Why Online Retailers Will Survive In the Age of Amazon

One counter-intuitive law of economics explains why.

In a previous blog, I predicted SMBs would survive in the “World of Free.” Here’s more good news: they’ll also survive in the World of Amazon. The reason is Ricardo’s Law of Comparative Advantage. It states:

A business can have a comparative advantage in a product, even if it’s less efficient at making it.

Although it’s counter-intuitive, the law has stood the test of time. (It was first proposed in 1807).

To understand how it works, let’s suppose Amazon Basics and Pop both make stuff. Amazon, a Fortune 500 company, is good at making pens and excellent at making staplers. Pop, a regional stationary supplier, is bad at making pens and terrible at making staplers.

At first glance, it seems like Amazon should make all its own stationary and ignore Pop. But hold on. Both businesses have finite time and resources. Moreover, one pen is worth a certain number of staplers.

If one pen equals one stapler, whenever Amazon makes a pen it’s making something it could’ve bought from Pop for the cost of a stapler. Since Amazon produces staplers faster than pens, they’ll reason:

Even though we’re better at making pens and staplers than Pop, it’s more efficient to buy Pop’s pens.

Likewise, Pop (whose terrible with staplers, and only bad at making pens) reasons:

I’d save money and time by focussing on making extra pens and “swapping” them with Amazon for staplers.

This natural and inevitable trend towards specialisation not only allows both businesses to co-exist — it’s a net positive for them. Not to mention the consumers; when businesses specialize efficiency goes up, prices go down.