The Supreme Court Deals a Blow to Price Discrimination

Yesterday, the Supreme Court of these United States (I enjoy writing that while in Brazil) declared that companies that make and sell products overseas cannot prevent them from being re-sold in the US.  From the always excellent Nina Totenberg of NPR:

The case involves a part of the copyright law that was aimed at so-called gray market goods. These are U.S. copyrighted products — from textbooks to watches — that are manufactured in other countries for sale there, then purchased and imported to the United States for discounted resale.

Supap Kirtsaeng, a mathematics student from Thailand, discovered that some of his textbooks were being published and sold in Asia for less money. They were identical to the textbooks he used at Cornell and the University of Southern California, except that they were much cheaper and bore an inscription saying they could not be exported. He got his friends and family in Asia to send him many copies of the books, sold them on eBay and made about $100,000 profit.

Needless to say, the publisher of the textbooks, John Wiley & Sons, didn't like that one bit. It sued Kirtsaeng for copyright infringement and won in the lower courts. Kirtsaeng was ordered to pay $600,000 in damages.

I went a little Twitter crazy about this yesterday because I think it is absolutely the correct decision from a purely libertarian property-rights perspective but also because it is such a good teachable moment. 

Why, you ask (or should), do firms charge different prices anyway, especially on copyrighted material that they have a monopoly over? Wow, what an excellent question!

 It all has to do with price discrimination. If you know the willingness to pay on average is lower for some markets than it is for others (due to many things but the most obvious is income) then it is a profit maximizing strategy to charge those with lower willingnesses to pay a lower price.

Companies would love to do this all the time but it can be hard to know about willingness to pay and you have to be able to deal with the arbitrage problem. Income per capita figures that are readily available are one way to find out about willingness to pay across countries as is simply market experience, so international sales are ripe for price discrimination.

The arbitrage problem is what this lawsuit is all about. Companies want to stop precisely what Mr. Kirtsaeng was doing, taking advantage of the wedge between the prices in the US and Thailand that they created through this law. They like the ability to do this because they make more money that way.  If you cannot stop arbitrage then you can't maintain the wedge between prices.  For example if there was not a ticket taker at the movie theater then enterprising kids would just buy tickets for adults and charge them less than the full adult price.    

Mr. Kirtsaeng learned his economics well at Cornell (maybe he had me as a TA...) and engaged in arbitrage. And why not? Once you purchase a good it becomes yours. I'll agree that he cannot copy it but just as I can go down to Powell's and sell my book, why can't he get on a plane from Bangkok and sell his book at Powell's? In my opinion restricting resale across international borders is a mistake.

Thankfully the court agrees:

Kirtsaeng appealed to the U.S. Supreme Court, contending that he was protected by a rule called the first sale doctrine, which says that once you buy a product, it is yours to do with as you please.

On Tuesday he won in the high court. Writing for the court majority, Justice Stephen Breyer said that to impose geographic limits on the first sale doctrine would make no sense. He cited statistics from retailers indicating that $2.3 trillion worth of foreign goods were imported to the U.S. in 2011, and many of those products were subject to copyright protection when they were made.

Automobiles, calculators, microwaves, tablets, personal computers — all may contain copyrighted software programs or packaging, and many of these products are made abroad with the U.S. copyright holder's permission, Breyer observed. To forbid their importation unless the copyright owner agreed would mean, in essence, that a car owner whose GPS, radio or carburetor was made abroad could not freely resell his vehicle without the copyright owner's permission. Therefore, said the court, goods, once sold lawfully — whether in the U.S. or elsewhere — can now be resold in the U.S. without the copyright holder's permission.

The textbook analysis of the result of this decision is that we should expect prices for textbooks and other goods that have enjoyed the protection of this law to become cheaper in the US and for textbook prices to rise in Thailand and other less wealthy countries thanks to the law of one price that will now be in effect. Also, overall textbook sales and profits should fall for publishers.

Now, I have nothing against price discrimination in general. I think it is both just and efficient that I pay a higher price than a kid does at the movie theater - I simply think that this law went a bit too far.

One final note: Scalia, Ginsberg and Kennedy were the dissenters! Wow, what a Motley Crüe (TM)!