Economies of Density in E-Commerce: A Study of Amazon’s Fulfillment Center Network
We examine the economies of density associated with the expansion of Amazon’s distribution network from 2006 to 2018. We demonstrate that, in placing a fulfillment center in a new state, Amazon faces a trade-off between the revenue implications of exposing local customers to sales tax on their purchases and the cost savings from reducing the shipping distance to those customers. Using detailed data on online transactions, we estimate a model of demand for retail goods and show that consumers’ online shopping is sensitive to sales taxes. We then use the demand estimates and the spatial distribution of consumers relative to Amazon’s fulfillment centers to predict revenues and shipping distances under the observed fulfillment center roll-out and under counterfactual roll-outs over this time period. Using a moment inequalities approach, we infer the cost savings from being closer to customers that render the observed network roll-out optimal. We find that Amazon saves between $0.17 and $0.47 for every 100 mile reduction in the distance of shipping goods worth $30. In the context of its distribution network expansion, this estimate implies that Amazon has reduced its total shipping cost by over 50% and increased its profit margin by between 5 and 14% since 2006. Separately, we demonstrate that prices on Amazon have fallen by approximately 40% over the same period, suggesting that a significant share of the cost savings have been passed on to consumers.
We thank Josalyn Geiman, Mallick Hossain, Olleskii Khvastunov, Nitin Krishnan, and Xinrong Zhu for research assistance, and the Dean’s Research Fund for financial support. We have benefited from conversations with participants at various conferences and seminars, as well as discussions with John Asker, Alan Collard-Wexler, Paul Grieco, Jin-Hyuk Kim, Brad Larsen, Robin Lee, Francesca Molinari, Charles Murry, Amedeo Piolatto, Imke Reimers, Fanyin Zheng, and others. The views expressed herein are those of the authors and do not necessarily reflect the views of the Federal Communications Commission, the U.S. Government, or the National Bureau of Economic Research.