Mark J. McCabe: Journal Pricing and Mergers 1 Journal Pricing and Mergers: Print v Digital Mark J. McCabe School of Economics Georgia Institute of Technology

Mark J. McCabe: Journal Pricing and Mergers 2 Business Models for Commercial STM Publishers Print Environment -- No Bundling or Price Discrimination – Why? -- (Compared to non-profits, more titles, higher prices but fewer subscriptions and lower quality) Digital Environment -- Bundling and Price Discrimination – Why? -- (Compared to non-profits, higher prices for licenses)

Mark J. McCabe: Journal Pricing and Mergers 3 Demand for Print STM Titles Although scholars use journals, libraries purchase most subscriptions. Budgets are defined for broad journal categories, e.g. biomedical. Subject to these budgets, libraries maximize their collections’ value.  demand is for a portfolio of titles, chosen on a cost/use basis (solution to the “knapsack” problem in operations research)

Mark J. McCabe: Journal Pricing and Mergers 4 Commercial Publisher Strategies in a Print STM World, Part I Given the demand for title portfolios, individual journals do not compete on the basis of content. Rather, competition is determined by the relative quality of all titles in the portfolio, and the size and distribution of library budgets. H igher quality titles should charge higher prices.

Mark J. McCabe: Journal Pricing and Mergers 5 Commercial Publisher Strategies in a Print Legal World, Part I In some categories of legal serials, e.g. reporters or newsletters, individual titles do compete on the basis of content. For these titles, competition is determined by the content and costs of similar titles. In other cases, e.g. encyclopedias or treatises, individual titles do not compete on the basis of content. In these cases, competition is similar to the case of STM journals

Mark J. McCabe: Journal Pricing and Mergers 6 Commercial Publisher Strategies in A Print World, Part II Market Power may increase as a publisher’s portfolio grows, due to pecuniary externalities. Attention must be paid to whether competition is based on content overlap or the quality of all titles in the market portfolio Sources of portfolio growth: - New titles - Mergers

Mark J. McCabe: Journal Pricing and Mergers 7 Empirical Evidence in the Print STM World Higher quality titles do charge higher prices. Commercial publishers do introduce far more titles than their non-profit counterparts. Mergers in the biomedical portfolio market have increased market power and prices. (merger results based on 7 transactions in the period )

Mark J. McCabe: Journal Pricing and Mergers 8 Empirical Evidence in the Print Legal World Price Inflation is greatest when competition is portfolio-based. Mergers are associated with higher prices when the merging parties both control titles in the same “portfolio” categories, e.g. encyclopedias, treatises. No apparent price effects when mergers join titles from different categories and/or similar “content” categories. (merger results based on 6 transactions in the period )

Mark J. McCabe: Journal Pricing and Mergers 9 Market Structure and Strategies in a Digital STM Environment, Part I Due to the importance of journal reputation, the digital environment does not necessarily enhance entry (this is true for both subscription-based and open access publishing) The role of 3rd-party vendors is diminished. Price discrimination and bundling enhance publisher margins.

Mark J. McCabe: Journal Pricing and Mergers 10 Market Structure and Strategies in a Digital STM Environment, Part II Library demand is for a portfolio of bundles, chosen on a cost/use basis. Large publishers have an incentive to foreclose smaller competitors. This threatens to lower collection quality. Because of the potential for foreclosure, mergers can be far more profitable, esp. those that result in control of 50% or more of a portfolio market.

11 Empirical Evidence in the Digital World Mostly anecdotal; also the transition from print to digital is not complete. Digital usage generally consistent with citation data. Almost all ARL libraries appear to be licensing expensive high quality commercial bundles. Fewer libraries are licensing lower quality bundles. Open Access publishing can be seen as a response to the foreclosure threats faced by new and/or small publishers.

Mark J. McCabe: Journal Pricing and Mergers 12 Antitrust Issues - Mergers, Part I Should markets be defined on the basis of content or portfolios? If the former, most mergers raise few concerns. If the latter, are all combinations suspect?

Mark J. McCabe: Journal Pricing and Mergers 13 Antitrust Issues - Mergers, Part II To date, only one proposed merger has failed, possibly due to EU antitrust scrutiny (R. Elsevier/W. Kluwer, 1998). In the US, minor divestitures occurred in West/Thomson (1996) -- In both cases, market definition was based on content. Libraries’ effort to block or modify the 2001 Elsevier/Harcourt merger hurt by uncertainty about digital transition. (However, the UK’s OFT did acknowledge the potential relevance of a broad, portfolio type market definition.)

Mark J. McCabe: Journal Pricing and Mergers 14 An example: ISI-ranked Biomed Titles, 1998 (first published ) Non-Profit (17 titles) Commercial (101 titles) Price 446 1,316 Citations 14,163 5,067 # Papers Circulation (circulation based on 194 medical libraries)

Mark J. McCabe: Journal Pricing and Mergers 15 Reed-Elsevier Biomed Journal Statistics Prices$482$1,548 Citations 3,477 4,222 # of Papers (ISI-ranked titles)

Mark J. McCabe: Journal Pricing and Mergers 16 (Medical) Library Response? In 1988, 15.5% of libraries subscribed to the typical Elsevier title In 1998, 14.4% of libraries subscribed to the typical Elsevier title