The World Wide Web has created a global platform for commerce where consumers all over the world have access to a vast array of goods and services online. With this e-commerce revolution, many consumers and policy makers expect that they should be able to buy any good or service online and pay the same price as anyone else in the world. In fact, for some goods and services, consumers cannot do that. Companies enforce these distinctions by a practice called “geoblocking,” which occurs when the price and availability of an online product varies according to the geographic location of the customer. Although geoblocking has encountered resistance, the practice can benefit consumers by increasing total supply, lowering average prices, and encouraging a competitive market in which consumers are offered an increasingly diverse supply of products. By providing lower prices for consumers in low income nations, it can also be highly progressive. As such, it would be a mistake for policymakers to restrict such pricing practices.
When a customer makes a purchase on an e-commerce website, the company usually has a pretty good idea of where the customer is located. There are many valid reasons for collecting this information. For instance, 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.
But why might companies use this information to vary pricing? Again, some reasons are imposed by government: taxes and tariffs vary by location. Other reasons have to do with market conditions. Exchange rates can vary widely. Companies often contract with local distributors to sell identical or related products in stores. These arrangements provide local jobs and give customers a physical place to go to for advice and repairs. But local dealers will fail if the producer then undercuts their business by offering cheaper Internet pricing.
These reasons aside, producers would like to charge each customer exactly what the product is worth to them so long as the price exceeds the marginal cost. Geoblocking, supported by better data analysis, allows companies to charge a higher price in those locations where the willingness to pay for a product is highest. Customers might attach different values to the same product for many reasons, including individual taste, social values, and professional needs. One important factor is income. Individuals with higher incomes are generally able and willing to spend more for a product than are those with less income. In this sense, the ability to price discriminate can be broadly progressive. It results in those with higher incomes paying more for a product while allowing those with lower incomes to still buy it at an affordable price. In a global context, price discrimination allows companies to increase their sales in low-income countries that cannot afford a global price, giving the poorest customers access to modern educational, health, and information services at close to the marginal cost while richer consumers cover fixed costs.
But geoblocking can also benefit all customers. As long as it covers marginal costs, the ability to offer low-value customers a cheaper price increases social welfare. If the producer can control price arbitrage, the additional revenue can be used to lower the price to others, reinvest in the next generation of products, or increase profits. In some cases the ability to make high margins on sales to a relatively small population while still making a lot of low-margin sales to the mass market may be vital to the product’s commercial viability.
Producers do not have unlimited power to set prices. Their products must compete with similar ones in their market as well as products in related markets. In many cases, the company must also compete with prior versions of the product (e.g., prior versions of a word processing program) that consumers have already purchased. Moreover, while the company can set the price of the product, customers will only purchase the product if it makes them better off.
Consumers have a conflicted view of price variation. No one likes to find out that he paid more for a product than his neighbor. But people seldom object to getting a bargain. Given human nature, it is not surprising that those who paid more than average feel they were cheated, while those who paid less think they got a fair price. But government is a very poor price regulator, both because it lacks most of the information needed to set prices and because the process quickly becomes politicized. Because companies have a strong interest in selling as much of a product as possible and customers have the option of saying no if they believe the price is too high, the burden of proof should therefore remain on the proponents of government intervention.