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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!