A new study argues that the growth of Amazon and other online retailers has
kept inflation and prices low in the U.S. Will Middle Eastern
economies follow suit and allow e-commerce to take off?
By TERRANCE J. MINTNER/THE MEDIA LINEUpdated: SEPTEMBER 12, 2018 07:07Amazon boxes are seen stacked for delivery [File](photo credit: REUTERS)
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” developmentshas been the rise of e-commerce. For the last few years, more Americans thanever are opting to do their buying and selling online.Alberto Cavallo, an economist at the Harvard Business School, recently argued ina much touted academic report that the “Amazon effect” is having a big impact onthe behemoth that is the American economy.Cavallo contends that the rapid growth of e-commerce is keeping inflation atunexpectedly 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 traditionalsellers. And with competition rising—given the rapid growth of the sector as wellas Amazon’s huge market presence—the trend has thus far translated into lowerprices for consumers.“In the past 10 years online competition has raised both the frequency of pricechanges and the degree of uniform pricing across locations,” Cavallo wrote in thereport. “The transparency of the web imposes a constraint on brick-and-mortarretailers’ ability to price discriminate across locations.”Analysts are now wondering if economic conditions are ripe for a similar effect inthe Middle East, where e-commerce has been on the rise.For example, Amazon has been considering opening up distribution centers inIsrael and Saudi Arabia. In the UAE, the company has already launched a websitecalled Souq.com, an English-Arabic language e-commerce platform geared tolocal consumers.To gauge demand in Israel, Amazon is currently offering free shipping on certainitems totaling $70 to buyers in the country. One catch is that products must bepurchased from Amazon Global and not from other sellers using the company’splatform. Another is that if consumers stay below $75, they do not have to payIsrael’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 onlineretailers like Amazon can establish a foothold in the region, consumers might beenticed to buy through them if their prices are more competitive than what thelocal market affords, although they might not be willing to wait lengthy amountsof time for products to arrive by mail.Dr. Alex Coman, a researcher at the Interdisciplinary Center Herzliya’s AdelsonSchool of Entrepreneurship, told The Media Line that in Israel “we have bigplayers basically charging monopoly prices.”He explained that Amazon is currently looking for a location to build its logisticscenter in Israel, which, he contented, will make shipments much cheaper andmore rapid. The “Amazon effect” would be felt in Israel, Coman added. “Itintroduces very welcome competition into the market. Many bad players who areused to very hefty margins will now have to cut them down.“We see that shopping malls are in trouble in the U.S., but in Israel as well. Partof that is because many people, especially younger people, have discovered that itis advantageous to buy online, and so brick and mortar business find it necessaryto reduce prices, otherwise they’ll be in big trouble.”Coman concluded that there has been significant push-back from Israeli retailersagainst Amazon’s plans. “There has been lots of lobbying which has failed.Basically, apparel companies first starting lobbying the government, arguing thatit’s not fair that brick and mortar stores must pay the 17% VAT while importedproducts bought online are not subject to the tax.”They argued that they would have to fire salespeople as a result. “This makessense to some degree. They put forth a strong argument, but to no avail.”Dr. Eitan Regev, an economist and research fellow at the Israel DemocracyInstitute, told The Media Line that Israel is a relatively expensive country due totrade barriers, tariffs, quotas, and customs.“In this sense, it is practically an island economy, and as such there is not muchcompetition for among local industries. Israeli businesses are protected bylobbies, laws, and all kinds of tailor-made standards designed to keepcompetition 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] whichopened up the import market for furniture or other products, and we saw thatprices 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 onimported goods. “It remains to be seen whether Amazon can reach agreementswith the state that will reduce the tax burden on the company.” But, he added,“Amazon has enough leverage and market power to negotiate favorable termswith the government.”