of that is because many people, especially younger people, have discovered that it is advantageous to buy online, and so brick and mortar business find it necessary to reduce prices, otherwise they’ll be in big trouble.”
Coman concluded that there has been significant push-back from Israeli retailers against Amazon’s plans. “There has been lots of lobbying which has failed. Basically, apparel companies first started lobbying the government, arguing that it’s not fair that brick and mortar stores must pay the 17% VAT while imported products bought online are not subject to the tax.”
They argued that they would have to fire salespeople as a result. “This makes sense to some degree. They put forth a strong argument, but to no avail.”
Dr. Eitan Regev, an economist and research fellow at the Israel Democracy Institute, told The Media Line that Israel is a relatively expensive country due to trade barriers, tariffs, quotas, and customs.
“In this sense, it is practically an island economy, and as such there is not much competition among local industries. Israeli businesses are protected by lobbies, laws, and all kinds of tailor-made standards designed to keep competition out.”
Amazon’s entry into this market, Regev added, will reduce prices massively. “We’ve seen this before with IKEA [the Swedish home accessories store] which opened up the import market for furniture or other products in Israel, and we saw that prices dropped significantly.
“On the other hand, within markets that remained relatively closed to imports, like the food industry, prices rose.”
Regev concluded that Amazon still must contend with Israel’s tax policy on imported goods. “It remains to be seen whether Amazon can reach agreements with the state that will reduce the tax burden on the company.” But, he added, “Amazon has enough leverage and market power to negotiate favorable terms with the government.”