iTunes U.K. and the Lessons of Market-Specific Pricing

Published November 1, 2004

Britain’s Consumers Association, the U.K. counterpart to the Consumers Union in the U.S., has asked the Office of Fair Trading to investigate why Apple prices iTunes downloads higher in the U.K. than in the U.S., France, and Germany.

British iTunes customers pay 79 pence ($1.40, or 120 eurocents) per song, while French and German residents pay 67.7 pence ($1.20, or 99 eurocents), a difference of 17.5 percent. Americans pay even less: just 99 cents per song, according to the complaint, covered in Wired News.

Now, I like to shop when I travel, so I have given some thought to the issue of international pricing of consumer goods. Here’s my question for the Consumers Association: Have you walked into a Gap store in London lately?

The Gap’s pricing policy is a standard one that’s seen in the pricing of U.S. goods sold in the U.K.: Change the dollar sign to a pound sign, and leave the number the same. What does that imply? U.S. goods cost about $1.45-$1.90 in the U.K. for every dollar they cost in the U.S.

Of course, some of that is transport costs and some of that is tariffs and taxes. But some is also the fact that, in general, for a pretty substantial subset of goods, the British pay more than we do.

Put another way, consumers in the U.K., U.S., France, and Germany still have opportunity costs that differ systematically, although those differences are declining over time with global commerce and international brands. Those systematic differences might explain the difference in iTunes pricing. I can’t say for sure … but it’s a hypothesis ripe for testing, and it runs directly counter to the Consumers Association’s plea for uniform pricing across all countries.

In fact, one of my favorite things to do (yes, I’m a geek) is to go into stores like Zara or Mexx that have multinational pricing on their price tags. I’ll pull things off the rack to try on, but I’ll also do the quick calculation to see what exchange rates they’ve built into their multinational pricing, to see if I’m getting a better deal in France than I would in Austria, or some such thing.

Different prices in different countries are driven by preference differences, cost differences, exchange rate differences and, to be sure, lack of market interconnection. That’s a complex bundle of factors, and it makes it difficult for me to be persuaded by the Consumers Association’s simplistic complaint.

Lynne Kiesling ([email protected]) is director of the Center for Applied Energy Research, a project of the International Foundation for Research in Experimental Economics. This article first appeared on the Knowledge Problem blog, September 17, 2004.