> As our shareholders know, we have made a decision to continuously and significantly lower prices for customers year after year as our efficiency and scale make it possible. This is an example of a very important decision that cannot be made in a math-based way. In fact, when we lower prices, we go against the math that we can do, which always says that the smart move is to raise prices. We have significant data related to price elasticity. With fair accuracy, we can predict that a price reduction of a certain percentage will result in an increase in units sold of a certain percentage. With rare exceptions, the volume increase in the short term is never enough to pay for the price decrease. However, our quantitative understanding of elasticity is short-term. We can estimate what a price reduction will do this week and this quarter. But we cannot numerically estimate the effect that consistently lowering prices will have on our business over five years or ten years or more.

> Our judgment is that relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon.com. We’ve made similar judgments around Free Super Saver Shipping and Amazon Prime, both of which are expensive in the short term and—we believe—important and valuable in the long term."

From the 2005 Letter to Shareholders: https://www.sec.gov/Archives/edgar/data/1018724/000119312506...

https://en.wikipedia.org/wiki/Price_elasticity_of_demand

If people buy something in about the same volume when its price fluctuates wildly, the price elasticity is low and vice versa.

The grocery store chain Aldi's entire value proposition is that they cut out every modern convenience that costs money and pass that savings on to consumers. For example, you have to pay 0.25 if you want a cart, but you get it back if you return your cart, thus drastically reducing the need to have extra workers to go get carts and bring them back in from the parking lot. Also, they don't have bags for your groceries, rather they have empty cardboard boxes you can use if you want (similar to Costco or Sam's Club). You'd think that that would turn people off, but actually people are very easily swayed at the prospect of saving a few bucks.