A case the U.S. Supreme Court just agreed to hear about “gray-market goods” not only involves fascinating economic issues but might eventually affect all Americans.
The case involves the legality of third parties importing and reselling goods that U.S. firms sell abroad for lower prices than they do here. A Thai citizen pursuing graduate study in the United States had his family ship him textbooks sold by U.S. publishers in Asia that he then resold on eBay. He could earn money doing so because publishers sell textbooks abroad for substantially lower prices than they do here. He did this as a side business to help support himself here. But John Wiley, a major publisher, sued him for violation of copyright. A federal court found against him and awarded damages of $600,000 for having sold eight Wiley-published books.
Let me say at the outset that my personal sympathies lie with the student. Textbook prices have risen much faster than inflation in recent decades and reflect abusive use of monopoly power. Publishers issue new editions of popular textbooks at frequent intervals primarily to kill the market for used texts. So I am happy to put some effort into facilitating my own students’ use of older editions, and I don’t mind when they buy brand-new “international editions” on eBay for as much as $50 less than they would have to pay for a U.S. edition.
But as an economist, I have to recognize the enormous implications of a court decision barring any ability of U.S. companies to sell products for lower prices in other countries.
To understand the issue, you need to understand the economics of what is going on here. Why do U.S. publishers sell books cheaper in other countries than here? The answer is that their overall profits are higher if they do. Their action is an example of “price discrimination” in which a seller with some degree of monopoly power charges different prices to buyers with different “elasticities of demand.” This is a numerical coefficient measuring how sensitive buyers are to price.
Other examples of price discrimination include lower prices for senior citizen and children’s meals, movie matinees, air tickets with a Saturday-night stay or nonrefundable advance purchases, drinks at bars with “ladies’ nights” and for paperback vs. hard cover books. It also explains coupons for brand-name breakfast cereals, college financial aid based on “need,” the federal dairy pricing system, the different prices California growers get for peaches to be canned rather than sold fresh and the operations of the Australian Wheat Board. In other words, price discrimination is everywhere.
Price discrimination makes people with inelastic demand – such as businesspeople traveling or eating lunch – pay more, while those with elastic demand – families going on vacation or taking the kids along to eat – pay less than they would if the seller could only charge one uniform price.
People in high-income countries generally are less price-sensitive than those in low-income ones. Hence people in Peru or Thailand can buy the same drug or the same textbook cheaper than we can here. Moreover, similar pricing differentials apply to myriad everyday consumer goods. Books and pharmaceuticals are just an extreme example.
More commonly, U.S. retirees wintering in Texas cross the border to get their prescriptions filled in Mexico. And few would object if the Thai student’s family sent him international editions of books for his own use and he sold them after the course was done. The question is whether he can do it as a business. If he can buy goods of U.S. companies at cheaper prices abroad and sell for higher prices here, why can’t Target or Walmart or CVS? Why can’t the farm co-op in my hometown source the on-patent herbicides it sells to its owner-members for the prices a Paraguayan farm store would pay? That is a huge issue, and that is why this case is being watched so closely.
There already is considerable trade in such “gray-market” goods, but estimates of volumes vary wildly. Take the numbers put out by whining industry associations with a spoon of salt.
The ability to keep different groups of customers separate is the key to successful price discrimination. Bars with ladies’ nights have the right to keep one woman at a table from buying a dozen beers and then passing 11 of them around to the guys. Restaurants can refuse to let Grandma buy five dinners at the senior citizen’s rate and then “share” them with her younger offspring. If five Supreme Court justices or more deny an analogous right to U.S. producers who sell abroad, there could be an upheaval in product sourcing by retailers.
However, people who think that an eventual Supreme Court ruling against the manufacturers suddenly would drop prices of books, medicine and other goods to levels now charged in poorer countries need to face a few facts. If a decision effectively makes international price discrimination impossible, it would raise prices much more in poor countries than it would lower them here. Most manufacturers would sacrifice considerable quantities sold in poor countries to protect price levels here.
Some abroad would benefit from such a ruling. Book translators would get lots of work because the easiest way to make a popular statistics or marketing text unattractive in the U.S. would be to publish it in Thai rather than English. India-based makers of generic drugs would see sales boom. But the students in my course would not get their texts for $50 less.
Yes, prices would drop somewhat here. Just how much is an open question. Let’s see what the court decides.