After seeing many cases where Amazon is not the cheapest, I wonder if Costco (and costco.com) could ultimately eat away at Amazon. It has incredible pricing power and an efficient infrastructure, and costco.com itself is growing rapidly. Most importantly, on many items Costco can beat Amazon's price by a significant margin (even comparing Amazon's tax-advantaged price to Costco's after-tax price)
How much of that pricing power would remain if Costco carried as many items as Amazon? Amazon is predicted to eclipse Costco (and Target) in terms of sales this year (http://money.msn.com/top-stocks/post.aspx?post=34532428-58cf...), so given an equal catalog, Amazon would be able to sell more of each item and command a lower price, no?
Amazon's catalog is so much bigger than Costco's along two axes; more kinds of products, and more varieties of a given kind of product. The latter axis can be good for Amazon, since people have different utility functions, brand loyalties, etc. But one thing I like about Costco is that their catalog seems to be curated; whatever brand/model of a given thing they happen to carry, it's usually pretty decent. Amazon, by comparison, carries good and crap versions of pretty much everything, but you can use the customer reviews to separate the wheat from the chaff). By removing the paradox of choice, Costco not only reaps the usual benefit on the buyer's psychology, but is also able to negotiate better wholesale prices on the items they buy due to higher volume. Maybe that's a way for them to compete?
Right, but the whole point of Costco is "currated" content: they get good deals on huge quantities, because they make sure not to carry every type of product. Variety isn't necessarily a good thing, and if Costco implemented free two-day shipping (for an additional fee), as well as an improved UI, they probably could become the biggest online "everyday" retailer (i.e. for things like cereal, toilet paper, etc.). Though I think it might be more likely that Fresh Direct, or a similar company, could get a stronger toehold on that market than Costco or Amazon.
And remember, the tax advantage doesn't hold everywhere (certainly not in California anymore). Amazon has to offer something better other than price, and I think Prime is a large part of that.
FTA, Amazon's core business is "build[ing] a massive online database and offline infrastructure to transport boxes from warehouses to hundreds of millions of doorsteps", and I would argue that Costco's physical presence, existing warehouse efficiency, and brand identity positions them well for a foray into Amazon's business.
As for "offer something better other than price", most people point to customer service, and in my experience Costco's customer service completely blows away Amazon.
