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.