Published on May 30, 2016
1. 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
2. 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
3. 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
4. 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).
5. Effects on welfare (compared to uniform pricing): ambiguous a priori 5 QB MC P QA Country A Country B pB pA qAqu pU qu qB DBDA MRA MRB -∆ in consumer surplus +∆ in consumer surplus and and + ∆ deadweight loss -∆ deadweight loss Geographic price discrimination An economic perspective (2)
6. 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
7. 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
8. 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
9. 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
10. 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 vsVPN Pandora
11. 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
12. 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
13. Search Collection Monitoring 3 stages OnlineVPN 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.
14. 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
15. 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 Pricedifferential[%] -2,90 -2,90 -2,90 -2,90 11,60 -5 0 5 10 15 DE FR IT NL UK Pricedifferential[%] -6,23 -8,52 -5,00 -4,79 24,54 -10 -5 0 5 10 15 20 25 DE FR IT NL UK Pricedifferential[%] Amazon iTunes Google Play
16. 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 Price[%] 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 Price[€] 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 Price[€] NET PRICE VAT By removing theValueAddedTax (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%
17. Empirical Analysis Comparing differentials in GDP per capita and price 17 -30 -20 -10 0 10 20 30 DE FR IT NL UK Differential[%] 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%).
18. Thank you!
Department of Policy Analysis and Public Management. ... price discrimination by online marketplaces ... discrimination is facilitated by geo-blocking, ...
GEO-BLOCKING THROUGHOUT THE EU ONLINE ... especially in online marketplaces. ... ability of their retailers to make online sales below a specified price ...
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Online price transparency has increased, ... Use of direct marketplaces. ... Geo-blocking. Territorial ...
Price transparency ... as in the case of restrictions on the use of online marketplaces ... The Report separately addresses geo-blocking since, across the ...
Digital Economy Outlook ... the EC also wants to end unjustified geo-blocking or geographic price ... platforms are online marketplaces where investors and ...
... (including online marketplaces, price ... Tackling geo-blocking is ... focusing on wider online availability of content across the EU. ...
The development of a new EU digital ... a ban on geo-blocking or the revision of key pieces of EU ... services by increasing price transparency of ...
... findings on geo-blocking ... come from online retailers. Questionnaires were also sent to operators of online marketplaces, price ...
... (including online marketplaces, price ... Tackling geo-blocking is only one ... focusing on wider online availability of content across the EU. ...