Why Geoblocking Can Increase Consumer Welfare and Improve Income Equality

Joe Kennedy May 5, 2014
May 5, 2014
Differential geographic pricing of digital goods can increase social welfare and innovation.

As the world economy becomes more integrated, it is increasingly common for the same product to be offered in many different national markets, often with very little or no local modification. Despite the sameness of the product, however, its price can vary, sometimes significantly, depending upon the country in which it is purchased, a process known as geoblocking.

For the most part, customers understand and accept these variations. But their understanding may be challenged when the goods are purchased on-line. In that case customers often believe that they should be quoted the same price absent charges for shipping and tax wherever in the world they order from, since the product is presumably being shipped from the same location and the seller cannot tell where the customer is located. Their acceptance may become even more strained when purchasing digital goods because in this case the production cost is basically the same no matter where the good is made and, if the product is downloaded, “shipping” costs are close to zero.

As it turns out, neither of the above assumptions is true. Companies can tell, with a fair level of precision, exactly where a customer is located when he or she purchases a product online. In addition, there a number of legitimate reasons why a company might logically vary its prices by region, even for digital goods.

Still, geoblocking for digital goods has sometimes generated opposition as customers (and policymakers) in high priced locations complain that they are paying too much. Why shouldn’t the same digital products be available at the same price to all locations in the world? Are these complaints legitimate? Why do companies need to track the location of their customers? Are there valid reasons why companies may tailor their sales strategies geographically? Does the practice raise anticompetitive concerns? Should governments attempt to fashion a remedy? This report answers these questions by explaining some of the valid reasons why companies look at customer location on the Internet, why varying price by geographic location often makes sense, and why doing so can help consumers and spur more innovation.

There are many valid reasons for collecting location data. For instance, many countries place limits on the products and services, such as cigarettes or Internet gambling, sold within their borders. Countries may also impose different requirements on the procedures and warnings that companies have to comply with in order to make sure purchasers are of legal age or otherwise authorized to transact business. Second, taxes usually vary widely by jurisdiction. When a company is required to collect tax on behalf of the jurisdiction, it must be able to determine where the customer is placing the order from.

There are a number of legitimate reasons for geographically-based price differentiation.  One key reason is that it allows companies to set prices lower for consumers in in low-income countries that cannot afford a global price. If the producer is forced to set one global price, they will be unable to offer lower prices in these nations where consumers’ ability to pay is more limited.  These sales can actually benefit all consumers by increasing total revenues, permitting the same level of profit at a lower average price. Whenever marginal prices approach zero, any additional sales increase revenue, which can be used to keep the price low, reinvest in the next generation of products or increase profits. The economic impact of these sales in low income nations may also be highly progressive, by giving the poorest customers access to modern educational, health, and information services at close to the marginal cost while richer consumers cover fixed costs. These lower prices can also reduce digital piracy, especially since the ratio of average costs to income is highest for low-income consumers. 

Markets ultimately run on mutual agreement. Government cannot make companies produce good music, movies, or software. And companies cannot make consumers pay more for a product than they think it is worth. In the end both parties – producers and consumers – must agree on a price. Producers often lose a lot of money pouring large up-front costs into products that consumers do not want. And consumers often get frustrated when they find out that someone else paid a lower price, possibly because they waited until later in a product’s cycle. But on the whole, these arrangements have delivered rapidly improving products and a declining cost. They also increase total social welfare beyond what would be achieved by requiring a single worldwide price.