Parallel importing Economist

Why is The Economist more expensive in New Zealand?

The simple answer is price discrimination. If readers in New Zealand are willing to pay more for subscriptions to The Economist than are readers in Canada, then prices will vary across markets – unless there is a way for consumers in the cheaper market to on-sell to those in the pricier markets, or for those in the expensive markets to pretend to be in the cheaper market.

Fortunately, you can parallel import The Economist simply by providing a Canadian billing address.

Price discrimination does not work when consumers in the higher cost market can easily access the lower cost market. New Zealand’s parallel importation regime helps to break international price discrimination that too often works to the detriment of Kiwi consumers.

I have not seen any study on it. But I would be willing to bet that New Zealand’s parallel importation regime has done more to help Kiwi consumers than has anything that the Commerce Commission has ever done. It is very likely our most effective competition-enhancing institution.

That was me reprising parallel importation and price discrimination in last week's print edition of the National Business Review. Subscribe!

The Economist Index

The Economist likes to compare currencies' purchasing power by checking the price of a Big Mac. As of January 2015, the New Zealand dollar was slightly undervalued: a Big Mac here cost US$4.49 at going exchange rates while it cost $4.79 in the US. So the New Zealand dollar would have to appreciate a bit in order for the real cost of a Big Mac to be the same in the two markets.

On another index, New Zealand's dollar is massively overvalued. The Economist offers Digital-Only subscriptions that are as identical across countries as is the Big Mac. Having finally decided to shell out for a subscription, I was taken aback by the subscription rate on offer: their best deal was $1020 for a 3-year subscription.

After some consideration of what intrafamily bargaining would need to take place to justify a $1000 subscription, I checked what the cost in the US would be.

The best NZ subscription rate works out to USD $4.49 per week, using The Economist's January exchange rates as reported in their Big Mac Index files. The American subscription rate is $2.19 per week: less than half. So the New Zealand dollar would have to halve in order for the NZ subscription rate, in $US, to match the American rate.

On a busy Monday morning, I had only time to check a dozen or so subscription rates. The weekly $US subscription price is below, with all exchange rates coming from The Economist's January Big Mac Index. Note that Argentina, Brazil, Chile, Columbia, Costa Rica, and Egypt quote prices in $USD: $1.94 per week.

At least I do not live in Australia.

And now to investigate whether I can geounblock things and pretend to be US-based or, better yet, Canadian.

Update: I'd made an attempt at a US-based subscription before figuring out that Canada was slightly cheaper. My NZ credit card worked just fine with a US address. So now you know.

Film imports

New Zealand is considering reducing the duration of the ban on the parallel import of DVDs. It should reduce it to zero. Why? The ban could have made sense in a world of physical film distribution; we are rapidly moving away from that world.

Background: films have traditionally taken a while to arrive in New Zealand. Film distributors used international release windows to ration a good in scarce supply: the physical copies of films that, after a first run in the US, made their long slow journey to New Zealand (complete with scratches and other assorted wear and tear). Movies could show up on planes before hitting theatres here. If everybody had been able to import VHS tapes or DVDs of films from the US when they hit the US market, film producers would have had to have printed more copies of films at the outset. This would have increased costs for everybody. One source says it costs the studios $1500 to produce and ship a film reel within the US. Maybe the benefits to consumers from earlier releases would have outweighed the increased ticket prices and the reduced producer surplus, but the movie industry's producer surplus is what lets new films be made too. Also, the US provided a testing ground letting film distributors get a handle on which films were likely to be able to make it on the international stage. If they had to produce enough copies of everything to satisfy a worldwide simultaneous release for all films that had a decent chance of making it internationally, costs could have been pretty substantial.

In general, New Zealand allows parallel imports. If some big brand wants to strike an exclusivity arrangement with some NZ retailer, the government rightly figures it's not the government's job to enforce that arrangement by banning wholesalers or retailers from other countries from shipping the same product to NZ retailers. But NZ has maintained a ban on parallel imports of DVDs until the theatres have had a kick at the can.

Now the marginal cost of another copy of a film is near zero with digital distribution. Theatres are flipping to digital projection. Worldwide simultaneous release is no more expensive to run than a staggered release, though you do forgo the benefits to local cinemas of being able to wait and see what works in the States so they can pick the winners, and you miss the chance to jet the stars around the world for the various premieres. The benefits to consumers of being able to see what's on in the States at the same time as it's there airing are also much higher now than they were two decades ago. If a pile of your Twitter and Facebook friends are all chattering about a movie you can't yet see, that really really sucks. You never say "Boy, am I glad that film didn't come here (or took 4 months to get here) because all my friends in the States saw it and said it stunk!" If you want movies to be pre-vetted that way, you do the same thing Americans do: wait for credible reviewers to see it and do what they tell you to do.

So, the benefits of staggered international windowing are much smaller than they used to be. Parallel importing of DVDs pushes distributors away from their ideal, but also circumvents the obvious alternative strategy of just downloading things, so the losses may be less than the naive model might suggest. If New Zealand abolishes the windowed ban on parallel DVD imports, it will have negligible effects on the film industry as a whole and will encourage that more films open here at the same time as the US. I'm not sure that it's in New Zealand's interest to help facilitate this particular international price discrimination scheme, or at least it would take reasonable evidence to convince me that it is.

An iTune

I've avoided iTunes. But there's a new Nirvana box set release with Butch Vig's original mix of Nevermind. And, StatChat gave me $40 in iTunes vouchers. So, off I went. After being unable to install iTunes for a couple of weeks because of some unfinished Apple install locked into my machine, I finally cleared things up. Then spent way too long setting up an iTunes account and re-logging in every time I turned around. But I first logged in as American. There, I saw the $1.29/song and $45 box set.

So I was surprised when my NZ account gave me a $2.39/song, $72 box set.

$1.29 US per song. Take a $0.75 exchange rate: NZ price then $1.72. Add GST*: $1.98. That's still a $0.41 price gap on an individual song. On a 70 song box set, that's $28.70 if you buy the tunes a-la carte.

What about the box set? $45 US = $60 NZ. Add GST*: $69. That's only $3 less! After you put in anything non-trivial for licencing fee differences or just the hassle of dealing with small market issues, the price is basically identical. [I only want the eleven Devonshire Mix tracks, so the box set doesn't much help me.]

If Bruce Hoult is right, things are worse: GST doesn't apply to iTunes because they count as an imported service rather than a good, and imported services are zero-rated. IRD suggests Hoult is right. The price gap is then $0.67 per song ($46.90 for a 70-song set) or $12 for the box set.

We'd always expect per-song pricing to be a worse deal than per album pricing. But I don't know why we'd expect the gap to be so much bigger here than in the States.

When I'd first seen the price gap per song, I'd figured price discrimination: maybe iTunes hits a richer part of the NZ demographic and so optimal price is higher. But surely it would be the high demanders who'd go for the box set over individual songs. It would be surprising for the bundle to sell for more than the components, but I wouldn't have figured a hefty box-set discount consistent with trying to hit the high demand high income cohort. Maybe those looking to buy a box set are more likely to engage in price search (setting up multiple iTunes accounts, comparison shopping with other online outlets) while those wanting individual tunes don't bother with those fixed costs.

Other candidate explanations:

• Less competition from other streaming sources in NZ than in the US.
• But we then require individual tunes are better substitutes than the box set for other streaming services.
• GST and licensing
• Definitely! But are there relatively more costly licensing arrangements for single songs than for box sets?
• Substitutes in form of physical media are way pricier here
• Sure. But why does that get us the box set for roughly the same price as in the States but not individual tunes?
• iTunes prices negotiated in $NZ, not $US, so currency fluctuations carry it.
• This one's pretty reasonable. If iTunes and the label have a set fixed per song price for everything, they'd just stick with that, but they'd need a separate price for a big compilation box set, and that could be negotiated in $NZ at more current exchange rates.
• High demanders have other options, like multiple iTunes accounts in different countries.
• That makes sense too - fixed costs in price search mean few would bother with the hassle for individual songs but might for a big purchase.
• Maybe the high demand, high income cohort, like me, only wants the Devonshire mix and doesn't need another set of mp3s of stuff they already otherwise have.

Other explanations?

Preventing arbitrage

Pharmaceuticals are cheaper in Canada than in the States. Even in the absence of Medicare this would likely be the case; income-based price discrimination would have cheaper prices in Canada for goods characterized by very very high fixed costs and trivial marginal cost (adjusting for that the price of everything is higher in Canada). But price discrimination can only be maintained if you make it hard to arbitrage. Car trips to Canada are relatively pricey, but internet sales aren't.

How to prevent re-import this way? Beat the crap out of Google:

Department of Justice

Office of Public Affairs

FOR IMMEDIATE RELEASE

Wednesday, August 24, 2011

Google Forfeits $500 Million Generated by Online Ads & Prescription Drug Sales by Canadian Online Pharmacies

Internet Search Engine Accepted Advertisements from Online Canadian Pharmacies that Targeted U.S. Consumers and Illegally Imported Controlled and Non-Controlled Prescription Drugs into the United States

Ouch. The DoJ's argument is disingenuous though:

“The Department of Justice will continue to hold accountable companies who in their bid for profits violate federal law and put at risk the health and safety of American consumers,” said Deputy Attorney General Cole.  “This settlement ensures that Google will reform its improper advertising practices with regard to these pharmacies while paying one of the largest financial forfeiture penalties in history.” 

I call BS. Prosecution protects a price discrimination scheme and consequently works to keep drugs cheaper for Canadians; in the absence of restrictions on arbitrage, drug companies would have to charge Canadians US prices and would forgo profits in doing so.

If Google is to be policeman for international price discrimination regimes, I wonder what Google's policing costs are.....

Economics of Scalping: Trent Reznor edition

Economists have for some time been trying to figure out why concerts are priced below market clearing. Surely the artist does better by having fans allocate scarce supply by willingness to pay rather than by willingness to queue. The scalper profits by the arrangement rather than the artist, venue or promoter: why not reallocate the surplus back up the chain by charging market-clearing prices? Some candidate explanations, and rebuttals:

• Queuing generates news stories the publicity value of which outweighs revenues forgone
  • But why not achieve the same outcome by pricing only half of the venue below clearing and have premium seats sold at market clearing prices? Is it really plausible that there's more press from queuing than from stories about sales of $1000 tickets?


• Queuing sorts fans by fandom rather than by willingness to pay. This has benefits for the artist by increasing the average attendee's willingness to pay for complementary higher margin goods like t-shirts and posters, by ensuring that the mosh pit is filled with the most enthusiastic fans and thereby improving the concert experience for everyone.
  • But this could be achieved still by segmenting the venue; it doesn't explain why concerts without mosh pits (or active floor seating) are priced below clearing. Steve Landsburg likes the t-shirt explanation, but it's unclear to me why this predicts overall queuing rather than queuing for the floor seats and market-clearing prices for the rest.
• Contractual arrangements between artist and venue give the artist stronger incentives to promote sale of ancillary goods than to maximize profits over both ticket sales and t-shirt sales; see discussion of sorting by fandom, above.
  • Then why don't they write better contracts?

Trent Reznor, the genius behind Nine Inch Nails, provides some insight. In short, scalping could be stopped immediately, without price changes, if concert promoters or venues wanted to stop it: simply print names on tickets and check against photo ID at the door. Why don't they do it? Let's turn it over to Trent.

The ticketing marketplace for rock concerts shows a real lack of sophistication, meaning this: the true market value of some tickets for some concerts is much higher than what the act wants to be perceived as charging. For example, there are some people who would be willing to pay $1,000 and up to be in the best seats for various shows, but MOST acts in the rock / pop world don't want to come off as greedy pricks asking that much, even though the market says its value is that high. The acts know this, the venue knows this, the promoters know this, the ticketing company knows this and the scalpers really know this. So...

The venue, the promoter, the ticketing agency and often the artist camp (artist, management and agent) take tickets from the pool of available seats and feed them directly to the re-seller (which from this point on will be referred to by their true name: SCALPER). I am not saying every one of the above entities all do this, nor am I saying they do it for all shows but this is a very common practice that happens more often than not. There is money to be made and they feel they should participate in it. There are a number of scams they employ to pull this off which is beyond the scope of this note.

In short, the ticketing agents have already made a deal with the scalpers to split the surplus without appearing like jerks by having high posted ticket prices. As Eric Cartman would say, it's like having your cake, and eating it too.
What's NIN done about it? Again, over to Reznor:

NIN gets 10% of the available seats for our own pre-sale. We won a tough (and I mean TOUGH) battle to get the best seats. We require you to sign up at our site (for free) to get tickets. We limit the amount you can buy, we print your name on the tickets and we have our own person let you in a separate entrance where we check your ID to match the ticket. We charge you a surcharge that has been less than TicketMaster's or Live Nation's in all cases so far to pay for the costs of doing this - it's not a profit center for us. We have essentially stopped scalping by doing these things - because we want true fans to be able to get great seats and not get ripped off by these parasites.

I assure you nobody in the NIN camp supplies or supports the practice of supplying tickets to these re-sellers because it's not something we morally feel is the right thing to do. We are leaving money on the table here but it's not always about money.
Being completely honest, it IS something I've had to consider. If people are willing to pay a lot of money to sit up front AND ARE GOING TO ANYWAY thanks to the rigged system, why let that money go into the hands of the scalpers? I'm the one busting my ass up there every night. The conclusion really came down to it not feeling like the right thing to do - simple as that.

That story's consistent with the fandom explanations above. I can buy that the artist would want the most enthusiastic fans up at the front rather than the boring folks who can afford to pay $1000 per ticket. Giving an economics lecture is a lot worse if the students up front seem less interested than you think they ought to be, and I'd fully expect that the effect is greater for musicians. Why shouldn't they trade off some monetary income for being able to put on a show that's more fun for them? I certainly put non-trivial weight on how fun a given lecture will be for me to deliver; I wouldn't expect anyone else to do otherwise.

Reznor concludes:

My guess as to what will eventually happen if / when Live Nation and TicketMaster merges is that they'll move to an auction or market-based pricing scheme - which will simply mean it will cost a lot more to get a good seat for a hot show. They will simply BECOME the scalper, eliminating them from the mix.

Nothing's going to change until the ticketing entity gets serious about stopping the problem - which of course they don't see as a problem. The ultimate way to hurt scalpers is to not support them. Leave them holding the merchandise. If this subject interests you, check out the following links. Don't buy from scalpers, and be suspect of artists singing the praises of the Live Nation / TicketMaster merger. What's in it for them?

I'm a bit confused at this point. If the prior argument was that collusion between the ticketing agencies and the scalpers allowed an arrangement maintaining the facade of "fan friendly pricing" while allowing for extraction of rents, why would a merger between the venues and the ticketing agents allow that solution to become explicit with true market-clearing pricing? If the current constraint is wanting to maintain the veneer of low prices, what about the merger removes that constraint?

I'd argue instead that we're just seeing a trend towards market clearing prices because prior arrangements where concerts effectively served as loss-leaders for albums has had to change with file-sharing; now, the CD tracks are the loss-leader for the concerts and ancillary products, and we'd have to expect a move towards clearing via prices.

Reznor provides a nice compendium of links on scalping, including Russ Roberts' discussion over at EconTalk! Reznor listens to Roberts. Worlds colliding....

Update 23 March: I told you recordings are a loss leader for the concert. See Reznor's distribution of free EPs for folks signing up for email updates on his upcoming tour with Jane's Addiction (awesome) and Street Sweeper (never heard of 'em, but almost certainly worth trying on given the recommendation).