Economies of Density in E-Commerce: A Study of Amazon’s Fulfillment Center Network / Jean-François Houde, Peter Newberry, Katja Seim.

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Houde, Jean-François

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w23361.Publication details: Cambridge, Mass. National Bureau of Economic Research 2017.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We study the importance of economies of scale and density in e-commerce, using the expansion of Amazon's distribution network between 1999 and 2018 as a case study. We highlight the role of two features: densification of the network of distribution facilities and vertical integration into package sortation. The resulting reduction in the cost of shipping orders comes at the expense of additional sales tax liabilities due to nexus tax laws, higher facility operating costs in more expensive areas, and lower scale economies of processing shipments. We combine data on household spending across online and offline retailers with detailed data on Amazon's expansion in order to estimate this trade-off through a static model of demand and a dynamic model of investment. Our results suggest that Amazon's expansion led to significant shipping cost savings, facilitated the realization of aggregate economies of scale, and lowered the external costs of e-commerce. We use the estimated model to quantify the distortionary effects of nexus tax laws on the firm's distribution network and shipping cost, relative to non-discriminatory taxation.

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April 2017.

We study the importance of economies of scale and density in e-commerce, using the expansion of Amazon's distribution network between 1999 and 2018 as a case study. We highlight the role of two features: densification of the network of distribution facilities and vertical integration into package sortation. The resulting reduction in the cost of shipping orders comes at the expense of additional sales tax liabilities due to nexus tax laws, higher facility operating costs in more expensive areas, and lower scale economies of processing shipments. We combine data on household spending across online and offline retailers with detailed data on Amazon's expansion in order to estimate this trade-off through a static model of demand and a dynamic model of investment. Our results suggest that Amazon's expansion led to significant shipping cost savings, facilitated the realization of aggregate economies of scale, and lowered the external costs of e-commerce. We use the estimated model to quantify the distortionary effects of nexus tax laws on the firm's distribution network and shipping cost, relative to non-discriminatory taxation.