One cheer for the Productivity Commission?

The Productivity Commission yesterday released its draft report Restrictions on the Parallel Importation of Books. As part of its proposed package of changes, the Commission proposed that the restrictions on parallel imports should apply for only 12 months from the date of first publication of a book in Australia, as opposed to the current arragements whereby restrictions can potentially apply for the full term of copyright. One cheer for this recommendation.

A brief overview of the welfare costs of parallel import restrictions to start with. Parallel import restrictions allow authors and publishers to price discriminate. Restricting supply in the domestic market will result in prices for books being higher than elsewhere. While part of the loss of surplus to consumers is transferred to producers (including foreign producers), part of it is not, and can be considered a deadweight loss. The deadweight loss also includes the extra costs to society of publishing books domestically that could have been imported more cheaply. In the absence of parallel import restrictions, while the prices for copyrighted books in Australia will not fall sufficiently to reflect long run marginal costs of production, we can expect that they would fall from their current levels, thereby removing the current deadweight losses.

Given these deadweight losses, what is the justification for parallel import restrictions (PIRs)? The report states that the main justification is the existence of 'cultural externalities':

While much of the total cultural value of a book will ... be reflected in its market value, there is also likely to be a component that is not. In particular, whereone person’s purchase and consumption of a book generates benefits for others (asidefrom the author, publisher etc, who of course receive payment for their work),unpriced benefits, or ‘externalities’ in economic parlance, can be said to arise. It is these external benefits (and costs) of activities that provide the strongest rationalefor governments to support (or, in the case of external costs, discourage) activities (p 6.9).

The existence of cultural externalities is also used to justify local content rules for television. Professor Sinclair Davidson and I have written on this previously. Local content rules and PIRs are equivalent in the blunt way that they are used to create and disseminate domestic 'culture'.

What is important to note in this case, however, is that the elimination or relaxation of PIRs on books would primarily affect an author's decision to supply the overseas market (where cultural externalities are not generated), rather than the domestic market where the external benefits of 'cultural valuable literature' are policy relevant! This is because it is the importation of remainders that displace existing domestic sales that will reduce total author income in the absence of PIRs.

Given that there is no necessary correlation between the size of cultural externalities for particular books and the expected size of the overseas market for these books , it is surprising that the Comission supports the retention of a policy that tends to disproportionately benefit those authors who expect large overseas sales, at the expense of domestic consumers.

While this is a crucial point, it seems to be overlooked in parts of the draft report. Consider the proposal to remove PIR protection for educational books, a proposal that is rejected in the report.

The report states that

This option would evidently increase the scope for price competition across the entire educational books market. To the extent that the cultural externalities in significant segments of this market appear to be limited, and the opportunities for low cost sourcing from overseas substantial ... there would be the prospect of a net gain for the community.

However, the boundary between educational and other books is often far from easy to delineate, with many books both read for pleasure and used in an educational context.Books prescribed for literature studies are an obvious example. Also, a significant number of educational texts embody a strong cultural component, with learning assisted by the presentation of ideas and arguments in Australian settings (italics mine).

This issue is irrelevant to the discussion of PIRs for books. Educators and students will be willing to pay a premium for textbooks that appropriately contextualise theory (Australian students of introductory macroeconomics would prefer to purchase a text discussing the RBA rather than the US Fed if they are to be examined on the implementation of monetary policy within the Australian context). These texts will not be affected in any way by the existence or non-existence of PIRs, as these texts are unlikely to have a large expected overseas market.

Let's hope that the Comission gives consideration to these issues in the final report.