Electronic Journal Site Licenses: A Boon for Whom? Ted Bergstrom, UCSB Economics Department

The speaker conferring with a leading commercial journal publisher

Pricing of Paper Editions The 6 most-cited journals in economics are owned by non-profit groups.The 6 most-cited journals in economics are owned by non-profit groups. Average price to libraries is $180 per year.Average price to libraries is $180 per year. Only 5 of the 20 most-cited journals are owned by commercial publishers.Only 5 of the 20 most-cited journals are owned by commercial publishers. Average price to libraries is $1660 per year.Average price to libraries is $1660 per year.

Costs of Economics Journals Publisher Type Number of Journals Price per Page Price per Cite Non-Profit91$0.18$0.15 For-Profit206$0.82$2.40

Costs of a Complete Economics Collection PublisherType Percent of Cost Percent of Cites Non-Profit9%62% For-Profit91%38%

Journal Prices by Discipline Ecology Economics Atmosph. Sci Mathematics Neuroscience Physics Costper page Cost per page For-profit Nonprofit Non-profitFor-profitNon-profit Cost per cite (In US $)

Monopoly Profits in Academic Publishing? Hint: University press and professional society journals are usually not subsidizedHint: University press and professional society journals are usually not subsidized They charge 1/5 as much per page as for-profit journals.They charge 1/5 as much per page as for-profit journals.

Costs and Profits Costs and Profits Estimates based on information from non-profit publishersEstimates based on information from non-profit publishers –For-profits won’t tell, but it’s the same technology. First-copy costs are about $100 per page.First-copy costs are about $100 per page. Marginal costs per subscriber: about 2 cents per page.Marginal costs per subscriber: about 2 cents per page.

Example: One Leading Commercial Journal Has about 1000 library subscribers and 2000 pages.Has about 1000 library subscribers and 2000 pages. Price for 2003: about $1800.Price for 2003: about $1800. Avg cost per subscriber: about $240.Avg cost per subscriber: about $240. Profit is about $1,560 per subscriberProfit is about $1,560 per subscriber –Total profits: $1,560,000 per year. Authors and referees are not paid!Authors and referees are not paid!

The Cost of Going Online In 1998 almost no journals were online.In 1998 almost no journals were online. In 2002, almost all were.In 2002, almost all were. Price of top non-profits was $0.10 per page in 1998 and $0.12 in 2002 for paper plus online.Price of top non-profits was $0.10 per page in 1998 and $0.12 in 2002 for paper plus online. For-profits charged $0.79 in 1998 and $0.89 in 2002 for paper plus online.For-profits charged $0.79 in 1998 and $0.89 in 2002 for paper plus online. Conclusion: Going online cost about $.02 per page. Prices of for-profits are not determined by costs.Conclusion: Going online cost about $.02 per page. Prices of for-profits are not determined by costs.

Pricing of Electronic Journals Electronic distribution allows new pricing methods not available with paper.Electronic distribution allows new pricing methods not available with paper. –Price discrimination by size of library –Bundling of Journals with all-or-nothing pricing –Consortium pricing

What is left for libraries to do? With paper journals, libraries had an obvious role.With paper journals, libraries had an obvious role. –Location for shared access With electronic journals, library serves no “physical” purpose.With electronic journals, library serves no “physical” purpose. Only a “fiscal” role: toll collector and gatekeeper for site licenses.Only a “fiscal” role: toll collector and gatekeeper for site licenses. Who benefits from this?Who benefits from this?

Who gains? An Example There are 3 types of scientists.There are 3 types of scientists. There are 100 universities. Each has 1 scientist of each type.There are 100 universities. Each has 1 scientist of each type. Willingness to pay for an electronic subscription: Willingness to pay for an electronic subscription: –Type A: $300 –Type B: $200 –Type C: $100

Costs and Publisher Types Electronic Journal has production cost of $32000 per year.Electronic Journal has production cost of $32000 per year. Marginal costs for an extra subscriber are 0.Marginal costs for an extra subscriber are 0. Consider two types of publisher: Consider two types of publisher: –Profit-maximizer –Non-profit subscription maximizer

Consumer’s Surplus: Economists’ Definition People buy things that are worth more to them than their price.People buy things that are worth more to them than their price. Your consumer’s surplus from buying a good is the difference between the amount you would be willing to pay and the amount you have to pay.Your consumer’s surplus from buying a good is the difference between the amount you would be willing to pay and the amount you have to pay.

Profit-maximizing publisher: No site licenses Since m.c. is zero, publisher wants to maximize revenue.Since m.c. is zero, publisher wants to maximize revenue. Revenue maximized at price of $200 with 200 subscriptions.Revenue maximized at price of $200 with 200 subscriptions. Profits are $40,000-32,000=$8,000.Profits are $40,000-32,000=$8,000. Type A’s get consumers’ surplus of $( )=$100 each.Type A’s get consumers’ surplus of $( )=$100 each. Type B’s and C’s get zero surplus.Type B’s and C’s get zero surplus.

Calculations for profit- maximizer The number who will buy isThe number who will buy is –100 at price $300 (Type A’s only) –200 at price $200 (Type A’s and Type B’s) –300 at price $100 (All 3 types) Total revenue at price:Total revenue at price: –$300 is $300x100=$30,000 –$200 is $200x200=$40,000 –$100 is $100x300=$30,000 Profit is maximized at $200 with A’s and B’s buying and C’s not buying.Profit is maximized at $200 with A’s and B’s buying and C’s not buying.

What happened? University site licenses allow publisher to make greater profits than it would with individual subscriptions.University site licenses allow publisher to make greater profits than it would with individual subscriptions. Although site licenses allow everybody access to the journal, nobody is better off and Type A’s are worse off than with individual subscriptions.Although site licenses allow everybody access to the journal, nobody is better off and Type A’s are worse off than with individual subscriptions.

First Moral of the Story We are protected from worst effects of monopoly by fact that monopolist doesn’t know who has high and who has low willingness to pay.We are protected from worst effects of monopoly by fact that monopolist doesn’t know who has high and who has low willingness to pay. Site licenses aggregate consumers and reduce the variance of demand.Site licenses aggregate consumers and reduce the variance of demand. This increases monopoly profit and reduces consumers’ surplus.This increases monopoly profit and reduces consumers’ surplus. Similar effects come from bundling across commodities.Similar effects come from bundling across commodities.

Non-profit publisher: No Site Licenses Publisher must recover costs and sell as many units as possible.Publisher must recover costs and sell as many units as possible. –Costs are $32,000. Best publisher can do is price at $160 and sell to 200 A’s and B’s.Best publisher can do is price at $160 and sell to 200 A’s and B’s. –For C’s to buy, price needs to be $100. Then revenue would be only $100x300=$30,000.

Non-profit publisher: No Site Licenses (cont’d) At price $160, consumers’ surplus:At price $160, consumers’ surplus: –Type A’s $ =$140. –Type B’s $ =$40. –Type C’s do not buy and get $0. Total consumers’ surplus is $140x100+$40x100=$18,000.Total consumers’ surplus is $140x100+$40x100=$18,000.

Non-profit publisher: with Site Licenses Publisher can cover costs at price $320.Publisher can cover costs at price $320. All 100 universities subscribe. Worth $600 to each university.All 100 universities subscribe. Worth $600 to each university. All 300 scientists have access.All 300 scientists have access. Consumers’ surplus at each university is $ =$280.Consumers’ surplus at each university is $ =$280. Total consumers’ surplus is $28,000.Total consumers’ surplus is $28,000. This exceeds c.s. with no site licenses.This exceeds c.s. with no site licenses.

A Second Moral With non-profit publishers, site licenses improve efficiency: allow access to all.With non-profit publishers, site licenses improve efficiency: allow access to all. Libraries have a useful role to play as revenue collectors that cover costs without shutting out users.Libraries have a useful role to play as revenue collectors that cover costs without shutting out users. Remember that when the cost of allowing access to another user is zero, it is wasteful not to allow access to all.Remember that when the cost of allowing access to another user is zero, it is wasteful not to allow access to all.

Ranking the Alternatives by consumers’ Surplus 1)Non-profit journal with site licenses 2)Non-profit journal with individual subscriptions only 3)For-profit journal with individual subscriptions only 4)For-profit journal with site licenses

Price Discrimination and Bundling With paper journals, all libraries paid the same subscription price. With paper journals, all libraries paid the same subscription price. Journals were sold separately.Journals were sold separately. With electronic journals, publishers charge prices that depend on size of university or on previous purchases.With electronic journals, publishers charge prices that depend on size of university or on previous purchases. They offer deals that bundle all of their journals in a single package.They offer deals that bundle all of their journals in a single package.

A Publisher’s View A Publisher’s View “So, we should have models where we make a deal with the university, the consortia or the whole country, where for this amount we will allow all your people to use our material, unlimited… And, basically the price then depends on a rough estimate of how useful is that product for you; and we can adjust it over time. It is a principle, which, in my view, is not immoral.” From a speech by Derk Haank, CEO, Elsevier Science

A Librarian’s View “In the Big Deal, libraries agree to buy electronic access to all of a commercial publisher's journals for a price based on current payments to that publisher, plus some increment. Academic library directors should not sign on to the Big Deal or any comprehensive licensing agreements with commercial publishers… You read that right. Don't buy the Big Deal…the Big Deal serves only the Big Publishers. “ Deal serves only the Big Publishers. “ Ken Frazier, head librarian, University of Wisconsin.

An Economists View “Morality” of price discrimination and bundling is not the issue.“Morality” of price discrimination and bundling is not the issue. Benefits and costs to the academic community is what concerns us.Benefits and costs to the academic community is what concerns us. Profitability is what concernsProfitability is what concerns commercial publishers. commercial publishers.

Benefits of Price Discrimination and Bundling Price discrimination allows more access for small colleges and poor countries.Price discrimination allows more access for small colleges and poor countries. Bundling allows big universities to get everything a publisher produces.Bundling allows big universities to get everything a publisher produces. Since cost of access for an extra subscriber is nearly zero, this raises efficiency.Since cost of access for an extra subscriber is nearly zero, this raises efficiency.

Benefits for Whom? Price discrimination allows publishers to raise price to big universities—releases the restraint previously imposed by threat of losing subscriptions at midsize universities.Price discrimination allows publishers to raise price to big universities—releases the restraint previously imposed by threat of losing subscriptions at midsize universities.

Bundling and Entry Deterrance Bundling plus annual price increases of about 7% means no room in library budgets for new cheap journals.Bundling plus annual price increases of about 7% means no room in library budgets for new cheap journals. Library budgets grow less rapidly than price of Elsevier bundle.Library budgets grow less rapidly than price of Elsevier bundle. This means no room in budget for new cheaper journals unless library drops entire Elsevier collection.This means no room in budget for new cheaper journals unless library drops entire Elsevier collection.

What should scholars do? Refuse to referee for overpriced journals.Refuse to referee for overpriced journals. Encourage cheap journals.Encourage cheap journals. –Referee for them. –Cite them. –Publish in them. Encourage professional societies to expand their journals and start new ones.Encourage professional societies to expand their journals and start new ones. Keep copyright on your own work and keep your papers on the web.Keep copyright on your own work and keep your papers on the web.

What should libraries do? Pay attention to prices per page and per cite when deciding what to subscribe to.Pay attention to prices per page and per cite when deciding what to subscribe to. Encourage departments to trade overpriced journals for cheaper new ones.Encourage departments to trade overpriced journals for cheaper new ones. Encourage or start new electronic journals.Encourage or start new electronic journals. Resist the Big Deal for overpriced journals. If you can’t resist, bargain hard and beResist the Big Deal for overpriced journals. If you can’t resist, bargain hard and be “ready to walk”. “ready to walk”.

Further Reading Labor for Costly Journals, by Ted Bergstrom—Journal of Economic Perspectives, Fall See Comments on above article in JEP, Fall See You can find: –Do university site licenses benefit the academic Community ? by Carl Bergstrom and me –“The Librarian’s Dilemma”, by Kenneth Frazier, from D-Lib Magazine –“Is Electronic Publishing Being Used in the Best Interest of Science: The Publisher's view” Speech by Derk Haank. at