Itunes Uk: Pricing That The Market Will Bear

Lynne Kiesling

Britain’s Consumers Association has asked the Office of Fair Trading to investigate the reasons why Apple prices iTunes downloads higher in the UK than in either the US or France+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.

Now, I like to travel and I like to shop, and 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 UK pricing policy is a standard (and, I would argue, transaction-cost-reducing) one that’s seen in the pricing of US goods sold in the UK: change the dollar sign to a pound sign, and leave the number the same. What does that imply? US goods cost about $1.45-1.90 in the UK for every dollar that they cost here. Of course some of that is transport costs and some of that is tariffs/taxes. But some of that is also the fact that in general, for a pretty substantial subset of consumer goods (clothing, shoes, electronics, leather goods), the British pay more than we do, regardless of the country of origin of the goods. Perhaps it’s because they are willing to pay more, and that reflects the market price in equilibrium.

Put another way, consumers in the UK, US, France and Germany still have opportunity costs that differ systematically, although those differentials are declining over time with global commerce and international brands. And producers also still have different opportunity costs. Those systematic differences might explain the difference in iTunes pricing. I can’t say for sure without doing a serious in-depth analysis to see what characteristics are correlated with the differential in iTunes pricing across the countries. But it’s a hypothesis that is ripe for testing, and 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 in to 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 (although in a perfect world we would achieve purchasing power parity), and illiquidity/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 complaint.