Review of Industrial Organization (2020) 56:593–613
https://doi.org/10.1007/s11151-020-09748-0
The Welfare Effects of Spotify’s Cross‑Country Price
Discrimination
Joel Waldfogel1,2,3,4
Published online: 11 February 2020
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract
We calibrate a simple empirical logit model of world demand—and subscription
pricing—at Spotify, with the use of available data on monthly prices and using
streaming volumes by country to create measures of the numbers of users. We find
that country-specific pricing increases revenue by 5.9% relative to uniform world
pricing, while country specific pricing decreases world consumer surplus by 1.0%.
Country-specific pricing within Europe increases revenue in Europe by 1.1%, and
EU consumer surplus increases by 0.3% with country-specific pricing. Consumers
in lower-income countries gain more from price discrimination than do the consumers in higher-income countries.
Keywords Platforms · Price discrimination · Recorded music · Streaming
JEL Classification L11 · L82
1 Introduction
Cross-country price discrimination is a common strategy for multinational firms,
and it is one of particular importance for firms with high fixed and low marginal
costs, such as pharmaceuticals and media products. Price discrimination can be
undermined by transferability across consumers, but access to prescription drugs
is highly regulated, which makes cross-country trade difficult. Analogously, the
country-specific nature of copyright law has inhibited cross-country trade in digital
* Joel Waldfogel
jwaldfog@umn.edu
1
Carlson School of Management, University of Minnesota, 321 19th Avenue South, Minneapolis,
MN 55455, USA
2
NBER, Cambridge, USA
3
ZEW, Mannheim, Germany
4
CESIfo, Munich, Germany
13
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J. Waldfogel
media products; but proposals to legalize cross-country trade in digital products are
under discussion in the European Union.1 Such changes could undermine firms’
ability to engage in differential pricing across countries.
These proposals raise the question of how the well-being of sellers and buyers
would be affected by such changes. It is well understood that third degree price discrimination raises overall welfare when it raises quantities sold (Varian 1985), but
magnitudes—as well as the identities of winners and losers—are empirical questions. This leads us to explore how cross-country price discrimination, relative to
uniform pricing, affects output, consumer surplus, and overall welfare, as well as
their distribution across countries and between consumers and producers.
In general this is difficult to study, as prices are in many cases shrouded. One
important exception is music streaming. Monthly streaming prices are freely available online, and—translated to dollars—they vary substantially across countries,
from $14.42 for an individual monthly Spotify subscription in Denmark to $2.45 in
the Philippines. Within the EU, monthly subscription rates vary between Denmark’s
$14.42 and about $5.39 in Poland, Bulgaria, Romania, and Hungary. The individual
prices for Apple Music vary similarly across countries. How would the inability to
price discriminate across countries affect producers as well as the consumers in various countries in this market?
To answer this question we calibrate a simple logit model of demand for streaming to data on prices and estimates of the numbers of subscribers by country: we
infer parameters under the assumption that current country-specific prices are revenue maximizing (and profit-maximizing given zero marginal costs). We then ask
how profits and consumer surplus would change—country by country and overall—
if Spotify could not charge different prices in different countries, separately among
EU countries and among all countries.
Data availability presents a significant obstacle. While prices, along with estimates of total revenue and the total numbers of world subscribers are widely available, country-specific measures of the number of subscribers are not. For Spotify we
estimate the number of subscribers per country with data on the volume of streams
for top 200 songs, by country. For Apple Music, we use a less direct proxy, the volume of Google searches for “Apple Music” by country.
Our basic analysis takes a monopoly approach, treating Spotify as the only seller,
but we also explore how results change with a duopoly alternative in which Spotify
competes with Apple Music.
We find that cross-country price discrimination raises quantity sold and therefore
welfare. It also raises worldwide revenue by about 6%, in both the monopoly and
duopoly versions of the model. Because of the greater economic similarly of countries within the EU than among countries overall, cross-country price discrimination
has a smaller effect within the EU, raising revenue by 1%. A move toward uniform
pricing would help consumers in high-price, high-income countries, while hurting
consumers in lower-priced, lower-income countries.
1
See, for example, European Commission (2018).
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The Welfare Effects of Spotify’s Cross‑Country Price…
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The paper proceeds in five sections after the introduction. Section 2 provides
some background on cross-country price discrimination. Section 3 presents the
monopoly model. Section 4 describes the data that are used in the study. Section 5
presents monopoly results. Section 6 presents duopoly results, and a brief conclusion follows.
2 Background
Both European integration and the prospect of “parallel” trade have created interest in the impact of cross-country price discrimination—or the absence thereof—on
the well-being of producers and consumers. The U.S. Supreme Court’s decision in
Kirtsaeng vs John Wiley and Sons, Inc., 568 U.S. 519 (2013)—which affirmed the
legality of reselling books across countries—raised similar concerns.
Market segmentation, and the charging of separate prices to different groups of
consumers, is a well-studied topic. Varian (1985) lays out the monopolist version of
the theory and shows that if price discrimination raises overall output, it also raises
overall welfare. Holmes (1989) considers the effects of oligopoly on the welfare
impact of price discrimination.
The automobile and pharmaceutical industries have received substantial amount
of empirical research attention as examples of cross-country price discrimination.
Verboven (1996) estimates a model of demand for automobiles in different European countries. Goldberg and Verboven (2005) document the rapid convergence of
automobile prices across countries in the wake of European integration. Danzon and
Chao (2000) explores the extent of cross-country price differentials in pharmaceuticals. Lichtenberg (2010) presents evidence that world pharmaceutical consumption
would be higher with price discrimination than without, which indicates that crosscountry price discrimination would be welfare-improving.
3 Monopoly Model
The world interactive streaming market has multiple sellers: Spotify and Apple
Music, as well as Deezer. During 2018 Spotify had by far the most worldwide subscribers (170 million, 75 million paid), followed by Apple Music with 36 million.2
Our main analysis will use the tools of pricing with market power to develop of a
model of demand and supply for interactive streaming (for Spotify) in 60 countries;
but section V explores a duopoly model of Spotfy and Apple Music for a subset of
44 countries.
2
Spotify revenue and subscriber numbers are drawn from Business Wire (2018). Apple revenue and
subscriber numbers are drawn from Zibreg (2018).
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J. Waldfogel
3.1 Demand
Consumers choose between Spotify and an outside good that consists of both not
using a streaming service and all streaming services besides Spotify. The utility of
the outside good is normalized to zero. The utility of subscribing to Spotify for a
consumer i in country c is given by:
Uic = 𝛽c + 𝛼c pc + 𝜖ic
(1)
In this setup βc is equivalent to what is typically (Berry 1994) modelled as a function of observables (Xcβ) plus an aspect of product quality that is observed to consumers but not to the econometrician (ξc). In our context, βc provides the full summary of the product’s value to consumers. Because we contemplate changing only
prices, but not product characteristics, treatment of product quality as a countryspecific constant is adequate for our purposes. Equivalently: It might be interesting
to know some underlying utility function parameters that attach value to attributes
of the product or the consumers, but since none of these would change in the counterfactual scenarios, inferring such parameters would have no effect on the answer
to our question. The inclusion of such parameters could affect our results if they
affected inference on the parameter α. But as we outline below, we infer this parameter from the supplier’s first order condition for pricing.
Utility maximization will give rise to a probability of subscription such that the
share of population using the service in country c is given by:
sc =
e𝛽c +𝛼c pc
.
1 + e𝛽c +𝛼c pc
(2)
here, sc = the number of subscribers in country c divided by population.
3.2 Supply
The supply-side decision of interest to us is price setting: We assume that Spotify
sets a price in each country to maximize Spotify’s profit. It is a common practice
in modelling markets to assume that price setting satisfies a profit maximizing first
order condition. The usual approach to the problem is to estimate utility function
parameters. Then, given that the estimated utility function parameters are a first
order condition for price setting, the researcher infers marginal costs.3
Our approach here similarly uses the first order condition for pricing for drawing inferences. Instead of inferring cost from the demand behavior and pricing first
order condition, we will infer the parameter α from what we know about marginal
costs, in conjunction with the first order condition. To implement this we need to
know costs, and this requires some discussion.
3
As Berry (2015) puts it, “supply decisions reflect demand elasticities and so are informative about
demand”.
13
The Welfare Effects of Spotify’s Cross‑Country Price…
597
There are two ways to think about that marginal cost of a subscriber month in this
context. Spotify makes payments to rights holders for each stream, at an average rate
that is reported to be between $6 and $8.40 per thousand streams. It is estimated that
Spotify users listen to seven songs per day, on average. This is 210 songs per month,
which would cost between $1.26 and $1.76. One approach to this problem would be
to assume that the marginal cost of a month’s service is, roughly $1.50. We could
then solve for the parameter α accordingly.
While Spotify does indeed have to pay its suppliers, it also negotiates with its
suppliers—the major record labels—that have an incentive to see the revenue maximized before they receive their payment. And, indeed, the major record labels collectively own substantial shares of Spotify, which may heighten their desire not to
impose double marginalization on the pricing decisions (Music Business Worldwide
2018). If we imagine the platform and its suppliers to be fully integrated and thus to
be setting the price in order to maximize the “pie” that they will split, then it makes
sense to view marginal costs as zero.
We think the latter approach is most reasonable—for both theoretical reasons as
well as for empirical ones. One bit of evidence that sellers of digital music maximize revenue despite paying for inputs comes from Shiller and Waldfogel (2011),
who find a revenue-maximizing price of $1.14 for songs at iTunes. This corresponds
much better to profit maximization with zero marginal costs than to profit maximization against the ostensible $0.70 wholesale cost of songs.
But it is reasonable here to assume that we can observe marginal costs and, moreover, that they are zero. In that case, the first-order condition has a clear implication for the utility function parameters—the parameter on price in particular. Profit
maximization requires the price in each country be set so that the elasticity of
demand = − 1. Using the logit, the price elasticity of demand is given by
(
)
𝜀c = 𝛼c pc 1 − sc .
(3)
And in general profit maximizing pricing satisfies markup rules of the form:
(
)
pc − mcc
−1
(4)
=
pc
𝜀c
Spotify annual revenue under the status quo—with country-specific pricing is
given by
Rev =
C
∑
c=1
Mc pc 12
(
e𝛽c +𝛼c pc
1 + e𝛽c +𝛼c pc
)
Annual consumer surplus in each country is
(
)
CSc = 12Mc log 1 + 𝛽c + 𝛼c pc
(5)
(6)
The assumption of static profit maximizing pricing merits some scrutiny. One
might be concerned, for example, that Spotify is engaged in intertemporally sophisticated pricing that involves low initial pricing to promote platform adoption. To
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J. Waldfogel
explore this, we have obtained Spotify’s monthly subscription prices in 45 countries in 2014, which we can compare with the prices in 2018. Prices are the same in
nominal, local-currency terms in 39 of the 45 countries. The exceptions are Argentina (with a 92% nominal increase), Turkey (40%), Colombia (30%), Chile (13%),
Peru (12%), and Norway (10%). Argentina and Turkey had high inflation over this
period.4 It appears, therefore, that low initial pricing is largely limited to the threemonth introductory prices.
3.3 Empirically Calibrating Parameters
Using profit maximizing (that 𝜀c = −1), we can derive 𝛼c from (3):
/
𝛼c = −1 p (1 − s ).
c
c
Using (2), we can derive that
( (
))
ln sc ∕ 1 − sc = 𝛽c + 𝛼c pc , or that
( (
))
𝛽c = ln sc ∕ 1 − sc − 𝛼c pc
(7)
(8)
Equivalenly: We have C × 2 observations (a price and a share in each country),
and we have C × 2 parameters with which we can fit the data exactly. Our calibration of parameters is in the spirit of Björnerstedt and Verboven (2013).
3.4 Counterfactuals
The main counterfactual of interest here is the effect of uniform, rather than countryspecific, pricing on revenue and consumer surplus, overall and by country.
Hence, we would like to calculate revenue with a profit-maximizing uniform
price:
Revu =
C
∑
Mc pu 12
c=1
(
e𝛽c +𝛼c pu
1 + e𝛽c +𝛼c pu
)
(9)
We are also interested in the effects on consumer surplus:
CSu =
C
∑
c=1
(
)
12Mc log 1 + 𝛽c + 𝛼c pc
(10)
And the effects on the quantity of output (the number of subscribers):
Qu =
C
∑
c=1
Mc
(
e𝛽c +𝛼c pu
1 + e𝛽c +𝛼c pu
)
4
See https​://fred.stlou​isfed​.org/serie​s/FPCPI​TOTLZ​GTUR​ and https​://tradi​ngeco​nomic​s.com/argen​tina/
infla​tion-cpi.
13
The Welfare Effects of Spotify’s Cross‑Country Price…
Table 1 Revenue and
subscribers in samples versus
overall
599
Spotify
Apple Music
Revenue, 2018 ($ mil)
5331
2000
Subscribers, 2018 mil
171
36
Share of rev/sub in 60
0.989
Share of rev/sub in 44
0.968
0.734
Spotify revenue and subscriber numbers are drawn from https​://www.
busin​esswi​re.com/news/home/20180​50200​6667/en/. Apple revenue
and subscriber numbers are drawn from http://www.idown​loadb​log.
com/2018/03/05/apple​-music​-10-billi​on-usd-busin​ess/
In addition to a counterfactual of theoretical interest—uniform pricing across all
countries—we also consider a counterfactual that is motivated by the policy discussion of the European digital single market.
4 Data
The data that are needed to undertake this study are measures of the price (pc), the
number of subscribers (qc), and market size (Mc) by country. We use population as a
measure of market size. Prices and quantities are less easily obtained.
For each of Spotify and Apple Music, we observe total revenue as well as the
total numbers of subscribers (from press accounts). Table 1 reports these figures for
mid-2018. Spotify reported first-quarter 2018 revenue of 1139 million euros, which
corresponds to an annual revenue of $5331 million, while Apple reported annual
revenue of $2 billion.5
During that time period, Spotify reported 170 million users for the 65 countries
in which they operated (of which 75 million were paid subscribers), and Apple
reported 36 million users for the 113 countries in which they operated. These revenue and user worldwide totals imply monthly per-user revenues of $2.60 at Spotify
and $4.60 at Apple Music.6
In what follows we will use data on 60 of the 65 Spotify countries for the Spotify monopoly model, and we use 44 countries for which we have both Spotify and
Apple data for the duopoly analysis. Hence, we need to scale down the reported
worldwide revenue and subscriber figures to the 60 and 44 country samples respectively. We do this using the total GDP from the sample countries, as a share of the
GDP for all countries in which the services operate. Thus, as Table 1 shows, the 60
Spotify sample countries account for 98.9% of the GDP in the 65 Spotify countries.
The 44 countries account for 96.8% of GDP in the 65 Spotify countries.
Because Apple Music operates in many more countries than does Spotify, the
same 44 countries account for 73.4% of the GDP in the Apple Music countries.
5
6
See Business Wire (2018) and Zibreg (2018).
See sources above.
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J. Waldfogel
.25
Density
.2
.15
.1
.05
0
0
5
dollar price
10
15
Fig. 1 Spotify monthly subscription prices
We estimate the number of users by country by apportioning the estimated total
users in the sample countries across countries. For Spotify, where top-200 streaming
volumes are available by country, we can apportion by these streaming volumes.7
Define sc as the total streams for the top 200 songs in Spotify in country c, and
∑
define S = c∈60 sc.8 Then if Ts is our estimate of the total number of subscribers for
the sample countries (with the worldwide figure
as per above), the number of
( /scaled
)
Spotify users in country c is given by qsc = Ts sc S .
For Apple Music we lack a direct measure of usage and instead rely on Google
Trends search data. Define gac as the Google search intensity for “Apple Music” in
country c.9 The search intensity is a per capita measure; we translate it to a volume
by multiplying it by population.
We then estimate the number of Apple Music users
gac popc
a
in country c as:qc = TA ∑ ga pop , where TA is the number of Apple Music subscribers
c
c
that are attributed to the sample of countries.
We can also produce a Google-based measure of users for Spotify. When we do
this for the 60 countries in the Spotify monopoly sample, its correlation with the
streaming based measure is 0.851.
Spotify and Apple report monthly subscription prices.10 Figure 1 shows the
monthly individual list prices for Spotify by country. Based on total revenue and
total numbers of subscribers in Table 1, these list prices are clearly not good reflections of actual monthly prices that are paid per subscriber, partly because Spotify has a large free tier and partly because of introductory discounts. Because our
7
See https​://spoti​fycha​rts.com/regio​nal.
We use streams for May 11–18, 2018.
9
We use searches for the year leading up to June 7, 2018.
10
See, for example, https​://www.apple​.com/at/apple​-music​/(for Austria) and https​://www.spoti​fy.com/
bg/premi​um/for Bulgaria.
8
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The Welfare Effects of Spotify’s Cross‑Country Price…
601
demand analysis requires a single price per service per country, we need to scale the
individual subscription prices so that the sum of revenue across users in the sample
countries equals world revenue, scaled for the corresponding group of countries.
We thus we calculate scale factors θS and θA for Spotify and Apple Music, respec∑
∑
tively, such that 𝜃 S qsc psc = RS , and 𝜃 A qac pac = RA, where psc and pac are monthly
individual list prices of Spotify and Apple Music, respectively, and RS and RA are
Spotify and Apple Music revenue, for sample countries, respectively. Then the
adjusted prices of Spotify and Apple Music in country c are 𝜃 S psc and 𝜃 A pac, respectively. We use these prices in the analyses below.
Individual country population data are obtained from the World Bank (https​://
data.world​bank.org/indic​ator/SP.POP.TOTL). We also use exchange rates that are
obtained from the IRS and from Google.11
5 Results for Spotify as a monopolist
Table 2 reports the fitted parameters αc and βc that are derived from (7) and (8) for
each country, along with the normalized price and population for all of the sample
countries.
5.1 Worldwide uniform pricing
The revenue maximizing uniform (60 country) world price is $2.77. As Fig. 2
shows, this price is below the normalized for high-income European countries, New
Zealand, and the U.S. but is above the current normalized price for the rest of the
world.
While 168.1 million consumers subscribe under country-specific pricing, only
149.8 million would subscribe under the counter-factual of uniform pricing at $2.77.
The increase in the quantity of output that occurs under the current regime of crosscounty price discrimination—the larger number of subscribers—indicates that price
discrimination across countries increases welfare in this context.
Table 3 reports estimates of consumer surplus and revenue by country under both
current and uniform pricing. Current pricing delivers $5273 million in revenue,
while uniform pricing at $2.77 would deliver $4980 million. Hence, country specific
pricing increases revenue by 5.9%. Consumer surplus overall decreases by 1.0%
with price discrimination. The total surplus accruing to consumers and producers
rises with price discrimination—as it must since price discrimination increases the
quantity of output.
By construction, revenue is (weakly) higher in every country with price discrimination. Revenue increases the most in countries whose discriminatory price is farthest from the uniform price. These include countries such as Brazil, Mexico, and
11
See Internal Revenue Service (2018).
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J. Waldfogel
Table 2 Model parameters, normalized prices, and population
Country
α
β
Normalized $
price
Pop 2016 (mil)
Argentina
− 0.926
− 1.177
1.191
43.8
Australia
− 0.492
0.057
2.625
24.2
Austria
− 0.333
− 1.587
3.218
8.7
Belgium
− 0.336
− 1.407
3.218
11.3
Bolivia
− 0.573
− 2.884
1.781
10.9
Brazil
− 0.704
− 1.678
1.513
207.7
Bulgaria
− 0.628
− 3.592
1.608
7.1
Canada
− 0.536
− 0.543
2.200
36.3
Chile
− 0.754
− 0.127
1.661
17.9
Colombia
− 0.667
− 2.576
1.541
48.7
Costa Rica
− 0.627
− 1.031
1.781
4.9
Cyprus
− 0.453
− 2.868
2.252
1.2
10.6
Czech Republic
− 0.535
− 2.370
1.930
Denmark
− 0.360
0.935
4.289
5.7
Dominican Republic
− 0.574
− 2.756
1.781
10.6
Ecuador
− 0.580
− 2.364
1.781
16.4
El Salvador
− 0.576
− 2.592
1.781
6.3
Estonia
− 0.479
− 1.459
2.252
1.3
Finland
− 0.439
0.527
3.218
5.5
France
− 0.336
− 1.437
3.218
66.9
Germany
− 0.353
− 0.857
3.218
82.5
Greece
− 0.451
− 3.203
2.252
10.8
16.6
Guatemala
− 0.572
− 2.931
1.781
Honduras
− 0.571
− 3.009
1.781
9.1
Hong Kong, SAR China
− 0.498
− 1.746
2.128
7.3
9.8
Hungary
− 0.639
− 2.585
1.608
Iceland
− 0.636
2.092
3.218
0.3
Indonesia
− 0.606
− 3.832
1.664
261.1
Ireland
− 0.407
0.138
3.218
4.7
Israel
− 0.646
− 2.841
1.580
8.5
Italy
− 0.351
− 0.919
3.218
60.6
Japan
− 0.403
− 3.968
2.498
127.0
Latvia
− 0.468
− 1.872
2.252
2.0
Lithuania
− 0.461
− 2.198
2.252
2.9
Luxembourg
− 0.342
− 1.204
3.218
0.6
Malaysia
− 0.925
− 2.501
1.113
31.2
Malta
− 0.535
− 0.375
2.252
0.4
Mexico
− 0.727
− 1.353
1.496
127.5
Netherlands
− 0.446
0.606
3.218
17.0
New Zealand
− 0.437
0.218
3.043
4.7
Nicaragua
− 0.567
− 3.642
1.781
6.1
Norway
− 0.557
2.189
3.766
5.2
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603
Table 2 (continued)
Country
α
β
Normalized $
price
Pop 2016 (mil)
Panama
− 0.592
− 1.844
1.781
4.0
Paraguay
− 0.585
− 2.116
1.781
6.7
Peru
− 0.616
− 1.762
1.719
31.8
-1.436
− 2.012
0.729
103.3
Philippines
Poland
− 0.650
− 2.108
1.605
38.0
Portugal
− 0.472
− 1.699
2.252
10.3
19.7
Romania
− 0.626
− 4.045
1.608
Singapore
− 0.606
− 0.182
2.049
5.6
Slovakia
− 0.530
− 2.740
1.930
5.4
46.5
Spain
− 0.358
− 0.741
3.218
Sweden
− 0.539
1.544
3.310
9.9
Switzerland
− 0.295
− 1.102
3.761
8.4
Taiwan, Republic of China
− 0.734
− 2.591
1.398
23.6
Thailand
− 0.927
− 4.205
1.084
68.9
Turkey
− 0.932
− 2.789
1.096
79.5
United Kingdom
− 0.332
− 0.285
3.677
65.6
United States of America
− 0.389
− 0.698
2.971
323.1
Uruguay
− 0.609
− 1.380
1.781
3.4
α is chosen to make demand unit elastic at current prices. The parameter β is chosen to fit the country’s
estimated share of population using Spotify, conditional on α
mean of price
4
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13
604
Table 3 Welfare under uniform
and country-specific pricing
($mil)
J. Waldfogel
Country
Uniform: $2.77
CS
CS
Rev
Rev
Argentina
55.38
58.16
13.33
33.78
Australia
150.98
172.03
141.77
171.70
Austria
21.36
22.11
24.67
21.85
Belgium
32.21
33.53
37.23
33.15
Bolivia
4.55
4.60
2.59
4.09
221.12
228.16
92.97
178.85
Brazil
Bulgaria
1.36
1.37
0.66
1.14
133.59
145.20
100.54
140.31
Chile
64.05
71.81
29.55
58.60
Colombia
23.52
23.84
10.44
19.17
Costa Rica
10.26
10.85
5.66
9.54
Cyprus
0.63
0.63
0.50
0.62
Czech Republic
7.75
7.87
4.97
7.29
82.94
103.87
126.52
92.25
5.03
5.09
2.86
4.53
Canada
Denmark
Dominican Republic
Ecuador
11.15
11.34
6.33
10.08
El Salvador
3.50
3.54
1.99
3.15
Estonia
2.51
2.60
1.97
2.54
Finland
51.89
61.97
61.14
61.06
France
185.47
192.85
214.29
190.64
Germany
358.12
382.00
415.21
377.41
Greece
4.20
4.23
3.33
4.13
Guatemala
6.63
6.70
3.78
5.96
Honduras
3.38
3.41
1.93
3.04
10.36
10.67
7.58
10.25
Hungary
4.91
4.98
2.35
4.14
Iceland
4.53
6.63
5.52
6.49
Indonesia
40.74
40.90
20.88
34.97
Ireland
37.79
43.39
44.27
42.79
3.30
3.34
1.54
2.74
Italy
251.72
267.64
291.72
264.44
Japan
26.03
26.12
23.33
25.98
Latvia
2.63
2.70
2.07
2.63
Lithuania
2.87
2.93
2.27
2.86
Luxembourg
1.95
2.04
2.25
2.02
11.68
11.85
2.55
6.52
1.83
2.02
1.42
1.96
Mexico
176.01
183.57
71.50
141.52
Netherlands
165.76
199.73
195.58
196.74
New Zealand
36.68
42.43
40.66
42.20
1.24
1.24
0.71
1.11
83.56
123.78
120.55
114.23
Hong Kong, SAR China
Israel
Malaysia
Malta
Nicaragua
Norway
13
Country-specific
The Welfare Effects of Spotify’s Cross‑Country Price…
Table 3 (continued)
Country
605
Country-specific
Uniform: $2.77
CS
CS
Rev
Rev
Panama
4.38
4.50
2.47
Paraguay
5.74
5.86
3.25
5.20
Peru
35.75
36.80
18.96
31.88
Philippines
39.60
40.53
2.16
8.58
Poland
29.41
30.04
13.96
24.87
Portugal
16.07
16.57
12.67
16.17
Romania
2.41
2.42
1.17
2.02
Singapore
23.98
26.77
16.07
25.11
Slovakia
3.99
2.82
2.85
1.81
2.64
Spain
219.11
235.25
254.27
232.38
Sweden
127.97
173.40
158.58
169.03
Switzerland
35.39
37.29
46.61
35.60
Taiwan, Republic of China
10.20
10.33
3.76
7.60
4.85
4.86
1.02
2.61
22.39
22.63
4.75
12.22
474.29
525.11
620.76
502.64
Thailand
Turkey
United Kingdom
United States of America
Uruguay
Total
1448.09 1558.65 1556.99 1554.36
5.53
5.77
3.09
5.09
4813.17 5273.35 4863.32 4980.47
50
dollars
40
30
20
U
ni
0
Ph MBra
i e z
te Arlipp xic il
d ge in o
Ki n es
ng tin
d
D C oma
en h
Tumaile
In No rkerk
d r
M onway
al es y
Poays ia
U
ni
la ia
te
n
d
CCanPerd
St
at Golomadu
Ta
es er b a
m
iw
of Sw a ia
an
A n
, R N mede y
ep eth ericn
ub er Ita a
lic lan ly
of Sp ds
Th Chain
Sw Fail ina
a
S itz rannd
C ingerlace
os a n
ta po d
Ec R re
i
F uadca
G Huinla or
ua n n
g
d
t
a
Ue
Parumary
D C
raguala
om z
gu y
e
I
r
in ch e a
H
ic R la y
on
an e Is nd
g
R purae
Ko
ng Pepublicl
, S an bli
ARBoam c
a
P Chlivia
El Roortuina
Sam ga
a
l
B lv n
H el adoia
o g
A nd iu r
N us ur m
ew A tr as
a
Z us lia
Beal tria
Slulgaand
ov ri
a
J ka
N Ic ap ia
ic el an
ar an
a
G
Li regud
th e a
u c
Laanie
E
Lu st tvia
xe Mon a
m a ia
b
C oulta
yp rg
ru
s
10
Fig. 3 Change in rev from PD
13
606
J. Waldfogel
2
mean of dcspc
0
-2
-4
-6
Si
n C
Ag h
C rg apoile
os en r
ta tine
R a
C Maica
a
M n lta
U exada
ru ic
g o
Bruay
H
on
Pa Pazil
g
naeru
Ko
Po m
ng
, S AEstlana
ARus on d
Pa Ctralia
i
P
Ta
hi raghina
iw
li
a
an
P ppiuay
,R
Ecortunes
ep M u g
ub al ad al
a
o
C lic o L ysi r
ze C f at a
ch o Ch via
R lomina
e
El H pu bia
Saungblic
D
lv ar
om
a
in LitTu doy
r
ic
an huakeyr
R Is nia
ep ra
Sl u e
ov bl l
G B a ic
u ok
H ate livia
on m ia
d a
C ur la
N Buypras
ic lg us
ar ar
U
a
ni
In Gr guia
te
d e a
d
R on ece
St
om e
at
es Tha ansia
of ila ia
AmJapnd
a
Auericn
Lu BFrastria
xe el nca
m giu e
b m
G ou
N ermItarg
ew
ly
Sw Z Spany
itzeal ain
er an
l
a
I
U N re nd
ni e F la d
te th in n
d e la d
Ki rla nd
n n
Icgdods
el m
Sw
a
Nen
D or dend
en w
m ay
ar
k
-8
Fig. 4 Change in annual per capita CS from PD
change in per capita CS per 10k inc
2
1
0
-1
1000
5000
10000
20000
50000
per capita income, log scale
Fig. 5 Winning and losing consumers from price discrimination
the Philippines, where the discriminatory prices are among the lowest as well as the
U.K. and Denmark, whose discriminatory prices are among the highest. See Fig. 3.
The effects of country-specific pricing on consumers vary across countries.
Consumer surplus increases with a move to discriminatory prices in countries
whose discriminatory prices are below the uniform price. These include the Philippines, Mexico, and Argentina. A move to discriminatory prices hurts consumers
in the countries with high discriminatory prices. These include the U.K., Germany,
Spain, Italy, and France. Figure 4 reports these results in per capita annual terms.
13
The Welfare Effects of Spotify’s Cross‑Country Price…
607
mean of price
4
3
2
1
U
D
e
ni
te nm
d
Ki ark
ng
do
Sw m
ed
en
N Sp
et
a
he in
r
Lu la
xe nd
m s
bo
ur
g
Ita
ly
Ire
la
n
Ic d
el
an
G
er d
m
an
Fr y
an
c
Fi e
nl
an
Be d
lg
iu
m
Au
st
Po ria
rtu
ga
l
M
al
Li
t
th a
ua
ni
a
La
tv
i
G a
re
ec
C e
yp
r
S us
C
ze lo
ch va
R kia
ep
ub
l
R
om ic
an
ia
H
un
ga
Bu ry
lg
ar
ia
Po
la
nd
0
Fig. 6 Current normalized vs uniform EU price
10
dollars
8
6
4
2
0
nd
la
Po
d
ite
n
U
k
ar
m
en
D
m
do
ng
Ki
l
y
s
c
s
a
a
a
e
a
e
d
d
ly
ia lta
in
m tria nd urg en
ki ari
ni
ni
ga bli
tv
a
an Ita and pa anc pru lan lan giu
ec
s
la
o
ed
M rm
y
n Ire el
re hua La
rtu pu ma ova ulg
S Fr
rl
Au Ice mb Sw
C
G
t
Fi
e
B
B
Po Re Ro Sl
he
Li
G
xe
et
h
c
N
Lu
ze
C
ry
ga
un
H
Fig. 7 Change in EU rev from PD
Not surprisingly, the effects of price discrimination on consumers are greater in the
counties with lower ability to pay.
Figure 5 plots the price-discrimination-driven change in CS per capita, per
$10,000 in annual per capita GDP, related to the countries’ GDP per capita. There is
a clear negative relationship. In the Philippines, consumers gain over $1 per 10,000
in their annual GDP from price discrimination. Norwegian consumers lose nearly a
dollar per $10,000 in GDP from price discrimination.
When we repeat the analysis above with the use of the Google based measure
of Spotify subscribers rather than the usage based measure, the results on the
13
608
J. Waldfogel
2
mean of dcspc
0
-2
-4
M
a
Po lta
rtu
ga
l
Ic
el
an
Po d
la
nd
La
Li tvia
C
ze thu
ch
a
R nia
ep
ub
H lic
un
N
et gar
he
y
rla
nd
Fi s
nl
a
Sl nd
ov
ak
i
Ire a
la
n
C d
yp
ru
G s
re
ec
e
Sp
G ain
er
m
an
Bu y
lg
ar
ia
Lu
xe Italy
m
bo
u
Be rg
lg
iu
m
Fr
an
c
R
om e
an
i
Au a
st
ri
U
ni Sw a
te
d ede
Ki
n
ng
d
D om
en
m
ar
k
-6
Fig. 8 Change in annual per capita EU CS from PD
impact of price discrimination on revenue are similar. Country-specific pricing
raises revenue by 5.9% while reducing consumer surplus by 1.1%.
5.2 European Uniform Pricing
The revenue-maximizing single EU price is $3.31, which is roughly the Swedish
price and below only the prices in Denmark and the U.K. The revenue maximizing uniform price is actually above the price in most high-income EU countries
and well above the current price in the lower-income EU member states. See
Fig. 6.
While the model indicates that 59.3 million Europeans subscribe under status
quo pricing, the number would fall to 58.0 million with EU uniform pricing. Hence,
price discrimination among EU countries increases welfare, although quantitatively
less than among world consumers.
The overall impact of country-specific pricing, relative to uniform pricing, is to
increase EU revenue by 1.06%. Overall EU consumer surplus increases by 0.3%.
As Fig. 7 shows, revenue increases everywhere—even if slightly—with the biggest
increase occurring in Poland, Denmark, the U.K., and Hungary.
As Fig. 8 shows, country-specific pricing increases per capita CS throughout the
EU, except in the U.K. and Denmark. Danish CS decreases by over $4 per year per
capita. A move from the status quo to uniform pricing would, of course, have the
reverse effects. Consumers in most EU countries would be hurt, albeit in small absolute terms. The largest decreases in consumer surplus would occur in the some of
the lower-income member states.
13
The Welfare Effects of Spotify’s Cross‑Country Price…
609
6 Duopoly
One potential shortcoming of the foregoing analysis has been the maintained
assumption of monopoly pricing, even though the market is oligopolistic. In this
section we explore the relaxation of the monopoly assumption by modelling the
market as a duopoly: Spotify and Apple Music.
We adapt the foregoing monopoly model to allow consumers to choose among
three options, Spotify, Apple Music, and an outside option with the following random utilities (suppressing country subscripts):
Uis = 𝛽 s + 𝛼 s ps + 𝜖i ,
Uia = 𝛽 a + 𝛼 a pa + 𝜖i ,
Uioutside = 0.
Then, for example, the Spotify share in country c is given by
s
)
(
ssc psc , pac =
s s
e𝛽c +𝛼c pc
.
a
a a
1+e
+ e𝛽c +𝛼c pc
𝛽cs +𝛼cs psc
With reasonable parameter values, an increase in the price of Spotify in a country
reduces its quantity sold, while an increase in the Apple price raises Spotify’s quantity sold.
With ps, pa, ss, and sa as the prices and market shares for Spotify and Apple
respectively (with country subscripts suppressed) and Mc as the market size in country c, the revenue for, say, Spotify, is given by:
s
R =
C
∑
c=1
)
(
Mc psc ssc psc , pac .
Revenue maximization by each firm in country c gives a first order condition that
is a reaction curve that shows how the optimal price depends on the other firm’s
price in the country. Because each firm’s optimal price is increasing in the other
firm’s price, these reaction curves cross at the Nash equilibrium.
The model consists of four equations (including two first order conditions) per
country. The equations are:
𝜕Rsc
𝜕psc
𝜕Rac
𝜕pac
= 0,
(11)
= 0,
(12)
(
)
ssc psc , pac = ssc ,
(13)
13
610
Table 4 Welfare from PD
relative to EU uniform ($mil)
J. Waldfogel
Country
Country-specific
Uniform, $3.31
CS
CS
Rev
Rev
Austria
21.36
22.11
20.74
22.10
Belgium
32.21
33.53
31.27
33.52
Bulgaria
1.36
1.37
0.47
0.97
Cyprus
0.63
0.63
0.39
0.58
Czech Republic
Denmark
7.75
7.87
3.73
6.56
82.94
103.87
109.43
99.26
Finland
51.89
61.97
50.15
61.94
France
185.47
192.85
180.06
192.77
Germany
381.83
358.12
382.00
347.41
Greece
4.20
4.23
2.61
3.88
Hungary
4.91
4.98
1.67
3.52
Iceland
4.53
6.63
4.35
6.62
Ireland
37.79
43.39
36.58
43.36
251.72
267.64
244.22
267.52
2.63
2.70
1.62
2.46
Italy
Latvia
Lithuania
2.87
2.93
1.78
2.68
Luxembourg
1.95
2.04
1.89
2.04
Malta
Netherlands
1.83
2.02
1.08
1.82
165.76
199.73
160.16
199.61
Poland
29.41
30.04
9.86
21.04
Portugal
16.07
16.57
9.87
15.13
Romania
2.41
2.42
0.83
1.72
Slovakia
2.82
2.85
1.36
2.38
Spain
219.11
235.25
212.52
235.14
Sweden
127.97
173.40
127.97
173.40
United Kingdom
total
474.29
525.11
529.32
521.73
2092.01
2328.10
2091.34
2303.57
(
)
and sac psc , pac = sac .
(14)
We use these equations to calibration the parameters. First we find 𝛼cs and 𝛼ca and
1
by solving (11) and (12), respectively. Accordingly, 𝛼cs = − ps 1−s
and
s
c(
c)
1
s
a
s
a
a
𝛼c = − pa 1−sa . Then we can solve for 𝛽c and 𝛽c by plugging in 𝛼c and 𝛼c into (13)
c(
c)
and (14) and solving the two nonlinear equations with two unknowns. This gives us
the baseline parameters that yield the data as the country-by-country Nash equilibrium solution of the model with different prices in each country.
To see the effect of country-specific price discrimination in this context, we then
need to re-solve the model with uniform prices across countries for each of the two
services. Given the underlying model parameters (𝛼cs,𝛼ca , 𝛽cs, 𝛽ca), we calculate the
Nash equilibrium in which each service chooses its best uniform price as a function
of the other service’s uniform price.
13
The Welfare Effects of Spotify’s Cross‑Country Price…
611
Table 5 Country-specific versus uniform pricing
Spotify revenue
Apple music Total revenue
revenue
Consumer surplus
Uniform
4898.2
1386.5
6284.6
9009.1
Country-specific
5162.0
1452.4
6614.4
8983.7
Gain from country-specific
5.4%
4.8%
5.2%
− 0.3%
Uniform
2324.2
376.5
2700.6
4006.7
Country-specific
2350.7
386.5
2737.2
4005.9
Gain from country-specific
1.1%
2.7%
1.4%
0.0%
World (ps= 2.86, pa = 4.89)
Europe (ps= 3.35, pa= 5.85)
All figures are millions of dollars. Uniform means one price for all countries for each of the two services.
Country specific means that each service sets a price in each country. Country specific prices are the
status quo, which is assumed to result from country-specific Nash equilibria in prices. Uniform prices are
calculated as a global Nash equilibrium in prices. This exercise includes 44 countries with measures for
both Spotify and Apple Music
Table 4 reports country-specific results, while Table 5 summarizes. The top panel
does the exercise for the world, while the bottom panel does the exercise for the
European market. Counterfactual uniform pricing—in which each of the two services chooses a single price for the entire world (all 44 countries in the duopoly
sample)—results in a monthly effective world price of $2.86 for Spotify and $4.89
for Apple Music. These prices generate $4898.2 million in revenue for Spotify and
$1386.5 in revenue for Apple Music. Country-specific pricing, by contrast, delivers
5.4% more revenue for Spotify and 4.8% more revenue for Apple Music. Consumer
surplus falls under country-specific pricing by 0.3%. The increases in revenue with
country-specific Nash equilibrium prices is larger than the decrease in consumer
surplus.
We can do the analogous exercise for Europe. The uniform duopoly Spotify price
for Europe would be $3.35 per month, compared with $5.85 for Apple. The resulting
European Spotify revenue is 1.1% higher with country-specific pricing, while Apple
revenue is 2.7% higher.
The main results of the paper do not change much with the duopoly model instead
of the baseline monopoly model. Moreover, if we redo the main Spotify (monopoly)
model on the 44 countries that are included in the duopoly analysis, country-specific
pricing increases revenue 5.2% over uniform pricing. Hence, the duopoly results are
quite similar to the monopoly results, which lends credibility to this paper’s main
results.
7 Conclusion
Policies that are currently under discussion could make it difficult to maintain different prices for digital products across European countries, so it is of interest to
analyze how such a proposed reform would affect consumers and producers. We
13
612
J. Waldfogel
develop a simple but highly tractable model of the demand for Spotify as well as
its pricing, which we can use to consider a counterfactual elimination of countryspecific pricing.
We have five broad findings. First, price discrimination increases the quantity
sold in all of our simulations, relative to uniform pricing. Hence, price discrimination increases overall welfare. Second, price discrimination increases world revenue
for Spotify by about 6% relative to a world uniform price. Third, price discrimination increases Spotify’s EU revenue by about 1% relative to an EU uniform price.
Fourth, price discrimination benefits consumers in lower-income countries while
reducing consumer surplus in higher-income countries. Finally, a robustness analysis that models the market as a Spotify/Apple duopoly yields very similar results.
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