Alibaba Vs Amazon

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Alibaba earns most of its revenue by advertising fees from the sellers and the fees from transactions (cctv, 2014). In 2012 Alibaba achieved a revenue of $4.1 billion. In 2013 Apple 3rd largest retailer with $18.3 billion, amazon (2nd ) with $67.9 billion and Alibaba as number one with market share of 80% in Chinese e-commerce market(Valdez, 2014).Asnabove, in this e-commerce market there are only few key players. The barriers to enter is quite high because firms like amazon and Alibaba spend alot on advertising to increase the awareness of their brand name. For instance, in 2013 Amazon cost on advertising was $157.7m (Sikka, 2014). At the same time there are geographical barriers. Such as, Amazon entered to China but they are having difficulty to capture Chinese customers. For instance, Amazon.cn has the market share of 2.7% (B2C) in China (Swanson, 2015). It is mainly because the e-commerce giant Alibaba has more knowledge about the Chinese market such as, people preference (Forbes, 2014). It is clear that Amazon and Alibaba operates in an Oligopoly market.

One strategy that Alibaba has used is to keep the cost low is by not owning a warehouse. Therefore, when compare with Amazon, Alibaba earns a large profit (Forbes, 2014). For instance, Alibaba gets 50cent of profit from every $1 they earn. Therefore, Alibaba could avoid costs such as labour cost. Alibaba spent around $3.5m in 2013 on acquisitions (cctv, 2014). Alibaba use acquisition as a mode to expand its market power. In 2008 Taobao.com merged with Alimama.com (key player in Chinese advertising). Splinder the Alibaba’s spokesperson mentioned that Taobao users will use Alimama to advertise their products. Furthermore, Taobao has 80 million customers hence, this will positively impact on the Alimama (So, 2008). This will bring more revenue to the company and will help increase their profit and the market power. In 2010, the Alibaba announced that they will purchase Auctiva, the solution provider for the eBay. “The acquisition of Auctiva, as well as Alibaba.com's purchase of Vendio in June, combined with Alibaba.com's strength in sourcing, will create a significant source of tools and resources for U.S. small businesses looking to leverage e-commerce” (Steiner, 2010). So, this will benefit the Alibaba.com to gain around 250,000 more customers. Also, this will help the Alibaba to expand their market power in the US (Steiner, 2010).

Amazon is more towards Low Cost of Production (LCP). Sometimes in the short run this will tend to reduce the revenue but on the other hand it will help the Amazon to increase its market share through attracting more customers. For instance, the cost of Kindle fire was about $202 But the Amazon sold it for $199 by enduring $3 of loss from each product. Amazon came up with this strategy with the intention attracting more customers to their tablet market then which will increase the market share they have in the tablet market (Cohan, 2013).

William and Blair and company states that Amazon sell its products 13% less than its competitors and Amazon currently controls 20% of the Market share of online sales in US with around 160 million of customers (Mangalindan, 2012). With the expectation of growing further once Amazon made an interesting offer to its “free price check mobile app” users (Mangalindan, 2012). Amazon provided 5% off for the product that app users compare in order to make their decision to buy and due to this offer the usage of this app increased by three times (Mangalindan, 2012). This helped the Amazon to increase its sales and Amazon might have covered that cost through the high volume of sales. Hence, this will helps the Amazon to increase their market power in the US market (Mangalindan, 2012).

Advertising expenditure ($ billions) sales ($ billions)

2012 2.00 61.09[pic 7][pic 8]

[pic 9][pic 10]

2013 2.40 69.7

Figure 1.7

There is a correlation between the advertising, market structure and the profit. (tung, lin & wang, 2010). The figure 1.7 in 2012 Amazon shows the spending on advertising has increased by 20% than 2012 (Dayton Business Journal, 2013) and (Emarketer, 2014). As a result of increasing the advertising the sales has increased by 14.1% (Brohan, 2013) and (Richter, 2014).This will increase the market power of Amazon and this will make a barrier for other firms to enter. In other words this will impact on the structure of Amazon. Amazon is a fan of selling goods and services for the lowest price. For example, 57% shop retailers use Amazon’s price as the standard price to sell their goods at the lowest price. As a result of low prices Amazon’s income is way bigger the Alibaba’s but when Alibaba is earning a profit margin of 54%, Amazon’s profit margin is just only 50% (Shpanya, 2014). In this, their pricing policy doesn’t work with earning a high profit in the short run.

Alibaba’s market value is $231 billion, which is larger than the combination of eBay and Amazon. As the biggest e-commerce retailer in China Alibaba use the pricing strategy of providing goods and services at lowest price but the profit is comparatively higher than Amazon. This is the competitive advantage of business based it China (low cost manufacturing). Also, another reason for the difference of profit is that Alibaba doesn’t provide free shipping like Amazon. Alibaba adds the shipping charges for the purchaser. As it’s mentioned before even with a high revenue Amazon is less profitable that Alibaba (Shpanya, 2014). In this case the pricing policy influence on the profitably of the company.

In an economy the government intervene on business to make sure that the businesses follow the country’s law if not they will strict the rules and regulations to prevent business from breaking rules.

China’s government has decided to make strict rules towards the quality of the goods and the services that provide by the online retailer firms. This happened after the survey results from State Administration for Industry and Commerce (SAIC) proved that top online retailers are selling fake products to people. The results from the report showed that 63% of goods selling on Taobao (the biggest C2C online retailer in China) is fake (Millward, 2015). For example,Gucci claimed that Alibaba is selling fake Gucci products (Bourke, 2015). This has impacted on the trust that purchasers have on Alibaba. This will damage the company’s reputation. Due to high rules and regulations by Chinese government in 2014, Alibaba announced that they will stop dealing with Bitcoin. Bitcoin is a digital money system which is use to