The Economics of Online Geographic Price Discrimination

Transcription

1 The Economics of Online Geographic Price Discrimination ICN Conference 2015 Sydney, Australia Friday, 1

2 Outline 1. A bit about price discrimination 2. A bit about what is happening in Europe 3. What does all this mean for countries like Australia and Switzerland? 4. Conclusions 2

3 1. A bit about price discrimination 3

4 Background on Price Discrimination Economic definition of price discrimination: price differences that do not reflect differences in costs Where prices differ solely due to different costs => it s not price discrimination! Price discrimination is usually a result of firms attempting to price according to different willingness to pay of different consumers or groups of consumers Geographic price discrimination is a form of third degree price discrimination meaning discrimination on the basis of identifiable customer types Nothing particularly special about online versus offline geographic price discrimination we are in a new digital world, but the story is the same For third degree price discrimination to be effective firms must be able to prevent arbitrage (resale by low value consumers to high value consumers) and other ways for consumers to circumvent discrimination In the online context, this often means geo-blocking (i.e. preventing consumers in one country from accessing or buying from sites in other countries) 4

5 Price Discrimination is not Per Se Anti- Competitive or Harmful to Consumer Welfare PD is normal business conduct in many industries (e.g. movie theatres; transportation) Firms have a natural desire to maximize profits by pricing to reflect differences in the willingness to pay of different consumers there is nothing objectionable about this The presumption that only cost differences can justify price differences is wrong pricing decisions depend on demand factors as well as supply factors Effects on consumer welfare (compared to uniform pricing) are ambiguous Some consumers may pay less and others may pay more, and new groups of consumers may be served => overall effects on consumers are unclear a priori Case by case assessments are required (although net effects may be difficult to assess) Indeed, price discrimination can significantly enhance consumer welfare It may allow firms to supply additional customer groups: e.g. if pharma companies can price discriminate and prevent parallel trade, they have incentives to supply their drugs at low prices in low income countries if not, those countries may not be supplied at all In some cases, without the ability to price discriminate firms may not produce at all (if fixed costs cannot be recovered effectively) or there may be less variety produced 5

6 2. A bit about Europe 6

7 The EU and the Digital Single Market The European Commission (EC) is on a drive to extend the EU single market principle to online commerce DG Comp s ecommerce sector inquiry was announced in March The EC s Digital Single Market Strategy was leaked last week This coincides with a general trend for competition policy in Europe to be concerned with forms of discrimination instead of instances of foreclosure A key focus of both the sector inquiry and the leaked strategy is online geographic price discrimination and geo-blocking These are perceived as unfair and for that reason per se objectionable The basis for the concern is the EU s vision of a single market (which has long been central to European politics through the European Union treaty) No acknowledgment anywhere in the documents that price discrimination has ambiguous effects on overall consumer welfare, nor of the potential implications for innovation and investment (including in audiovisual and other content production) 7

8 The Single Market and Competition Policy The single market rationale is not restricted to the online world Intervention to prevent geo-blocking follows similar offline interventions to facilitate parallel trade in pharmaceuticals and passive sales in the audio-visual sector (e.g. the Murphy case) But it is unique to the EU It reflects a desire for Europeans to experience commerce amongst themselves in the same way as residents of member states in other countries (e.g. the US) It does not imply that the EU would object to efforts to maintain price differences between EU markets and non-eu markets The single market rationale is not competition policy as we normally understand it It will sometimes conflict with competition policy s overarching goal of promoting consumer welfare It may also hamper investment and innovation by European firms, which are more constrained than non-european firms in how they may price to recover their costs 8

9 3. What does all this mean for countries like Australia and Switzerland? 9

10 Should non-eu countries prevent geo-blocking? No single market rationale exists for non-eu countries There is no rationale based on exclusionary abuse of market power either Geo-blocking to sustain inter-country price differentials is not exclusionary (if anything, it may facilitate entry in both low and high priced countries) There may be a parochial rationale based purely on (local) consumer welfare, but This seems to be more central planning/price regulation than competition policy From a global perspective, overall consumer effects are ambiguous and consumers in the poorest countries may be harmed most (if the producer responds by ceasing to supply there) There is a risk for production if producers cannot cover their fixed costs, they will not produce/invest/innovate if products are not produced all consumers will be worse off 10

11 What about Australia and Switzerland? Preventing geo-blocking may well be in the narrow interests of a small wealthy country that has few firms that would themselves benefit from geographic price discrimination Local consumers will be able to access lower prices The risk of impacting production may be small if the country represents only a small proportion of the producer s global revenue But would it be the right thing to do? The basis for intervention is unclear Unclear why efforts are being made to undermine a system of price discrimination so that Australians can buy music more cheaply, but there is no call for undermining other systems of price discrimination (e.g. for adults to be allowed to enter movie theatres using child tickets!) Impacts on local producers should not be ignored too quickly particularly if the country is keen to preserve its creative content industry as part of its national identity Would it tend to undermine a government s moral authority for example when it tries to condemn tax avoidance schemes? Progressive tax systems and geographic price discrimination are equivalent in that they both attempt to extract more from those that have a greater ability to pay is it hypocritical to expect citizens to respect a progressive tax system, but at the same time encourage or assist them to bypass geo-blocking? To be really provocative is this a form of state-sponsored piracy? 11

12 Are we all pirates now? House of Representatives Standing Committee on Infrastructure and Communications 2013: Recommendation 5: The Australian Government amend the Copyright Act s section 10(1) anti-circumvention provisions to clarify and secure consumers rights to circumvent technological protection measures that control geographic market segmentation. Recommendation 6: The Australian Government investigate options to educate Australian consumers and businesses as to: the extent to which they may circumvent geoblocking mechanisms in order to access cheaper legitimate goods; the tools and techniques which they may use to do so; and the way in which their rights under the Australian Consumer Law may be affected should they choose to do so. Recommendation 7: The Australian Government, in conjunction with relevant agencies, consider the creation of a right of resale in relation to digitally distributed content, and clarification of fair use rights for consumers, businesses, and educational institutions, including restrictions on vendors ability to lock digital content into a particular ecosystem. Recommendation 9: The Australian Government consider enacting a ban on geoblocking as an option of last resort, should persistent market failure exist in spite of the changes to the Competition and Consumer Act and the Copyright Act recommended in this report. Recommendation 10: The Australian Government investigate the feasibility of amending the Competition and Consumer Act so that contracts or terms of service which seek to enforce geoblocking are considered void. The Harper Review has endorsed the above recommendations and: supports moves to address international price discrimination through market solutions that empower consumers. These include removing restrictions on parallel imports and ensuring that consumers are able to take legal steps to circumvent attempts to block their access to cheaper legitimate goods. 12

13 4. Conclusions 13

14 Conclusions Online geographic price discrimination and geo-blocking are just online variants of third degree (geographic) price discrimination nothing new Price discrimination (including online geographic price discrimination and geoblocking) is not per se anti-competitive or harmful to consumer welfare (and may well deliver significant benefits to consumers that would not otherwise be served) The EU consistently outlaws attempts by firms to prevent the circumvention of geographic price discrimination systems and is now seeking to outlaw geo-blocking The EU is guided by the single market principle and has little regard for aggregate effects on consumer welfare or impacts on investment and innovation incentives Non-EU countries that seek to outlaw geo-blocking will tend to be pursuing their own parochial interests without regard to global impacts, and may inadvertently jeopardise investment and innovation and the production of goods that they value (but wish to purchase cheaply) 14

15 London Tel +44 (0) Bishopsgate London EC2M 3XD United Kingdom Brussels Tel +32 (0) Avenue Louise B-1050 Brussels Belgium Paris Tel +33 (0) Avenue de l Opéra Paris France Sydney Tel +61 (0) Level 23, Tower Oxford Street Bondi Junction NSW 2022 Australia [email protected] 15