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1. To which market structure belong Amazon? Explain. Amazon can be considered an oligopoly is its price-making powers; this can be seen by its higher levels of technological suppliers/consumers that distribute and purchase products that can be regarded as highly sensitive in nature, making the pricing and demand higher in elasticity. Amazon operates within a monopolistic competition market structure, which is characterized by numerous sellers and buyers, product differentiation, non-price competition, and relatively easy entry and exit. These attributes distinguish Amazon's position in the e- commerce industry. However, Amazon also exhibits characteristics of an oligopoly , which is a market structure dominated by a few key players, with high barriers to entry and exit, and interdependent pricing decisions. Amazon competes with major e-commerce firms such as Walmart and Alibaba, and has formed strategic alliances with other companies such as Whole Foods and Twitch³. Therefore, Amazon's market structure can be seen as a combination of monopolistic competition and oligopoly, depending on the perspective and the segment of the market. According to Perloff and Brande (2020), an oligopoly is a market with only a few firms and with substantial barriers to entry, which prevent other firms from entering. A barrier to entry could be a government licensing law that limits the number of firms or patents that prevent other firms from using low-cost technologies (pg.218). 2. Amazon has relied on shipping using United Parcel Service (UPS), FedEx, and the U.S. Postal Service (USPS). Amazon worries that these delivery services are relatively expensive and have trouble delivering on time, especially during heavy shipping near the December holidays. Consequently, Amazon says that it needs to develop its delivery services. One option Amazon is considering is Shipping with Amazon (SWA), a form of vertical integration. It requires a significant investment initially, with a payoff in the future. This investment cannot pay unless its present value is positive . a. Show formally using an equation involving interest rates to explain your answer. The present value (PV) of a future cash flow is the amount of money that would be needed today to achieve that future cash flow, given a certain interest rate or discount rate. The present value formula is: PV=FV(1+r)n where: - FV is the future value or the expected cash flow - r is the interest rate or the discount rate - n is the number of periods or years The present value formula shows that the higher the interest rate, the lower the present value of the future cash flow, and vice versa. This is because a higher interest rate implies a higher opportunity cost of investing today, or a higher rate of return that could be earned elsewhere. Therefore, a higher interest rate reduces the attractiveness of the future cash flow, and lowers its present value. To apply the present value formula to the case of Amazon, we need to estimate the future cash flow that Amazon expects to generate from its SWA investment, the

interest rate or the discount rate that Amazon uses to evaluate its projects, and the number of periods or years that Amazon plans to operate its SWA service. For simplicity, let us assume that Amazon expects to generate a constant annual cash flow of $10 billion from SWA, starting from the next year, and that it uses a discount rate of 10% to evaluate its projects. Let us also assume that Amazon plans to operate SWA for 10 years. 3. Amazon has relied on shipping using United Parcel Service (UPS), FedEx, and the U.S. Postal Service (USPS). Amazon worries that these delivery services are relatively expensive and have trouble delivering on time, especially during heavy shipping near the December holidays. Consequently, Amazon says that it needs to develop its delivery services. One option Amazon is considering is Shipping with Amazon (SWA), a form of vertical integration. It requires a significant investment initially, with a payoff in the future. This investment cannot pay unless its present value is positive . b. Show formally using an equation involving interest rates to explain your answer. PV = π + π 2 1 1+ i The equation inserted above would be used to calculate the profit maximizing over time. The first year’s profit would be indicated by π 1 , and the second year’s profit π 2 . So, for example the present value at 5% interest rate would be calculated by taking the first-year profit which is equal to (-$10,000) and year two equal to $20,000: Example 1:(Using 5%) PV =−10 0 , 000+ 20 0,000 1+0.05 PV =−1 0 0,000+ 2 0 0,000 1.05 PV =−10,000+19,047.62 PV = $ 90 , 476 .19 PV =−10,000+18 , 181.82 PV = $ 81 , 818 .18

Essentially, the present value calculation allows us to determine the current worth of an investment's expected future cash flows by discounting them back to their value today. Present value is calculated by taking the expected cash flows of an investment and discounting them to the present day. In the context of SWA, this formula helps Amazon assess whether the potential future benefits outweigh the initial costs. For SWA to be a viable option, its present value must be positive; this indicates that the future income adjusted for time and risk surpasses its upfront investment, justifying its execution from a financial standpoint. c. Use an Excel sheet to confirm your answer to question a. In the excel sheet, use 1%, 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9%, and 10% interest rates. (Hint: follows Q&A 7.2, pages 2028-209 in the textbook). Interest Rate % Profit year #1 Profit year #2 PV (Present Value) 0.01 -$100,000.00 $200,000.00 $98,019.80 0.02 -$100,000.00 $200,000.00 $96,078.43 0.03 -$100,000.00 $200,000.00 $94,174.76 0.04 -$100,000.00 $200,000.00 $92,307.69 0.05 -$100,000.00 $200,000.00 $90,476.19 0.06 -$100,000.00 $200,000.00 $88,679.25 0.07 -$100,000.00 $200,000.00 $86,915.89 0.08 -$100,000.00 $200,000.00 $85,185.19 0.09 -$100,000.00 $200,000.00 $83,486.24 0.1 -$100,000.00 $200,000.00 $81,818.18 The table displayed below, is what the present value would be after year 1 & 2, with the increase of interest rates starting at 1% increasing up to 10% interest.

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