Fighting Overseas IP Piracy with Price Discrimination: Will It Work?

by on September 27, 2005

The Wall Street Journal reported today that, in an effort to combat rampant movie and music piracy overseas (especially in China), some media companies are radically cutting prices on their DVDs and CDs to undercut the pirates. Warner Brothers, for example, plans to drop DVD prices to roughly $2 to $4 in China and NBC Universal is apparently planning a similar response for Russia.

I find this business strategy very interesting because I think it has legitimate chance of helping to undercut a significant chunk of the piracy that the studios have to deal with in China and other foreign markets. After all, I would think that many Chinese consumers would be willing to spend a dollar or two more to get the legitimate studio version of a film since its quality is likely better and it probably contains a host of extras not available on the pirated versions. And, hopefully, at least some Chinese consumers will also realize it’s the right thing to do instead of robbing the content companies of any compensation for the wonderful products they produce.

On the other hand, I’m also wondering if this new strategy might backfire on the movie and music studios. In particular, I’m wondering (a) if this will open up global arbitrage opportunities; and (b) if this sort of price discrimination will rub a lot of other consumers back here in the States the wrong way.

Let’s start with the arbitrage issue. If the studios are selling DVDs in the Chinese or Russian market at $2-$4 bucks, what’s to stop someone from buying them in bulk and then reselling them back into the U.S. market below cost? After all, assuming a $15-$20 retail cost of new DVDs in the U.S. market, that still leaves a healthy profit margin for some E-Bay wholesaler out there. Would such arbitrage violate copyright law? I don’t know. But what if the arbitrage was simply consumer-driven in that people just ordered one DVD at a time from some Chinese website? Is the Chinese firm violating copyright law? Is the U.S. consumer?

Of course, as my colleague Patrick Ross reminds me, regional disc encoding would likely “lock-up” the disc for Asian market media players only. And, more importantly, there is a serious language barrier here. Presumably, most DVDs shipped to China or Russian will be dubbed making them less appealing to those who might want to resale them back to the U.S. So it could be the case that very little arbitrage will take place since language continues to act as a sort of informal trade / resale barrier. If true, that means the studios should be able to use such a price discrimination strategy for major foreign markets like China and Russia.

So let’s turn to that price discrimination issue next. What I’m referring to here is the fact that the studios are attempting to extract whatever value they can from the Chinese and Russian markets even if it means they must price their DVDs well below the price they charge consumers in many other markets, especially the U.S. and Europe.

There’s nothing wrong with this sort of “discrimination,” of course. In fact, price discrimination drives capitalist economies. Differential pricing allows sellers to determine who values their products most highly and also allows them to recover costs in a variety of ways. But many consumers don’t understand price discrimination when you first explain it to them. In many cases, they just think it’s unfair to charge consumers different prices for the same good or service even though that practice happens countless times every day throughout our economy. Consider airline seats and gasoline to name just two common examples. Nonetheless, some U.S. consumers might look at the studio’s new strategy and ask: Why are we stuck paying higher prices while the Chinese and Russians get the same movie for just a few bucks?

In this sense, I see some interesting parallels here with the debate over drug re-importation. Regardless of what you think about the legality of re-importing pharmaceuticals back into the U.S. after they have been sold cheaper elsewhere, there is no doubt that this sort of price discrimination makes a lot of people very angry. Of course, many of them don’t understand that there are perfectly sensible reasons for drug companies to price discriminate by regional markets or countries. But that doesn’t stop some consumers from traveling by the busload up to Canada to purchase certain drugs below-cost!

So, will price discrimination in the foreign DVD marketplace create a similar consumer backlash here in the U.S.? Again, I don’t know. I’m just posing these questions because I find them very interesting. But, in conclusion, I do think that the movie studios deserve some credit for taking these steps to combat piracy by lowering prices in overseas markets. After all, many copyright critics repeat the “just change your business model” mantra endlessly in response to questions about what the studios should do in response to overseas piracy. Well, now they’ve gone and done it! Not surprisingly, I don’t hear the copyright critics rushing to give the studios much credit for doing so.

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