Intellectual Property and Price Discrimination - iTunes
Michael Carroll
January 17, 2009
http://carrollogos.blogspot.com/
There's a lot of debate about whether allowing or encouraging price
discrimination - charging different people or classes of people a
different price for the same good - is good policy with respect to
goods that embody copyrighted works of authorship or patented
inventions. The general population seems to have different reactions to
different kinds of price discrimination schemes. On the one hand, most
people don't seem to have a problem with senior citizen discounts at
movie theaters, even though some seniors are quite wealthy. But, if
Amazon chooses to customize the price of DVDs for each consumer, an uproar ensues.
I am very interested to see what happens with the recent deal between Apple and the recording companies
to allow variable pricing on music files distributed by iTunes. This
may or not be price discrimination depending on whether the good is
"music" or particular songs because everyone will still pay the same
price for particular songs.
Here, I just want to make two
related theoretical points about the way that economists and legal
scholars who use economic models talk about price discrimination.
Point 1.
Most economic or law-and-economic analysts who talk about price
discrimination say that the policy goal is to maximize people's
welfare. I'm at the Penn Law Review symposium on the Foundations of Intellectual Property,
and just watched Christopher Yoo make this point about his paper with
John Conley on intellectual property and impure public goods.
For
these analysts, whether price discrimination is good or bad for society
depends on who wins and loses and by how much. But they model this
trade off using people's willingness to pay for intellectual property
goods as a signal for how much having a copy of a song or book or movie
is going to improve their welfare. And these models get pretty
complicated quickly, but they all are built on this foundation.
The
problem is the gap between ability-to-pay and willingness-to-pay. If
you care about welfare, ability-to-pay is a poor proxy for utility or
welfare because the marginal value of a dollar depends on how many
dollars you have. When iTunes charged you 99 cents a song, how does a
consumer decide when it is worth paying that price? Imagine two people
who value owning a legal copy of a particular song exactly the same,
but one is wealthy and the other is struggling. At certain values, the
wealthy person buys the song and the struggling person won't even
though they both would get exactly the same amount of pleasure from the
song because the relative
cost to each person is quite different. So their respective decisions
to buy or not are not really telling you how much they value owning a
copy of the song.
So, in my view, analysts need to defend the
proposition that their models tell us something about the effect of
variable pricing on people's welfare when they have not accounted for
the gap between wealth and welfare in the model. (Of course, this is a
more general point about neoclassical economics, but it has particular
salience in this context.)
Point 2.
Those who have a reflexive antagonism to price discrimination need to
be careful about form and substance. Some folks who have this reflex
are reacting to the underlying market power that gives a seller the
ability to engage in variable pricing without losing all of its
customers to a competitor. I agree that market power is something to
watch.
But firms with market power also engage in uniform
pricing, as Apple has done with iTunes. In such a case, uniform pricing
functions as a form of value discrimination or cost discrimination.
Because the marginal value of a dollar varies across people, the price
may be the same, but the relative cost of the song from the buyer's
perspective varies. So if you want greater equality in the market
place, you may actually want to encourage variable pricing if it has
the economic effect of equalizing relative cost. I agree that this is
very difficult to do in practice, but remember this is a theoretical
point. In practice, though, this point about variable cost is what
progressive taxation is all about.
So, if copyright is a tax on readers, should it be a progressive tax?
