Earlier today, an Australian Parliament Committee heard testimony from three leading U.S. IT companies: Apple, Adobe, and Microsoft. The committee was examining what some MPs believe are excessive prices being charged in Australia.
There’s an important principle involved in this discussion – the ability of companies to set prices that reflect demand. If some people are willing to pay more for a product than others are, then companies should be allowed to charge more. If the company gets the price wrong, the market will let them know that.
Or as Microsoft stated in their testimony: “If we price our products too high, our customers will vote with their wallets.”
Like many other companies in the software and digital content market, Microsoft does not operate on a single global model. It segments markets globally, and charges an appropriate price in each market, based on a range of factors.
The benefits of differential pricing are widely recognized by economists. For instance, Carl Shapiro and Hal Varian argue in their book Information Rules that differential pricing in IT makes these products available to more people and maximizes revenue to companies, which, in turn, drives R&D and innovation.
Hal Varian makes this argument more generally in this article on differential pricing and efficiency. Different prices for different versions of the same good, or for different categories of users, usually leads to an increase in output, either by serving markets that would otherwise not be served or by increasing consumption above what would be allowed by a uniform price. This pricing strategy grows the economy, makes beneficial products more widely available, and benefits consumers.
This strategy is especially valuable for software and other IP-intensive industries. As SIIA member Adobe noted in its opening statement, software is economically quite different from the typical manufactured good. With software, there are enormous up-front and relatively fixed costs for research and development. The marginal costs per unit sold for software tend to be lower than the fixed, up-front costs. Publishers and pharmaceutical companies are other IP-intensive industries that share this same basic business model in which the R&D costs are high but the manufacturing costs are usually low.
Businesses that share the characteristic of fixed up-front costs have flexibility in terms of how they recover costs and earn a profit. They typically seek to find the optimum selling price in each market, taking into account price elasticity of demand as well as local costs. The result is that products are priced differently in different markets—both geographically and by market segment.
This kind of pricing strategy is not unique to IT or to Australia. It is a common business model of many companies in a broad range of industries as they seek to provide their products and service to customers around the world. There is no basis for government intervention to restrict this business practice.
Mark MacCarthy, Vice President, Public Policy at SIIA, directs SIIA’s public policy initiatives in the areas of intellectual property enforcement, information privacy, cybersecurity, cloud computing and the promotion of educational technology. Follow the SIIA Public Policy team on Twitter at @SIIAPolicy