Nikhilesh Rao

Amazon and Wal-Mart hardly seem reckless, though. So why did they go to war? The answer is that they didn’t, really. Sure, Wal-Mart is making a statement that it’s a player in the online world, but the real goal of this conflict isn’t to lure readers away from Amazon, and it isn’t to get people to buy one of those ten books. It’s to lure them online, away from big booksellers and other retailers, and then sell them other stuff. Usually, price wars wreak havoc because they erode the pricing power of an entire business. But, because this price war involves just ten items, its impact on revenue will be small, and outweighed by the positive effects of all the publicity. (It has garnered publicity because it involves books. A big banana price war has been raging in Britain, but you probably haven’t heard about it.) It’s textbook loss-leader economics.

Outraged book publishers and booksellers are making exaggerated claims about how the discounts will devalue books and wreck the industry. But they’re right about one thing. The real competition in this price war is not between Wal-Mart and Amazon but between those behemoths and everyone else—and the damage everyone else is incurring is deliberate, not collateral. Wal-Mart and Amazon have figured out how to fight a price war and win: make sure someone else takes the blows.