SOME ECONOMIC ANALYSIS TED BERGSTROM, UCSB Prices of Economic Textbooks

A startling difference Median price of economics texts in U.S. market is more than $150. New copies of many of these same texts sell in India and/or China for less than $10.  Authorized by publisher  Paperback, two-color, and non-glossy paper  Otherwise page-for-page identical, authorized by publisher for sale in India

What does this tell us? Marginal cost of printing and distribution is low.  Hardback cover and four-color printing add little to cost.  Estimate from one industry insider—Marginal cost is $10-$15. Theory of third degree price discrimination.  Where monopolists can keep markets separate, they charge lower prices in market where demand is more elastic. Problem of separating markets.  Resale of international editions abroad is legal, but publishers try to restrict it.  Reduce quality of cheap edition to discourage sale in high price market  Print warnings in book  Limit quantities printed  See discussion of legality

Textbook costs and pricing Book publishing costs in general consist of fixed costs and variable costs. Fixed costs:  Author’s time and effort  Editing  Typesetting and permissions  Ancillaries  Advertising and promotion Variable costs  Materials, printing, shipping.  Retail handling costs

Costs Retail Markup  Most bookstores have margin of 25% of retail price for new textbooks  Expensive books used in large classes are profitable  Often lose on books used in small classes Author’s royalties  Typically about 15% of wholesale price (11% of retail) If textbook sells for $160, publisher nets about $90  $40 to bookstore  $18 to author  $12 marginal cost

What is left for publisher? If book sells 10,000 copies--$900,000 to cover fixed costs and profits If book sells 15,000 copies a year for 10 years, there is $13,500,000, almost all profits.

Economics of Used Books Suppose bookstore sells new text at suggested retail price (SRP) $160. If same edition will be used at university next term, bookstore buys it back for half of SRP which is$80 and sells used copies for ¾ of SRP, which is $120. If book is not used again at same university, but no new edition available, bookstore buys back used copies for 30-40% of SRP (say $50) and resells to wholesaler. Bookstores commonly order some used books from wholesalers, pay ½ SRP to wholesaler and sell them to students at ¾ SRP.

The used book market Publishers say that they have to charge so much because the used book market spoils sales of new books. They have this backwards. They are able to charge as much as they do for new books because students can resell their texts for half the price. They will charge what market will bear. Publishers of major texts try to maintain three year new edition cycle to spoil used book market.

Costs of book ownership First semester of edition cycle—1/2 of SRP.  Must buy new book for, say, $160.  Can sell text at end of term for $80. Net cost $80. Semesters 2-5 of cycle—1/4 of SRP  Buy used text for $120  Sell used text back for $80. Net cost $40. Last semester of edition cycle—3/4 of SRP  Buy used text for $120.  No resale value—Keep as reference.

Saving money on texts Buy new text online: modest savings, some risk of getting wrong edition. Buy international edition from e-bay. Cheaper, but remember that you can’t resell to the bookstore.  Remember that if the text is not in its last year of the edition, you can buy used text and sell it back to bookstore. Net cost is about ¼ SRP, say $40.  If you buy international edition, little resale value, some risk in online transaction. But you can keep it for a reference. Share a text with a friend. Use previous edition. These should be available very cheaply online. If you are going to use the text a lot, there is much to be said for getting your own copy direct from bookstore.

What can faculty do? Pay attention to prices. Like physicians prescribing medicine, professors don’t pay for the books they assign—and often don’t pay much attention.  Not much variation between prices charged by major publishers, and they don’t make it easy to verify.  PoET: Prices of Economics Textbooks website Allow students to use old edition (especially during first year of new edition.

How responsive is textbook demand to price? A survey of 257 UCSB students in Econ 100a, 100b Conducted in 2005

Did you buy new, used, or none at all? % of students New 11% Used 72% None 18% Number of students surveyed 257

Where textbooks were purchased Where bought UCEN 34% IV 23% Online 9% Other student 15% None 18% No response 2%

Planning to resell textbook? Keep 29% Sell 69% Don't Know 1%

Demand for texts as reference Buyback price Percent who would keep $ 80 3% $65 9% $55 15% $45 32% $35 50% $25 73% $15 83% $ 5 100%

At what price would non owners buy? Price Percent $757% $65 13% $55 22% $45 38% $35 53% $2569% $15 80% $5 82%

Why should publishers consider cutting price over life of the text? Reducing the new book price will force used book price down. Reduced used book price will reduce buy-back price. Reduced buy-back price will increase number of students who keep book as a reference. Every book kept as a reference means another new book sold. Also, lower prices will increase number of students who buy a textbook at all.

Some estimates Based on class surveys like those reported above. Estimated effect of reducing price by 25% in second year and 50% in third year of life of edition. Estimates suggest this would increase profits.

Textbook Pricing Reduced Prices Lead to Increase in Profits JEFFREY E. THOMPSON,* DR. THEODORE C. BERGSTROM,** *DEPARTMENT OF BUSINESS & ECONOMICS, CALIFORNIA STATE UNIVERSITY, FULLERTON, FULLERTON, CA, **DEPARTMENT OF ECONOMICS, UNIVERSITY OF CALIFORNIA, SANTA BARBARA, CALIFORNIA ABSTRACT METHODOLGY ACKNOWLEDGMENTS CONCLUSION INTRODUCTION RESULTS Textbook prices have long been the source of aggravation for the academic community. Students find it hard to justify the inflated prices they have to pay in order to have the proper materials for their classes, and teachers view these high prices as barrier to disseminate information. We study the textbook markets by collecting secondary pricing information from various textbook retailers, and demand information through student surveys. From the collected data, we will identify pricing cycles through derived demand functions and regression analysis which will lead to a more efficient textbook market. We will investigate whether textbook publishers can increase revenues during the life of the texts by reducing prices over the life of an edition. Textbook publishers make huge profits the way things are now, so there is no incentive to change their pricing strategies. The primary goal of this research is to come up with a model in which publishers can reduce textbook prices while actually increasing profits. In doing so, we create the incentive needed for publishers to lower textbook prices. In order to determine weather or our hypothesis is feasible, we will use the Hal Varian Textbook “Intermediate Microeconomics: A Modern Approach” as a sample of the textbook market. The Varian text has an edition life of three years, a typical textbook lifespan. The new book price for the text is $ In order to illustrate the effects of a declining price schedule on total profits, we will compare two different models. Assumptions include: The quantity of textbook purchasers are the same in each year. The textbook will be used for the entire life of the edition. Model 1 Constant Pricing Policy In this model we will use the full textbook price of $ as the new text price for all three years of the text life. Model 2 Proposed Declining Pricing Scale. The price of the first year of the edition is the full price of $ In the second year of the edition, the new textbook price will be reduced to 75% of the original price, or $ Finally in the third year of the edition, the price will be reduced even further to 50% of the original price, or $ Survey Results are used to determine the quantity demanded at each price level. A willingness to pay for new textbooks was given to students. The results from this question was used to determine quantity sold at each price level. We will show by comparing the two pricing policies, by reducing the new textbook prices over the life of the textbook, the publisher will actually incur larger total profits. The increase in profits is due to the structure of the textbook market. The interesting thing about the textbook market is the demand for keeping a textbook is elastic. The elastic demand coupled with reducing the price of a new textbook forces down the buyback price for used books, which in turn lowers the cost of keeping a used book. This will lead to greater total revenue (Total Revenue = Price * Quantity). The preliminary results attained by comparing our two basic models are reported in the following table: The results from our analysis show that by reducing the new book price over the life of the text actually increases profits by about $6000. The unique structure of the textbook market allows for this increase in profits. Such market factors include: Lower new textbook prices will result in a lower buyback price. This results in less textbooks sold back at the end of the term, which reduces competition for new textbook sales. A reduction in price of 25% for the second year increased the quantity sold by almost 250% An additional reduction of 50% for the third year increased the quantity sold by over 400% Both of these price reductions lead to an increase in profit Profits Table Constant Price ModelDeclining Price Model PriceQtyProfitPriceQtyProfit Year 1$ $21,570$ $21,570 Year 2$ $4,088$ $7,339 Year 3$ $3,479$ $6,389 Total 335$29, $35,298 The preliminary results of this study reveal the possibility of a more efficient textbook market, a market which includes a welcome reduction of new textbook prices. Although we obtained expected results, further research will include expanding our models to cover a more comprehensive market. The analysis of demand elasticity may be used to determine the optimal price schedule for new textbooks. This will allow a more accurate reflection of real life condition. Eventually leading to a market where profits are maximized while prices are minimized. I would like to thank the GRIP (Graduate Research Internship Program) NSF-AGEP Grant #: – I would also like to thank the GRIP advisors, Dr. Ted Bergstrom, and everyone who made this project successful. Profits Table Constant Price ModelDeclining Price Model PriceQtyProfitPriceQtyProfit Year 1$ $21,570$ $21,570 Year 2$ $4,088$ $7,339 Year 3$ $3,479$ $6,389 Total 335$29, $35,298

Textbook Pricing Reduced Prices Lead to Increase in Profits JEFFREY E. THOMPSON,* DR. THEODORE C. BERGSTROM,** *DEPARTMENT OF BUSINESS & ECONOMICS, CALIFORNIA STATE UNIVERSITY, FULLERTON, FULLERTON, CA, **DEPARTMENT OF ECONOMICS, UNIVERSITY OF CALIFORNIA, SANTA BARBARA, CALIFORNIA ABSTRACT METHODOLGY ACKNOWLEDGMENTS CONCLUSION The preliminary results attained by comparing our two basic models are reported in the following table: Profits Table Constant Price ModelDeclining Price Model PriceQtyProfitPriceQtyProfit Year 1$ $21,570$ $21,570 Year 2$ $4,088$ $7,339 Year 3$ $3,479$ $6,389 Total 335$29, $35,298 The preliminary results of this study reveal the possibility of a more efficient textbook market, a market which includes a welcome reduction of new textbook prices. Although we obtained expected results, further research will include expanding our models to cover a more comprehensive market. The analysis of demand elasticity may be used to determine the optimal price schedule for new textbooks. This will allow a more accurate reflection of real life condition. Eventually leading to a market where profits are maximized while prices are minimized. I would like to thank the GRIP (Graduate Research Internship Program) NSF-AGEP Grant #: – I would also like to thank the GRIP advisors, Dr. Ted Bergstrom, and everyone who made this project successful.