September 26, 2018

Should the U.S. Allow Region Coding?

On Friday I wrote about DVD region coding, which allows the manufacture of DVDs that (in theory) can only be played in certain regions of the world. U.S. public policy, in the form of the Digital Millennium Copyright Act (DMCA), plays an important role in shoring up the region coding mechanism. Is this good public policy? Should the U.S. want DVDs to be region coded?

Let’s look at the economic effects of region coding. These days, the main effect is to allow the studios to price discriminate by selling the same DVD at a different price in the U.S. than overseas. Generally, we can expect the U.S. price to be higher – let’s assume the price is Pu in the U.S. and Po overseas. If it weren’t for region coding, this differential pricing would be hard to sustain, because people could buy DVDs cheaply overseas and resell them in the U.S. Region coding prevents this kind of reimportation.

(Similar issues arise in the debate over drug reimportation, where we also see U.S. producers wanting to price discriminate, and reimportation posing a threat to that price discrimination strategy. The drug reimportation issue is more difficult – there, policy decisions take on a moral dimension, because drug pricing is literally a life and death issue for some patients.)

If region coding were abolished, then the U.S. price and the overseas price for a DVD would equalize, at a level below the current U.S. price and above the current overseas price. The studios could no longer price discriminate, and so would be worse off. U.S. consumers would be better off – they would spend fewer total dollars on DVDs, and would get more DVDs for those dollars. Overseas customers would see a price increase, and so would be worse off. Total welfare would decline, with the gains of U.S. consumers outweighed by the losses of U.S. studios and overseas consumers.

But we shouldn’t expect U.S. policy to care much about the welfare of overseas consumers. And if we focus only on the impact on U.S. people and companies, then region coding doesn’t look nearly as good – it looks like a deliberate policy of boosting DVD prices in the U.S. Indeed, region coding acts just a like a tariff of Pu-Po dollars on each reimported DVD. If we didn’t have region coding, would Congress enact such a tariff? I doubt it.

(Note: My analysis above assumes that all movie studios are located in the U.S., so that the U.S. economy captures all of the producer-side benefits of price discrimination. If overseas studios use region coding to boost their prices in the U.S., this hurts U.S. consumers while providing no countervailing U.S. benefit, so region coding looks even worse.)

(Another note: Some readers may object that the U.S. shouldn’t be so selfish as to ignore the welfare of people outside its borders. Point taken. But surely you would agree that, whatever level of U.S. aid to the world community is appropriate, that aid should be used to attack a problem more pressing than the high price of DVDs.)

Comments

  1. Why assume that “Total welfare would decline, with the gains of U.S. consumers outweighed by the losses of U.S. studios and overseas consumers.”? Could it not equally be a wash, or a net increase in total welfare depending on the balance of the US vs overseas consumers?

  2. Producers should be allowed to sell their products with whatever “features” or in whatever condition they want, as long as they’re not decptive about these features. A better question is “should the US prevent consumers from circumventing such producer-imposed restrictions?”

  3. The claim that US prices are lower struck me as an odd assumption. I would expect other factors to dominate and to find no fixed pricing relationship.

    As a quick check I compared “Spirited Away” pricing. The native Japanese (NTSC, Region 2) is the most expensive at 4700 yen, then English Region 1 (at 30 US dollars), then English Region 2 PAL (at 20 Euros) , then German Region 2 PAL (at 15 Euros). This matches my recollection that the import pricing for Japanese DVDs was much higher than US Domestic.

    The Japanese pricing is perhaps not representative. Perhaps there is a pattern that US producers sell cheaper in the US than elsewhere. Was the assumed relationship based on general pricing analysis? I would expect local distribution costs (advertising, translations, etc.) to dominate the variations, and indeed there is a language related pricing variation within Region 2.

  4. Unfortunately, although going region-free would indeed be a boon to U.S. consumers, our government has a nasty tendency to prefer corporate welfare to its popular equivelant. if you wish to know why the U.S. maintains this instance of corporate protectionism, you need not look any further than http://www.opensecrets.org/industries/indus.asp?Ind=B02

  5. Joseph Smarr says:

    Region coding does more than just raise the cost of DVDs–it also limits the content to which I have access. My fiancee is from Austria and recently brought me back some German-language DVDs that I can’t get in the states. She didn’t know about region coding and so unfortunately they were unplayable (until I learned about region hacking with VLC anyway). I would argue this adds to the harm caused to US consumers by region coding–why shouldn’t I be able to watch those DVDs, especially since I couldn’t pay for them (at any price) here?!

  6. Compare with the situation in the prescription drug market – where regulatory differences from one country to the next create some barriers to trade and the drug manufacturers take that as an opportunity to set higher prices in the US. The result is a lot of trade in prescription drugs across the border with Canada – and even though we supposedly have a free trade treaty, and some US States are treating this as a good thing, others, and the Federal government, seem to be considering it illegal, immoral, and something they have to put a stop to.

    I think the bottom line on the region coding issue is that even if it doesn’t benefit US consumers, it benefits some large US companies. They have lobbyists; the consumers have Ralph Nader. Connect the dots.

  7. Why do we assume prices would equalize?

    Let’s compare this to importing drugs from Canada. If we import drugs from Canada, the U.S. pharmaceutical companies, in which Canada relies upon since there are no Canadian manufacturers would raise prices in Canada to the level of U.S. drugs.

    The Canadian market for drugs, relative to the U.S. one, is very small. The amount of money lost to raising prices in Canada is also small. If Americans are paying these prices anyways, and drug companies just off-load drugs onto other countries, then why would they lower prices in the U.S.?

    If you feel all countries should pay the same price, then fine… everyone will pay the U.S. price.

  8. Chris Tunnell says:

    Ack, that last post was me. I forgot to enter in a name.

  9. Steve Purpura says:

    Ed,

    This type of regulatory policy is part of an effort by the United States to remain attractive as a “competition state”. To learn more about this line of thinking, read “Globalization and the Changing Logic of Collective Action” by Philip Cerny.

    The summary of this article is that as the scale of markets widens and economic organizations become more complex, the nation-state level is becoming insufficient to provide the range of public goods demanded by their citizens. Rather than creating a single “super-state”, the result has been a series of overlapping political instituations at the local, regional, and transnational levels.

    In this paradigm, the outer limits of effective action by the state are seen as the capacity to promote a favorable investment climate for transnational capital (think Sony and Hollywood). And a state becomes a insurer of immobile factors of production, such as human capital, infrastructure, support for critical r&d, basic public services, and (above all) maintenance of a public policy environment favorable to investment and profit making.

    “Region coding” is a basic support policy for an environment that is conducive to private control of profit making and thus falls under this regulatory scheme.

    If you want the next layer of analysis of why the United States wants to be a competition state, lookup the economic literature related to the descriptive and prescriptive models that predict where capital will flow. Hint: it goes to places where the environment is perceived as being conducive to profit-making.

  10. Small market countries like Denmark would most likely see a price drop so be my uest and drop the region encoding.

  11. Region coding was pushed into place by large companies, so we only look at the damage they do. But what about smaller movie studios? They’re unable to release a move worldwide due to their limited funding. Region coding allows them to release one region at a time, as money and interest permits. Drop region coding, and internet piracy will kill the small studios.

  12. I have also heard an argument for region coding is to allow movies to be released at different times. The Distribution model of a movie hitting theaters, then discount theaters, then video stores, then HBO, then network television is deeply cut into American Movie culture. Whether this is good or bad (I personally don’t like it, but don’t expect a different model) is indifferent, however, in European countries, this model may not work the same, nor will the movies be released on the same timeline. However, if it was possible to watch a DVD available in Japan while currently only available in American theaters, this could have a direct impact on Box Office sales, which American studios would consider a negative.

  13. The Casablanca DVD is region restricted. There are countless examples of other old movies which are region restricted.

    Thus we can conclude that region restrictions have little to do with release windows and much to do with making consumers in certain markets pay more.

  14. Region-free players have been declared lawful in the EU — it’s actually a selling feature. I think the idea is that regionalisation restrictions are anti-competitive; but, rather than force the movie studios to stop doing it, it’s easier just to let the people decide for themselves — the question becomes, does the availability of cheaper DVDs make a region-free player worth any extra cost that such a feature may incur? Also, if you own the DVD, then the {encrypted} content is most evidently not a secret from you — ownership confers the right to view the content, and the end justifies the means.

  15. The idea that region coding produces DVDs that are more expensive in the US than overseas is blatantly false. Region coding is used mostly to ensure a DVD version is not available in a market where the film is still screening at the cinemas. In Australia (where we are having US copyright laws stuffed down our throats) the local pricing of DVDs is usually more expensive than the US as the pricing is determined based on a high water US-OZ currency exchange rate rather than the cost to manufacture/distribute locally.

  16. Alexandre Drummond says:

    Where does somebody find DVDs cheaper than US? I’m just curious because in Brazil (region 3) a DVD uses to cost at least 60% more (sometimes up to 300%) the price of the same DVD at US (region 1). And I have to tell you: region 3 DVDs usually misses some features present on region 1 DVDs.Latin America is not known by having numerous rich countries, and I admit I’m a dumb person, so please explain to me as you would do with a 7 years old child why DVDs cost so much here in Brazil, and what business model is behind this behavior from US studios and phonographic companies?(A tip: I already found out it has nothing to do with taxes).

  17. Let’s look at the economic effects of region coding. These days, the main effect is to allow the studios to price discriminate by selling the same DVD at a different price in the U.S. than overseas. Generally, we can expect the U.S. price to be higher — let’s assume the price is Pu in the U.S. and Po overseas. If it weren’t for region coding, this differential pricing would be hard to sustain, because people could buy DVDs cheaply overseas and resell them in the U.S. Region coding prevents this kind of reimportation.
    This is plain wrong. Even in second world countries, and I dare to postulate the same for third world countries, DVDs are MORE EXPENSIVE than in the US. Just go to amazon.XYZ and compare prices ….

  18. I was recently in Singapore on a business trip. The local department store was selling Shrek 2 a month before it went on sale in the US – it was also about $15 less than the US version.