At the time of writing, Amazon.com offered Prime, a bundle that includes free shipping on consumer purchases, discounts on groceries, as well as video, music, games, and books, at a price of US$119 per year. The price of the Harry Potter paperback box set was US$50.33 with free shipping.

1. From the viewpoint of an Amazon Prime subscriber, compare the marginal cost of buying the Harry Potter box set from Amazon vis-à-vis a competing retailer that charges for shipping.
2. Suppose that Amazon Prime subscribers are subject to the sunk-cost fallacy. How would that affect their demand to buy products from Amazon vis-à-vis competing retailers?
3. By default, Amazon has set membership of Prime to automatically renew. This auto renewal takes advantage of a behavioral bias. Explain which one.
4. Considering your answers to (a)–(c) above, explain how the Prime service gives Amazon an advantage over competitors.

Answer rating: 100% (QA)

ANSWER Exlanation 1 If customers who have Amazon Prime are susceptible to the sunkcost fallacy then ... View the full answer