Amazon is considering a price subsidization strategy, which will subsidize each Amazon Web Services (AWS) customer $50 per month. The purpose is to generate spillovers to Amazons Marketplace.

For AWS, assume:

There are altogether 200,000 AWS customers;

On average, a customer contributes $5,000 as the monthly service fee in each month for Amazons profit;

When the monthly service fee charged by AWS changes, the number of customers will also change correspondingly. Amazon estimated that the elasticity of the number of customers with respect to the fee change is -0.9;

Among AWS customers, 40% are sellers on Amazons Marketplace.

For Amazons Marketplace, assume:

There are altogether 100,000 sellers;

On average, a seller contributes $3,000 each month as the referral fee for Amazons profit;

Among Marketplace sellers, 80% are AWS customers.

(a) Is the subsidization plan profitable for Amazons total business? You have to show every step of your calculation in order to obtain maximum points.

(b) Name two other possible benefits that have been ignored in this calculation. Explain