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Don’t Block Geoblocking

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One reason information technologies have delivered huge benefits to the world—and promise even greater gains in the future—is that they lower the cost of producing high-value, information-driven products and services, from movies and games to software tools. Yet, because these information products are fundamentally different from physical goods or services, their pricing models have often led to confusion. An example of this is the current debate in Australia about geoblocking, the practice of varying the availability or price of a digital good or service, market by market, depending upon the location of the purchaser.

A recent draft report by the Australian Government’s Productivity Commission renewed longstanding complaints against geoblocking. Citing a previous report by the Australian House of Representatives, plus pricing data from 2012, the report found that Australians paid an average of 50 percent more for digital goods than did Americans. In response to this perceived unfairness, the commission urged copyright holders to provide more timely and less costly access to digital works. It also encouraged the government to affirm that consumers may use software that circumvents geoblocking technology without violating Australian copyright laws.

Such a policy could reduce the availability of products and services that people want or need while actually raising consumer prices. A 2014 report by the Information Technology and Innovation Foundation shows why this is so and why the existing rules may produce the greatest consumer choice at the lowest prices over the long term.

The price of information-driven goods can differ internationally for many reasons. For instance, the House of Representatives report noted that Australian prices usually include sales tax while U.S. prices do not. Fluctuations in exchange rates can also result in a divergence between posted prices. Finally, many electronic products require advertising and consumer service, which has to be spread out over a smaller market, thereby losing some economies of scale.

Information-driven goods are different from physical goods in other respects, too. Normally, competition drives the price of a good down near its marginal cost. At this price, the cost of producing one more unit is equal to its value to the person who buys it. But because music, movies, and software programs normally entail high up-front costs but very low marginal cost, producers have to charge a higher price in order to recoup costs and make a profit.

Copyright law allows this to happen by giving producers the right to prevent people from using copyrighted materials without the permission of the rights holder. But if a copyright holder has to charge everyone everywhere the same price, it will restrict production and raise prices, because the marginal value of new sales at a universal price for the widest-possible market would be more than offset by the lost opportunity to set higher prices for customers who are willing to pay more.

By contrast, rules that allow copyright holders to charge different prices to different consumers benefit society by encouraging greater distribution at a lower average price overall. A movie studio might charge a higher price in a developed country while charging a lower price in developing countries. Because rich markets are normally less sensitive to price, this practice normally favors poorer consumers. But it can only exist if price discrimination and geoblocking is protected. If consumers are allowed to arbitrage the market, the producer will create less and charge higher prices.

Copyright holders remain constrained by market forces, however. First, they cannot compel any consumer to pay more than the product is worth to him or her. As a result, we can be sure that Australian consumers benefit from every purchase they make. Second, beyond a certain point, raising prices lowers total revenue. Third, it is hard to think of a more competitive or dynamic industry than that for many information goods. Consumers have literally hundreds of thousands of movies, songs, games, and software applications to choose from. Just consider how much is now available to stream legally for free.

There is another reason to be wary of attempts to interfere with copyright owners’ ability to set prices and availability. As the Australian Treasury and the Attorney General’s Department pointed out to the House of Representatives, attempts to ban geoblocking can force offshore sellers to withdraw from the Australian market or eliminate local distributors. The Australian Internet market is rapidly developing and policymakers should let this process play out before interfering.

Public policy requires balancing social risks. The tremendous potential of information technology is likely to revolutionize markets, reduce prices, and increase quality, productivity, and living standards. Instead of concentrating on the risk that Australian consumers might temporarily be paying higher prices than those in the world’s most dynamic market, the government should worry about maximizing the supply of new information products of all types.

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About the author

Joe Kennedy is a senior fellow at ITIF. For almost 30 years he has worked as an attorney and economist on a wide variety of public policy issues. His previous positions include chief economist with the U.S. Department of Commerce and general counsel for the U.S. Senate Permanent Subcommittee on Investigations. He is president of Kennedy Research, LLC, and the author of Ending Poverty: Changing Behavior, Guaranteeing Income, and Transforming Government (Rowman & Littlefield, 2008). Kennedy has a law degree and a master’s degree in agricultural and applied economics from the University of Minnesota and a Ph.D. in economics from George Washington University.
  • Glenn Langford

    This makes sense from a purely economic perspective, but it would seem to me that having a consistent price-point across markets with similar standards of living would create a more positive perception of fair treatment in markets with relatively smaller populations (e.g. Australia). Of course, consistent approaches to sales tax etc. across these different economies might also help to alleviate this negative perception of being punished for living in a less populous country. I agree that developing countries need to be treated differently to the 1st world and that rich nations can afford to compensate for poor nations, but it seems inevitable that there will be a single (1st world) market for these products in the not too distant future. Making it happen sooner could have a positive impact on revenues.