Game Theory in Indian e-commerce. Really?

 

Indian ecommerce

Credit: Livemint

What will the endgame look like? This question is probably keeping Flipkart, Snapdeal, and Amazon awake.

We have seen globally that e-commerce is a winner-takes-all market. Since there is little differentiation or customer loyalty, only one thing matters—discounts. For the most part at least. Which in turn boils down to “who has more money to give away”. That simple. The one who lasts longest wins. Everybody else loses, and likely does a fire sale.

In the past, Flipkart and Snapdeal were able to raise huge sums of money, presumably promising investors that Nirvana (aka breakeven) was just around the corner. However, despite the huge capital raises, we all knew that access to funds was not unlimited. Investors, howsoever optimistic, would’ve to be convinced that they will get an attractive return. There was no “I will back you till you win” scenario, and we were waiting to see who lasts longest.

All that changed with Amazon’s entry. It is not just that Amazon has access to large amounts of capital, which it certainly does. What changed is that the parent (Amazon.com Inc.) is willing to back its Indian entity till it wins. And that is the key point—“till it wins”. Not if it makes sense, but till it wins.

That changed the game totally. First, the new investors in Amazon’s competitors will find it much harder to convince themselves that they will be able to outlast Amazon. In other words, if you know you are going to lose, why even try?

That explains why Amazon.com Inc. keeps announcing that they are backing the Indian arm with billions of dollars. And that they will continue to do so. There is no other reason why Amazon would publicly announce its investment decisions. After all, US companies are known to be tight-lipped about their investment plans. So when Amazon said that it was investing $5 billion (in two recent announcements) in the Indian arm, it was not an innocuous thing. It was a message to investors in Amazon India rivals: stay away from investing or be doomed.

So is the goose for Flipkart and Snapdeal cooked? Well, things are rarely that simple in business. So here is an alternative end game: what if they manage to get an equally deep-pocketed investor who will invest till they win?

That is what makes the deal news of a potential investment by Wal-Mart Stores Inc. in Flipkart so interesting. It is not just about the investment. It is about the signal you are sending: Flipkart will also fight till it wins.

Right now, this is speculation since we don’t know the status of a Walmart-Flipkart deal, and what the contours are. Is Flipkart going to be Walmart’s horse in the race against Amazon? We don’t know the answers, but we are pretty sure these are the thoughts in the minds of Flipkart founders Sachin Bansal and Binny Bansal.

This is what game theory is about: how you make moves in competitive situations where the outcome depends critically on your competitor’s moves. Here, signalling is just as critical as the actual action.

Walmart is quite familiar with these ideas. Here is an interesting example of how it uses these ideas. Walmart positions itself as a ‘low- cost’ player and would not like another player to sell cheaper. But it also wants to make profit. So, how can Walmart prevent competitors from pushing the prices down too far?

Any attempt to do that would appear unsavoury and be possibly illegal. It does that with its benign-looking “Price Matching Policy”, which states that Walmart.com will match the price of any online retailer. That removes any incentive for a competitor to try to be cheaper than Walmart. Ironically, this “low- cost promise” effectively prevents prices from sliding too much.

Will a savvy player like Walmart give unconditional backing to Flipkart? It’s hard to say. What happens in a scenario where it matches Amazon’s assertion that it is here to win? There is no clear endgame, as many scenarios are possible. At some point, if Amazon believes that the price of a scorched earth battle is too high, it might sue for peace and move to merge with Flipkart. If that happens, both parties will win.

But not everyone will be happy. What if the acquisition price causes losses to the more recent investors? How much say will they have? Will they prefer it to be a long-drawn battle.

It will be interesting to see how the e-commerce battle shapes up. In the interim, as consumers, you would be well-advised to make the best of the big sales being run by online retailers. The sale will last only till the money lasts. Or, as retailers like to say, “only till stocks last”.

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