1. Dealing with Big Deals Ted Bergstrom

2. The old regime Back in the 20th century, libraries subscribed to paper editions of academic journals. Journals were sold separately. No price discrimination among universities. Big universities had multiple subscriptions to major journals. Small universities did not subscribe to most journals--costly subscriptions, scarce shelf space.

3. Along came the internet… Scholars preferred downloading to visiting the library. Marginal cost to publishers of extra subscription fell from about $.01 per page to almost $0. Shelf space was no longer an issue for small libraries. Big universities no longer needed multiple copies.

4. A short history of prices

5. Enter the Site License Publishers learned to sell site licenses for online access to journals. Some learned faster than others. Elsevier was quickest. The new internet technology lent itself to bundling and price discrimination.

6. The Big Deal, Round 1

7. Elsevier’s Clever Scheme Elsevier devised an effective way to price discriminate. Calculate each library’s current expenditure on paper journals. Multiply this by 1+x where x~.15 Supply electronic access to all Elsevier journals, plus paper access to previous subs for this lump sum. This is a 5 year contract. Elsevier promised annual price will rise by no more than 7%.

8. How effective? Elsevier knows library is willing to pay at least what paid for paper subscriptions. Additional access costs Elsevier nothing. Libraries chose not to pay for this access before. Library’s value of additional access roughly proportional to budget. Uptake rate was high and other publishers soon copied this trick.

9. Benefits (to seller) of bundling Monopolist’s problem: Demanders’ willingness to pay differs and monopolist can’t tell who has high and who has low value. Must charge same to “similar-looking” customers. Can’t collect entire consumers’ surplus. Due to “law of large numbers,” demand for bundles of journals less variable than demand for single journals. Monopolist can come closer to extracting all consumers’ surplus.

10. Bundling deters entry Libraries who bought the Big Deal were obliged to increase their payments to Elsevier by 7% per year. Payments to Elsevier are about half of library serials budget. Serials budgets rise at less than 3.5%. Libraries are in perpetual cancellation mode, but bundled journals are exempt. Adding new competing journals is not likely.

11. What happens when 5-year Big Deal contract expires? Faculty addicted to online access. Must negotiate new contract.

12. Polysyllabic Thunder A single agency, the California Digital Library negotiates one Big Deal for all UC campuses. They negotiated a second Big Deal contract in 2004. Afterwards a CDL spokesperson said “ The economics of scholarly journals publishing are incontrovertibly unsustainable.” And an Elsevier spokesperson said "Although the negotiation period was challenging for both parties, the tone of the discussion was professional and cordial throughout." Beats having your pocket picked by surly amateurs!

13. The Big Deal, Round 2

14. Renewing the Big Deal After first round of contracts, what happens? Old formula doesn’t work. Print subscriptions not useful any more. Bargaining for large buyers becomes one-on- one. Publishers can no longer credibly claim that they don’t give discounts. Secret contracts commonly signed.

15. How to bargain? Theory of bargaining suggests that library needs to know what will happen if Big Deal bargain breaks down. “You have to be ready to walk.” But what is a Big Deal worth to a library? What is it worth to publisher? Very difficult question: Big publishers have thousands of journals in hundreds of different fields.

16. A hint: If Big Deal breaks down, library does not abandon publisher’s journals. Library would still buy selected individual journals from publisher that are “worth their cost.”

17. A proposed recipe: Hypothetical publisher: Call it Wiley. Library lists its current holdings of all journals in each discipline. Library counts the (weighted) citations to journals currently held in each discipline. Finds minimum cost subscription list that would achieve current citation levels in all discipline swithout the Wiley package.

18. Recipe continued: Finding this list is easy. Array journals in each discipline by cites per dollar. Work down list until necessary number of cites achieved. Calculate total cost V of all subscriptions to journals on this list and total cost W of all subscriptions on this list that come from Wiley.

19. Recipe continued Suppose that library buys a Big Deal site license to the entire Wiley bundle. Calculate minimum cost Y of topping up the Wiley Big Deal bundle with non-Wiley journals to achieve current citations in all fields. Then X=V-Y is maximum willingness to pay for the Wiley package. Emphasize V-Y is the MOST library could pay and not be worse off. This is NOT what library should pay if it has any bargaining power.

20. Value of Big Deal to Publisher If Big Deal falls through, publisher still gets revenue from individual subscriptions. For Wiley, we calculated this as W. Value to Wiley of consummating Big Deal at price P is P-W.

21. Nash-Rubenstein Bargaining Solution If a Big Deal is made at price P, – The library gains X-P (where X=V-Y, is the library’s maximum willingness to pay) – The publisher gains P-W (where W is its revenue from the library if no Big Deal is struck.) Nash-Rubenstein theory predicts “split the difference”. X-P=P-W, so P=(X+W)/2

22. Caveat Suppose that a library managed to bargain so well that it got entire surplus from purchasing the bundle rather than individual journals. It would still be paying monopoly rents equal to the profits that the monopolist would earn by selling journals individually without bundles.

23. Bundles and non-profit journals Many non-profit societies contract with Blackwell- Wiley nee Blackwell to market and print their journals. Examples: Econometrica, RE Studies, J of Finance, Economic Journal, Canadian Journal. Old Regime: Societies negotiated low subscription prices, with threat to move to other publishers (MIT, Oxford, Cambridge) Blackwell also publishes some high-priced journals that it owns. Two operations were completely independent.

24. Enter the internet… Blackwell now sells electronic bundles that include their own journals as well as non- profits that they publish for societies. Blackwell price discriminates by the Elsevier first-round Big Deal formula. Libraries pay for journals they previously bought in paper, plus a surcharge for the electronic bundle. If library drops a paper journal, price of bundle rises so no money is saved.

25. Importance of non-profit bundles Review of Economic Studies currently has 1500 ``stand-alone’’ subscribers and 2000 subscribers who purchased the Blackwell bundle but did not subscribe to RE Studies on its own. Econometrica opted out of Blackwell’s bundle arrangement because it thought it was losing subscriptions and was not getting a fair share of revenue.

26. Sharing the revenue Blackwell divides the revenue from sale of its bundles among journals in proportion to stand-alone subscription price. But non-profit journals are both cheaper and more cited than Blackwell’s for-profits. Econometrica, RE Studies, and J Finance supply 61% of quality-weighted cites and cost 4.5% of the total subscription price. Blackwell argues: Societies don’t lose. They get to keep their old subscription base. Only a few of the bundle buyers don’t already have their journals.

27. Mark Armstrong’s critique Blackwell’s argument doesn’t work for new markets. The claim that your price for electronic rights will rise permanently if you drop paper subscription is not credible. Blackwell’s goals of profit-maximization for its journals are incompatible with society goals of maximizing exposure subject to break-even constraint.

28. Non-profit bundles Armstrong predicts that societies will continue to cover their costs with subscriptions, but will join together to bundle non-profit journals separately from for-profit journals. Much as bundling allows monopolists to make higher profits, it allows non-profits to have more subscribers while covering their costs.

29. Tha Professional and Cordial, throughout