Wednesday, October 2, 2013

Abbott should repeal great big 'Australia tax'

When government changes hands, it s possible for important issues to fall between the cracks and useful work to be lost. In late July, a Labor-constituted parliamentary committee issued a report about the Australia tax . It drew a fair bit of media attention at the time but, coming so close to the election campaign, was soon forgotten.

But the report made some important recommendations recommendations the Coalition members of the committee were happy to support on measures the government could take to reduce the Australia tax and it s important the new government takes up those recommendations.

The report was an inquiry into the prices of information technology hardware and software sold in Australia, conducted by the House of Representatives standing committee on infrastructure and communications. It found, unsurprisingly, that Australian consumers and businesses must often pay much more for their IT products than their counterparts in comparable economies. Hence the term Australia tax .

Evidence presented to this inquiry left little doubt about the extent and depth of concern about IT pricing in Australia. Consumers are clearly perplexed, frustrated and angered by the experience of paying higher prices for IT products, the report says.

Submissions to the inquiry compared the prices of more than 150 professional software products and found an average price difference usually between Australian and US prices of 50 per cent. The median price difference was 46 per cent for Autodesk products, 49 per cent for Adobe products and 67 per cent for Microsoft products. Submissions compared the prices of more than 50 IT hardware products and found a median price difference of 26 per cent. Comparisons of 70 music products found a median price difference of 67 per cent. For 70 games products it was 61 per cent and for 120 e-books it was 13 per cent.

How can such differences be justified? A lot of possibilities spring to mind. Taxes might be higher in Australia. For physical products, freight and handling costs would be higher. Australian companies may face higher rent and wage costs. And our much higher dollar has greatly improved the comparison between the prices of imports and local prices.

Obviously, the inquiry needed a lot of help from the representatives of the global IT companies to explain these puzzles and possibilities. It didn t get it. The big companies repeatedly declined to appear before the committee, sometimes saying they d be represented by their industry body while the body said it couldn t represent the views of individual members.

So in February the committee took the unusual step of summonsing Apple, Adobe and Microsoft. The evidence they gave was incomplete, conflicting and unconvincing.

It s hard to see how claims of higher costs in Australia can account for the price differences, particularly in the case of content that s delivered digitally. And when the same overseas site puts up its prices for such content as soon as it discovers you re from Australia, it s hard to avoid the conclusion there s something funny going on.

The inquiry concluded that many IT products are more expensive in Australia because of regional pricing strategies implemented by major vendors and copyright holders .

Just so. To anyone with any training in economics it s obvious what s going on: global IT companies are engaging in price discrimination by charging different prices for the same product in different parts of the market. They maximise their profits by charging what the market will bear in each market segment, taking advantage of differences in customers willingness to pay .

Economists have long studied this phenomenon and regard it as perfectly normal profit-maximising behaviour. Global companies charge higher prices in Australia than in the US because they know Australians have a higher willingness to pay than Americans have. Why? For no reason other than that we re used to paying higher prices than the Yanks are used to.

As the inquiry s report acknowledges, there s nothing new about international price discrimination. It s been going on for decades. What s new is the digital revolution. The internet has made it much easier for us to see what s going on and get around it.

Economists know that for price discrimination to succeed, you have to be able to keep the two markets separate. Otherwise people will switch to buying in cheaper markets or some middleman will make a quid by doing it for them.

To keep national markets separate in the old, physical world, many governments used legislative bans on parallel importing , where companies buy in the cheaper market and sell at a discount in the local market.

To keep national markets separate in the digital world, big companies use various forms of geoblocking the use of internet addresses, credit card numbers or other means of electronic identification to block internet sales and downloads of electronic products ... based on the geographic location of the consumer .

There are ways around geoblocking ask any teenager to show you but it s not certain all the ways around are strictly legal.

So the committee recommends the government remove the few remaining parallel importation restrictions in the Copyright Act and also secure consumers rights to circumvent measures supposedly intended to protect copyright, which are being used to impose higher prices on honest customers.

And it should amend the Competition and Consumer Act to render void consumer contracts that seek to enforce geoblocking.

Let s hope Tony Abbott is still listening.