Economies of Density in E-Commerce: A Study of Amazon’s Fulfillment Center Network

ABSTRACT: We estimate the cost savings associated with the expansion of Amazon's fulfillment center network from 2006-2018. We first demonstrate that, in placing a fulfillment center in a new state, Amazon faces a trade-off between the revenue considerations from exposing local customers to sales tax and the cost savings from reducing the shipping distance to those customers. Using detailed data on online transactions, we estimate a model of demand for retail goods and show that consumers' online shopping is sensitive to being charged sales tax. We then use the demand estimates and the spatial distribution of demand relative to Amazon's fulfillment centers to produce predicted revenues and shipping distances under the observed fulfillment center roll-out and under counterfactual roll-outs over this time period. Using a moment inequalities approach, we infer the cost savings associated with being closer to customers that render the observed network roll-out optimal. We find that Amazon saves between $0.58 and $0.91 for every 100 miles of $100 of goods shipped. Further, we calculate the cost saving associated with the expansion of the network over the last decade and find that Amazon has reduced its total shipping cost by nearly 51% and increased its profit margin by between 5 and 9%.

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