Greedy Goblin

Wednesday, June 8, 2016

Price discrimination

Tobold is upset about region coding of DVDs and want to bypass it by cracking the device. What he wants is understandable: why should he pay more for the very same content than a guy in Asia?

He is wrong though. Regardless of being obviously unfair, price discrimination is a good thing and everyone - including those who pay high price - would be worse off if it was banned or en-mass circumvented by customers. To understand why, we must understand how it works: different groups of customers (or even individual customers in case of personally marketed goods) are offered different prices depending on their assumed paying ability. For example a shop gives discount to students or an airline to families or a medicine is cheaper in a third world country. They can do it because all products have "already sunk" and "not yet sunk" cost which is connected to fixed and variable costs, but not equal: all fixed costs are already sunk, but not all already sunk cost is fixed, see first example below.

The seller gains money if he sells a unit of product over its "not yet sunk" cost. Let me give a some of examples:
  • If too many units were produced, their variable costs are sunk and selling a unit has zero opportunity cost. If your warehouse is full of unsold products, selling them at any price is better than trashing it.
  • The aircraft will fly anyway, if you get passengers to the empty seats for any price, you get money
  • The film is already made and producing one more DVD - or rather bandwidth for streaming it - has few cents of cost, so selling a copy for more than a few cents is profit.
  • Medicine is already researched, producing one more pill and transporting it to Africa costs a few cents, so the cents coming from poor Africans are profit - hell, giving them for free is profit because of brand marketing value.
You might ask that if it's true, why don't they sell all units for over this cost? Because in order to keep the company afloat, their total income must cover the total production and development costs plus some profit. If they sell all of it for a few cents, they go bankrupt. So someone must pay more than a few cents.

Why you? Because you can afford it and the African guy / family guy / student cannot. So it's this way or no way. Of course, in the name of fairness, you can say "no way", but please consider the consequences. Let's say that the product costs $100M to develop and $0.1 to produce one more unit. Now they price it at $10 in US/EU and $1 in the third world, getting 10M sales both places, providing 110M income over 102M costs. If you'd stop them from doing it, they'd get 100M income over 101M costs, an unsustainable plan, so they must price the product higher (practically $11) to remain in business. Bang! While the Africans won't get anything, you get to pay their part! But you shown that no one gets unfair advantage over you, way to go, moron!

The point of price discrimination is to share the costs of production among the customers according to their ability to carry it. It's like pushing a broken down car: if your 8 years old child helps pushing it, he'll surely carry only a small part, but even this small part is more than nothing and helps. Letting a weaker one carry less weight is not welfare. Welfare is when you carry him! The poor African who pays $1 for a drug you pay $20 while the variable cost of a pill is $0.1 is still helping the production by $0.9, while a welfare recipient simply takes your tax.

For the same reason, - despite being a Randian free market fan - I'm an ardent supporter of the "price discrimination of government" aka progressive taxation. A poor worker still produces GDP and supports himself so he is a useful member of the society and we shall accept whatever little tax he can pay. The alternative is that we demand him the same tax as we pay, but he can't pay that and goes unemployed and we just got one more welfare leech!

PS: I did a group Red Nose for the first time with me and one person having 5 scrolls and other 3 having 4 scrolls (22 together). I got 58 seals, 17 armor stones, 8 weapon stones and 1M in vendortrash and crystals. All together about 10.6M. Not bad, but of course most of it came from my own quests, so doing it in group isn't mandatory, but definitely nice and fast ... after creating the party. Hint: arrive with a cart and do processing while waiting. When everyone arrived, put the materials to the cart. Then also put the vendortrash into the cart between pulls.


nightgerbil said...

Funny arguement that when the super rich elite and big buisness hate progressive taxation on THEM and go out of their way to avoid paying any tax at all so they don't have to pay the higher rates, to then expect me to pay more then the african and the asian because I have more disposable income they can soak for their own profits. Just like how they "decline" to buy into our progressive tax regimes by evading the taxes we get to "decline" to buy into their "progressive" price gouging by cracking their codes.

Hanura H'arasch said...

I agree with your point on price discrimination, but that's not what Tobold was upset about. He's angry about the fact that he can't view the DVDs that he already bought in another country. It's not like DVDs from Europe would be more expensive than ones from the USA in the first place, tax and shipping excluded.

The hole copy protection of DVDs is stupid, and the reason they'll never see a cent from me. It's crappy service they're providing, and for as long as torrents provide a better service I'll go with that option.

Anonymous said...

South Korea is between the UK and Germany, 11th (and way above most EU nations) in terms of $ disposable income for 2014. Japan is 15th. Hungary is 29th. They are also way above a load of EU countries in gross income. They are 10th and 17th (and Singapore 14th) in terms of average monthly wage.

So, your country should have cheaper DVDs than South Korea, Japan, Singapore and Hong Kong (the largest Asian markets).

luobote kong said...

Or alternatively it could be regarded as legacy media desperately trying to sustain their outdated monopolistic business models in the face of new disruptive technologies. Phone companies tried to stop VOIP using similar arguments. Thinking about it, the Soviet Union also tried to ban photo copiers. While that was for a a political rather than a financial purpose, the end game was the sane. To restrict the ability of what was then new technology to disseminate media content.

Gevlon said...

@Nightgerbil: just because they are hypocrites they don't stop being right. It's just disgusting that they don't apply to themselves what they apply to their customers.

@Hanura: buying something in a lower price region and moving it is the definition of smuggling, even if he didn't mean to.

@Anon: yes, but since Hungary is in the EU, it cannot be separated from UK and Germany.

Cathfaern said...

But it is separated sometimes. You can buy World of Warcraft expansions cheaper in a hungarian video game shop than buying it online or buying it from a german or UK shop.

Herman said...

My biggest gripe with region locking content (DVDs in this case, or watching content on my Netflix subscription) has very little to do with price, but much more to do with stuff I just cannot watch over here.

The DVDs I would want to watch will usually come from the US, and those aren't much cheaper than over here in the EU. And some of them are just available for Region 1 (if that's the US), and no other. I would assume the creator of the content will still get their money if I buy a DVD in the US, it's just another distributor that gets to handle it (and also get a piece of the pie).

Anonymous said...

I don't know if this is connected (not an economy expert), but what I noticed is that you can buy the same product with different packages for different prices in stores too.

For example: I found that one of the cheapest milk on the store has the same label as the more expensive milk. Same energy/fat/sugar/prtein content, same manufactory, same distributor. In fact the whole page is the same, only the colors differ.

Same with peanuts. I can buy a pack 20% cheaper, again, with the same page copied onto another packaging.

Now either they are lying, or the manufactory sells the same products for different prices.

Maybe the psychology behind this is that when you think you pay 1EUR for milk and not 0.7EUR, you get the better product, while the poor guy can only afford the cheaper lower quality one, but in the end, everyone gets the same. Is this possible? Or I should stop buying the cheaper one?

(This is in Hungary, milk manufactory called Alföldi Tej, and peanut manufactory called Mogyi Kft)

Gevlon said...

@luobote kong: that's unrelated. Streaming killing DVDs is irrelevant in DVD region pricing. Also streaming services sell by region. Advancement is between technologies

@Cathfaern: because with boxed product they can discriminate as it's unlikely that someone will travel to Hungary to buy WoW $2 cheaper or buy from a smuggler selling Hungarian copies on the streets of UK

@Herman: not selling in some markets is a nasty by-product of the system

@Anon: read the wikipedia link of price discrimination, the thing you described is right there

Kevan Smith said...

Very nice summary of why why progressive taxation is good, Thanks. I don't think I could have accomplished it in fewer paragraphs, and English is my degree!

luobote kong said...

@gevlon. Actually it ia related in the same way as the gramophone killed music manuscript publishing (also run on a local monopolistic basis). I can't force you to see the pattern but defending the neoliberal model of deliberately restricting a servicw while increasing prices (be it an ISP or legacy DVD producer) can't hold. The cost of replicating content is tending to zero (copy and paste). Any industry that ignores that is a racket even if it haa legislative support.

Tithian said...

While your general idea is correct, that isn't Tobold's (or mine) complaint. For example I was forced to buy some DVDs years ago overseas, simply because they were not available in my country. Some of them are still not available here. However, when I finally made the jump from my home PC to a multimedia center set up with my TV, I quickly found out that I had to re-buy them if I wanted to watch them legally (hint: I didn't).

So I'm forced to either 'hack' my DVD player to remove region locking, or torrent the stuff I already own to be able to watch them on a new device. In both cases I refuse to pay for something that I already own, which I'm guessing is why a lot of people resort to scrapping the region locks.

What you're mentioning happens mostly on the retail part of the business, and not by the consumers. For example, sites like G2A buy game codes from South America, East Europe etc. where they are cheaper and then sell them to NA/EU consumers for a hefty profit even with the large discounts. It's scummy, and apparently completely unregulated when it comes to digital media. But for physical media, shipping things across the globe to save a few Euros (while paying them back to the shipping company) just doesn't happen nowdays.

And then there are things like Netflix where you are barred from streaming a show to certain regions, because reasons. A lot of people refuse to be 'second-rate' customers that pay the same fees (i.e. myself), which is why I simply have no Netflix account. I could set up a VPN to connect to the US version, but I can't be bothered. So in essence the region lock simply loses them revenue.

Anonymous said...

ok, let's have a look at wiki:
price discrimination can only be a feature of monopolistic and oligopolistic markets
-> already a somewhat bad start
In the US the Digital Millennium Copyright Act has provisions to outlaw circumventing of such devices to protect the enhanced monopoly profits
-> same as above

and here lies the problem with the difference on how we see it applied. your example is a nice simple product and value-creation process. ususally it is not used to make a 20% profit, but to make a maximum of profit. this changes the whole approach.

why are university costs (books, tuition) so expensive? why does simple medial equipment (gauges, siringes, etc) so expensive in hospitals? because someone can be made to pay it. because of monopolies or other dependencies.

"buying something in a lower price region and moving it is the definition of smuggling, even if he didn't mean to."
smuggling is moving shit without declaring / paying taxes. buying and reselling is just what you did in eve -> trade / transport / resale

Gevlon said...

@luobote kong: replicating content has near zero cost. Creating it has serious costs. If everyone manages to copy-paste, there will be no content creation. While streaming will kill DVD format, someone will still have to pay for the content that used to be distributed on DVDs.

@Tithian: assault rifles are not available in Hungary, so I'm forced to go to Bosnia and bring it in. Right?

Also, you never owned the film. With the original DVD you paid for a limited license to access it with restrictions and now you hack your way over these restrictions, instead of just not buying them with restrictions. Having no Netflix account is the valid customer choice, not hacking. If enough people do that, Netflix will change its menu.

@Anonymous: Monopolies in themselves can't make people pay. If Coca Cola would get full monopoly on fizzy drinks and start selling a bottle for $100, people would simply not buy it and drink water. University costs are that expensive because the class is still full with people who can pay more than you. The community college is your alternative. Medical costs is a different issue, I wrote about that:

In EVE there was no legal restriction to do it. In Black Desert Online there is (35% marketplace tax) and bang, I'm not doing it.

Anonymous said...

it's ok to go multinational and hire dirt cheap labour in china or elsewhere in the world. companies could afford local workforce but for the same money you could get 15 3.worlders on the job plus ship your shit back and forth. The only difference with the DVD is that they invented some copyright/patent bullshit .. so they can sue and talk down and make me a criminal.
There is no Fair. There is only max profit and peoples own desire to get it for what ever risk.
On DVDs/Bluerays. I buy them for their overpriced prices. Watch the content and sell the Box on ebay. If in any rare case the content seems rewatch worthy .. and that happens very rarely. I rip it, edit it, encode it and directly set a sell order in ebay for the box when the rip checkes out ok. I have my copy without the bullshit menu,copyright warning and commercials. the company has their money

On BDO daily. you can solo the scrolls and be done with it. Sure duo would be way faster because of agro pathing so one deals always damage to the back. 22 scrolls takes what? 1h plus finding the group 30m to 1h? Every class has its mechanics. As a witch I d omy daily when I get my 100% blackspirit. cast the scroll dance around and nuke him within 3 blzard cylces down. sorcs are even faster, because their damage scaling is insane. I don't know if you Valkyrie has enough ompf.
The only bosses in grps are relic and cartian because of memory fragments! weekly and daily I do solo (I would prefer duo but I hate to wait for others and their biobreaks, pizza burns, other excuses)

Hanura H'arasch said...

@Gevlon: "and now you hack your way over these restrictions, instead of just not buying them with restrictions."

But there is nothing wrong with "hacking" your DVD player, same as with transporting DVDs from the USA to Europe, as in most jurisdictions there is no law that says you can't. It's not "smuggling" as you claimed either, because the definition of smuggling is as follows (from oxford dictionary):
"Move (goods) illegally into or out of a country." [emphasis added].

DVD producers can (and should) implement price discrimination systems, that's not the issue. But if they want that they are accepted they'll have to do it the same way as other goods producers do it: by obligating your distributors to only sell to retailers that veritably charge the correct amount for the respective country.

Implementing lazy price discrimination systems (region locks) and then complaining that customers legally circumvent them is just stupid.

Provi Miner said...

there is that, selling something you can't sell at any price is good. However progressive taxation is just plain stupid lets take millionair gobs and slave wage Provi and see what happens


Provi pays $0 on his paltry income of 1000 a year.

Gobs pays $300,000 on his 1,000,000 income.

Fair taxation

Provi pays $10

Gobs Pays $100,000.

What is the difference you ask? well basically a flat tax would make Provi skip going out for dinner one day. were as in a progressive format there is not penality to provi for doing something stupid. Well basically a flat tax would allow gobs to either dump 200K into the cashflow by buyng things or he creates more jobs by investing even if it has no return that still 200K being directly pumped into the economy. With a progressive tax that money disappears and if it should reappear it would be more like 50 to 75K being pumped into the economy. This is do to waste inefficiency and generally silly socialist bullshit that a five year with an allowance can understand.

So no gobs progressive in general is stupid.

Gevlon said...

@Provi miner: at first, your numbers are greatly off. Since most of the GDP is generated by high income workers, despite their small numbers, their share of the tax is also greater, even with flat tax. The sum of Gobtax + N*Provitax must be constant if we talk about the tax system and not general tax rates (N is the Gob:Provi ratio in the population). Also, you made a numerical error: 300K is 30% of 1M, so if there is 30% flat tax, Provi pays $300 and not $10. Therefore the correct numbers are:

The country needs 300K tax, Gobs earn 1M, 10 Provis earn 1K each, total 1.01M income, needs 29.7% flat tax rate.

Fair taxation:
Provi pays $279 on his paltry income of 1000 a year.
Gobs Pays $279,000 on his 1,000,000 income.

Provi pays $0
Gobs pays $300,000

I think it's clear now.

Provi Miner said...

No my numbers are right
10% of 1000 is $10 and 10% of 1000000 is 100,000. Where you got confused is this $200K that gobs has he is going to do something with it? say oh I don't know spend it, invest it the only way that money doesn't make it into the economy is if he bury's it.

Gevlon said...

10% of 1000 is 100.