An new Parliamentary investigation into price differentials for digital products has been announced. Australians, like every other country other than the US, pay more for all manner of digital products — music, movies, ebooks, games and software. The question is why?

Here are some explanations that don’t hold water:

  • Small market size: there are no economies of scale in distributing pure digital goods beyond the first copy so there is no reason why a small market size would matter. Another unit sold is another unit sold and the costs to the distributor are essentially the same.
  • Higher incomes in the US: it is common to separate out regions and charge a higher price in the higher income reason not the other way around. The US is the richest economy in the world yet US sellers of digital products act as if it is the smallest.
  • Taxes: now it is common for people to forget that US prices are often ex tax whereas Australian prices include tax. In the US, the sales taxes differs by state. However, even removing the GST from the equation, the ex tax prices are higher in Australia. The one exception I could find was Apple products. Buy Pages (for Mac) and the ex tax price in the US is USD19.99 whereas the ex tax price in Australia is $19.08. At today’s exchange rate the US product is 3.3% more expensive. But for all other software that isn’t the case. So that suggests that when Apple has control, it’s pricing makes more sense.
  • Poor broadband in Australia: things like download limits constrain incentives to buy digital products. But if that is the case, prices should again be lower in Australia rather than higher.

Here is the thing. What this suggests is that US content providers are losing money by pricing lower in the US. What gives?

I don’t know the answer but here are several candidate explanations. First, suppose that digital piracy is higher in Australia. Then it is possible that this is undertaken most by those who have lower willingnesses to pay for digital goods. The remainder will have higher willingnesses to pay and will be also less price sensitive. Hence, it is profit maximising to charge them higher prices. Of course, this same behaviour could be reinforcing piracy incentives. The end result is that US content providers may have themselves driven a high piracy/high price equilibrium that is difficult to get out of.

Second, suppose that because it is the biggest market and must have a single price, US content providers are concerned about controlling that US price. That means that should another market get a lower price, they worry about arbitrage the other way. That concern drives them to set a lower price in the US and higher price elsewhere to maintain that control and not let an exchange rate fluctuation cause an arbitrage opportunity outside the US. Now this story isn’t quite complete because it must depend on some special characteristics of the US market that simply don’t exist elsewhere. I’m not sure what they are and I’m not sure why Apple itself doesn’t care about it. But that might be a place to look.

Third, with respect to digital products that have current alternative physical distribution or are delivered by broadcasters, it may be that those domestic retailers and broadcasters have insisted on terms that raise the price of pure digital products. This is because of the high cost and/or market power of such domestic entities. An inquiry could surely ask to see the contracts to see if such terms exist or not.

All of these explanations spell bad news for Australian consumers. But here is the point, if we believe in free trade we need to allow our copyright laws to embrace it rather than exclude it as they do now. What if, every copyright holder selling goods in Australia was obliged to allow Australian consumers to purchase at the US price if such a product exists there too? Then Australians would have a choice without having to falsify their location. And whatever the explanation, Australians would be on an equal footing with their US counterparts.

9 Responses to Why are digital products cheaper in the US?

  1. Kyle says:

    Nice post! 

    Ive been curious about this so looking forward to seeing the results from the inquiry. Another example of a product which has both physical and digital distribution channels is the Book. Its typically cheaper to buy books and pay for shipping from Amazon than purchase in Australia –sometimes half the price! 

    So theres a domestic price issue here but the digital versions of the book say for kindle or your iPad, etc. are the same price in AU and US, sometimes half the US print edition price even. Clearly there is an incentive to buy digital, when available. Inquiry could also examine this. Why is Amazon different from Apple? 

  2. David Stern says:

    There are likely fixed costs to setting up website operations, tax compliance etc. for each country which then have to be spread over a smaller number of sales. Also there could be a premium for exchange rate risk.

  3. John Street says:

    Suppose that USA producers know (or believe) that the rest of the world market has a lower price elasticity of demand for their products than the USA market.  Then it makes sense for them to price discriminate.

    By the way, it is happening for other products as well.  I am a keen bushwalker and consumer of US products such as MSR stoves and Thermarest Sleeping Pads.  Try buying them direct from a USA supplier such as REI and you will find that you cannot get them to supply.  And that the price will be significantly higher in Australia.   

    Hmmm, some free trade agreement.  NOT.  

  4. derrida derider says:

    John, try BuyUSA.  They take a modest cut, but you still come out ahead.

    Maybe they think the Australian demand curve has a lower slope because we don’t know enough to shop around.  People of all countries think foreigners are stupid – this wouldn’t be the first time that an ingrained belief in American superiority over all things foreign has cost them business (eg they’re still not on the metric system).

    But it is also lack of competitive urgency in Australia’s distribution networks.  The Kindle is a clear case here.  Amazon used to sell it online only, at the same price everywhere in the world.  Then they decided they could sell more if they distributed it through Australian retailers as well.  With the margins these retailers insisted on this meant raising the retail price by about 50%. So as not to undercut their new-found friends they then raised the online price to Australians. I bought my Kindle before they did this – I would not buy it now.

    Actually I should have known to buy an ereader that supports open standards to limit the possiblity of such ripoffs. But I’ve learned my lesson – I now have an Android phone.  Marginal superiority in design (ie iPhone, Kindle) is not enough compensation for putting yourself at the mercy of monopolists.

  5. Jacques Chester says:

    Market segmentation. The world is artificially divided into regions and then each region is squeezed as hard as possible. Australians have historically paid higher prices due to shipping; but even with the input cost removed the prices remain the same because we have no legal alternative.

  6. The problem of price discrimination in Australia for global ‘commodity’ goods is much broader than digital products (I think we mean electronics and computing generally).  As other commenters have noted, clothes, bike parts, tools, toys, etc all are cheaper online from abroad. You can find Australian wine for 2euro a bottle on the supermarket shelves in Paris. Heck, you can find plenty of Australian made products cheaper online from the UK than online from Australia. I’d like to hear some other views on this. My only reasonable explanation is that being a small market means that import competition is slow to establish.  There are fewer people willing to try untested business models because the upside is much smaller here. Hence, it takes us years longer to not only get new products, but to get get them at the global price.   

  7. Tony Healy says:

    I think the simple answer is that the US market is the main market and thus is managed using tight marketing discipline, to maximise returns from the product and brand. So prices are managed more closely in that market.

    Australia is a trivial add-on where the dynamics are more heavily influenced by the interests of small re-sellers and local executives seeking to maximise their revenue figures, without overall concern for product or brand stragegy.

    The answer, I think, lies in having US marketing managers take more responsibility for their global presence.

  8. Bob says:

    Microsoft Office (download only, no cds or manual) costs much more for Australian customers than it does for US.
    My guess is that the US is a global technology hegemon, meaning that if you successfully establish market dominance in the US, the rest of the world will follow suit. This makes discounting to US customers the dominant strategy, particularly with zero or near-zero marginal cost.
    However, this makes less sense the less ‘digital’ the product is, so it doesnt really explain things like books from Amazon.

  9. RowanS says:

    I think your point about relative incomes is misleading. GDP per capita or average income may be higher in the US, but median incomes are much lower in the US than here. From memory, median household income in the US is about 45,000 USD and it’s about 67,000 AUD here. At current exchange rates, that’s a huge difference. At the kind of exchange rates we saw before the current mining boom the median incomes were much more in line, although it’s hard to generalise as the AUD is so volatile.  

    It seems that AUD prices have not reset in line with the exchange rate change over the last 10 years (i.e. PPP AUD/USD exchange rates have drifted up from 1.3 to 1.5, but the actual exchange rate has plunged from 1.8 to parity.

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