Geo-blocking and price discrimination

by online marketplaces in the EU

Laurea magistrale in Economia e Management delle Amministrazioni Pubbliche e delle Istituzioni Internazionali

Università Bocconi

Relatore: Carlo Altomonte

Controrelatore: Mariateresa Maggiolino

ANTONELLA ZARRA matr. 1495852

Introduction Context

Demand side consumer

empowerment search costs

Supply side wider access to

data information on

consumers’ behaviour

The “death of distance” in the digital economy has given rise to the feeling that everything is just a click away;

The rise of the Internet as a pivotal driver to foster the achievement of a Single Market:

Evidence of geographic barriers in the e-commerce that might enhance the fragmentation of online markets;

Concerns by European Commission about those business practices, such as price discrimination, which might hamper EU market integration.

2

Introduction Contribution of my work

This thesis aims at analyzing to which extent, in the digital economy, territorial restraints (in particular geo-blocking), leading to price discrimination, affect competition and the pursuit of a Single Market.

Twofold purpose of the research:

Providing a methodology to classify geo-blocking techniques carried out by online platforms;

Detecting the existence of price discrimination based on user’s location due to geo-blocking restrictions and identifying the components of the prices, contributing to assess whether price differentials should be attributed to exogenous variables.

3

Geographic price discrimination An economic perspective (1)

4

Price discrimination: price differences that do not reflect differences in costs. In order to maximize their profits, firms charge customers different prices according to their willingness to pay;

Geographic price discrimination is a form of third degree price discrimination: customers’ characteristics are studied to extract the entire surplus;

Assumptions:

Constant marginal costs,

The producer knows the demand curves,

Firms must be able to prevent arbitrage (resale by low value consumers to high-value consumers).

Effects on welfare (compared to uniform pricing): ambiguous a priori

5

QB

MC

P

QA

Country A Country B

pB

pA

qA qu

pU

qu qB

DB DA MRA MRB

-∆ in consumer surplus +∆ in consumer surplus and and + ∆ deadweight loss -∆ deadweight loss

Geographic price discrimination An economic perspective (2)

Price discrimination The EU legal framework

Non-discrimination is one of the pillars at the heart of the EU. It is strictly related to the “four freedoms” of the Single Market (free movement of goods, capital, services and people).“Similar situations shall not be treated differently unless discrimination is objectively justified” (European Court of Justice);

EU Competition Law: Articles 101 and 102 TFEU

Case law:

United Brands case: geographic price discrimination in the cross-border distribution of bananas,

iTunes case: it breaks new ground in attempting to transpose to on-line distribution legal principles on cross-border trade that were developed for physical distribution. In the iTunes case, geographic price discrimination was feasible thanks to “facilitating practices” such as the use of credit cards details. In fact, the billing address can be deemed as a “technological green banana clause” to the extent that it eliminates any possibility of arbitrage.

6

Geo-blocking The EU legal framework

Geo-blocking, by preventing consumers in one country from purchasing in other countries, is a tool used by firms to limit arbitrage across countries, engage in price discrimination and thus maximizing profits. This is a well-known practice used in the offline markets, where firms try to obstacle parallel imports.

Geo-blocking as a result of vertical restraints: restrictions affecting online market resulting from contractual agreements between digital content owners and distributors fall within the scope of Article 101 TFEU.

EU Competition law: Vertical Restraints Block Exemption Regulation (VRBER) and Commission’s Guidelines on Vertical Restraints;

Geo-blocking as anti-competitive by object: the Commission is concerned about the potential competitive harms of geo-blocking, which could be due to vertical restraints that prevent passive sales;

Case law on passive sales in the audiovisual sector: the Murphy Judgment and the Pay TV Case.

7

Geo-blocking Definition and types of geo-blocking

Types of geo-blocking:

Blocking measures,

Rerouting measures,

Restrictive measures.

Technical means of geo-blocking:

IP address-based,

Payment system-based,

Personal information-based.

8

“Geo-blocking refers to practices used for commercial reasons, when online sellers either deny consumers access to a website based on their location, or re-route them to a local store with different prices” (European Commission).

Source: European Commission

Geo-blocking Levels of geo-blocking

9

Access Choice Purchase After-sale

Goods Access denied

Re-routing

Different interface

Different prices

Refusal to accept

payment

Refusal to delivery

Refusal to provide

additional services

Refusal to provide

customer service

Refusal to provide

maintenance

support or repair

Digital

Content

Access denied

Re-routing

Restriction on take out a

subscription

Restriction on sign-up for

an account

Different interface

Different

catalogues

Different prices

Refusal to accept

payment

Refusal to

play/stream

content

Refusal to

download content

Ban on playing

content previously

downloaded

Geo-blocking in the Single Market Evidence of g-b on online platforms

10

Barriers

Access Denied

Re-routing

Restriction on subscription/

sign-up

Choice Different interface

Different catalogue

Different prices

Purchase Refusal to accept payment

Refusal to

play/stream/download content

After-sale Ban on playing content

previously downloaded

The Spotify Pricing Index

Netflix vs VPN

Pandora

Geo-blocking in the Single Market The relevance of g-b in the EU political

agenda

One of the priorities of Juncker’s Commission is the establishment of a Digital Single Market (DSM), which “aims to open up digital opportunities for people and business and enhance Europe's position as a world leader in the digital economy”.

The first pillar of the DSM aims at removing the barriers to cross-border online activities, including geo-blocking.

Initiatives

Public consultation: more than 80% of respondents have faced geo-blocking,

Sector inquiry on e-commerce: it aims at reducing information asymmetries and understanding the dynamics that are occurring in the EU e-commerce,

Consumers protection: reformulation of the e-Commerce Directive and the Services Directive,

Copyright reform: proposal for cross-border portability of online content services and an action plan for updating copyright rules.

11

Empirical Analysis Methodology and data

Web scraping: I ran a two months experiment collecting data with the help of the web scraping technique on three platforms, iTunes, Amazon and Google Play;

Analysed products: I collected the prices of a sample of six albums. I chose audio-visual content (music) instead of physical goods, as they do not involve logistics costs and/or national-based standards that could influence the price;

Bias removal: the experiment was carried out in a controlled system by checking for any inconsistencies and removing possible sources of noise.

Once a day at the same time, a simulation of the purchasing experience in five EU countries:

France Italy Germany Netherlands United Kingdom.

12

32 days

of price collection

3 platforms

5 countries

6 albums

6720 observations

Search

Collection

Monitoring

3 stages

Online VPN

Browser’s plug-in

Cloud software (PriciusTM )

3 tools

Empirical Analysis The experiment

13

The use of PriciusTM

An open source software conceived to help European Commission to detect and monitor price discrimination through the use of big data.

1. 2. 3. 4.

Empirical Analysis Results

14

Germany France Italy Netherlands United

Kingdom Mean

Platform

Artist

Adele 9,99 9,99 11,99 9,99 9,99 11,99 10,09 9,99 11,99 10,01 9,74 11,99 10,45 13,07 13,07 10,11 10,56 12,21

Coldplay 9,09 7,79 10,99 10,99 8,49 10,99 10,99 8,49 10,99 8,64 9,99 10,99 13,07 13,07 13,07 10,56 9,56 11,41

David Bowie 8,09 7,99 9,99 10,99 6,27 9,99 10,99 7,99 9,99 9,10 7,99 9,99 10,45 10,45 11,76 9,92 8,14 10,34

Debussy 7,39 9,49 8,99 7,99 9,49 8,99 8,09 9,49 8,99 6,37 9,12 8,99 7,18 12,41 10,45 7,40 10,00 9,28

Rolling Stones 18,29 16,99 19,99 23,69 16,99 19,99 25,09 16,99 19,99 17,29 16,99 19,99 22,22 18,95 26,15 21,32 17,38 21,22

The Blues Brothers 9,79 8,71 11,99 11,99 8,71 11,99 11,99 8,71 11,99 8,64 7,96 11,99 4,57 11,39 11,76 9,40 9,10 11,94

Mean 10,44 10,16 12,32 12,61 9,99 12,32 12,87 10,28 12,32 10,01 10,30 12,32 11,32 13,22 14,38 11,45 10,79 12,73

• On average, iTunes, which is the market leader, charges higher prices • Evidence of dynamic pricing on Google Play Store

Empirical Analysis Country-based price differentials

The graphs show the deviation of the mean for each product’s price using the average price across countries as reference (the “0”);

Amazon: on average, Italian and French users

pay respectively 10% and about 12% more than other users; buying from the Netherlands

ensures savings of almost 12%;

iTunes and Google Play: UK users face higher prices (+11,60% and + 24,54% ).

15

-7,28

10,06 11,55

-11,39

-2,94

-15

-10

-5

0

5

10

15

DE FR IT NL UK

Pri

ce d

iffe

ren

tial

[%

]

-2,90 -2,90 -2,90 -2,90

11,60

-5

0

5

10

15

DE FR IT NL UK

Pri

ce d

iffe

ren

tial

[%

]

-6,23 -8,52 -5,00 -4,79

24,54

-10

-5

0

5

10

15

20

25

DE FR IT NL UK

Pri

ce d

iffe

ren

tial

[%

]

Amazon

iTunes Google Play

Empirical Analysis Impact of different tax regimes on prices

16

9,98 9,86 9,61 9,74 11,50

2,34 2,46 2,71 2,59

2,88

0

5

10

15

DE FR IT NL UK

Pri

ce [

%]

NET PRICE VAT

8,46 10,09 10,04

7,91 9,06

1,98

2,52 2,83

2,10

2,26

0

2

4

6

8

10

12

14

DE FR IT NL UK

Pri

ce [

€]

NET PRICE VAT

8,23 7,99 8,02 8,13

10,58

1,93 2,00 2,26 2,16

2,64

0

2

4

6

8

10

12

14

DE FR IT NL UK

Pri

ce [

€]

NET PRICE VAT

By removing the Value Added Tax (VAT) from the average price per country, net prices are not equalized. Thus, different tax regimes do not explain different prices.

Country VAT

France 20%

Germany 19%

Italy 22%

Netherlands 21%

United Kingdom 20%

Empirical Analysis Comparing differentials in GDP per capita

and price

17

-30

-20

-10

0

10

20

30

DE FR IT NL UK

Dif

fere

nti

al [

%]

Amazon iTunes Google Play GDP per capita

Amazon: Users that try to download from Italy and France face higher prices (+11,55% and +10,06%) although the GDP per capita are the lowest (-24,36% and -4,39%).

Thank you!