Transcript pricesectexts - UCSB Economics - University of California, Santa

Prices of Economic Textbooks
SOME ECONOMIC ANALYSIS
TED BERGSTROM, UCSB
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.
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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.
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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
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See discussion of legality
http://answers.google.com/answers/threadview?id=295219
Textbook costs and pricing
 Book publishing costs in general consist of fixed
costs and variable costs.
 Fixed costs:
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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.
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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
http://theory.economics.utoronto.ca/poet/index.php/index
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 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?
New
Used
None
% of students
11%
72%
18%
Number of students surveyed 257
Where textbooks were purchased
 Where bought
 UCEN
 IV
 Online
 Other student
 None
 No response
34%
23%
9%
15%
18%
2%
Planning to resell textbook?
Keep
29%
Sell
69%
Don't Know
1%
Demand for texts as reference
Buyback price
$ 80
$65
$55
$45
$35
$25
$15
$5
Percent who would keep
3%
9%
15%
32%
50%
73%
83%
100%
At what price would non owners buy?
Price
$75
$65
$55
$45
$35
$25
$15
$5
Percent
7%
13%
22%
38%
53%
69%
80%
82%
Why should publishers consider cutting price
over life of the text?
 Reducing the new book price will force used book
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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
* D E P A R T M E N T
* * D E P A R T M E N T
J E F F R E Y E . T H O M P S O N , *
D R . T H E O D O R E C . B E R G S T R O M , * *
O F B U S I N E S S & E C O N O M I C S , C A L I F O R N IA S T A T E U N I V E R S I T Y , F U L L E R T O N ,
F U L L E R T O N , C A , 9 2 8 3 1
O F E C O N O M I C S , U N I V E R S I T Y O F C A L I F O R N I A , S A N T A B A R B A R A , C A L I F O R NI A
9 3 1 0 6
ABSTRACT
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.
METHODOLGY
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 $139.30 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 $139.30.
In the second year of the edition, the new textbook price will be reduced to 75% of the
original price, or $96.97.
Finally in the third year of the edition, the price will be reduced even further to 50% of
the original price, or $64.65.
•
•
•
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.
RESULTS
Wepreliminary
will show by
comparing
thebytwo
pricing policies,
by reducing
textbook
overtable:
the life of the textbook, the publisher will actually incur
The
results
attained
comparing
our two basic
models the
are new
reported
in theprices
following
larger total profits.
ProfitsThe
Table
The increase in profits is due to the structure of the textbook market.
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).
Constant Price Model
Declining Price Model
INTRODUCTION
Price
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 $139.30.
Qty
Profit
Price
Qty
Profit
The
from our analysis show that$129.30
by reducing the new
life of the text actually
increases profits248
by about $6000. $21,570
The unique
Yearresults
1
248 book price over the
$21,570
$129.30
structure of the textbook market allows for this increase in profits. Such market factors include:
Year 2
Year 3
Total
47 buyback price. This
$4,088
$96.97
• Lower new textbook prices$129.30
will result in a lower
results in less textbooks
sold back at the117
end of the term, which reduces competition for new textbook sales.
• A reduction in price of 25%
for the second year
sold by almost 250%$64.65
$129.30
40increased the quantity
$3,479
166
• 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
335
$29,137
CONCLUSION
531
$7,339
$6,389
$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.
ACKNOWLEDGMENTS
I would like to thank the GRIP (Graduate Research Internship Program) NSF-AGEP Grant #: 8 - 487610 – 26406. I would also like to thank the GRIP
advisors, Dr. Ted Bergstrom, and everyone who made this project successful.
Textbook Pricing
Reduced Prices Lead to Increase in Profits
* D E P A R T M E N T
* * D E P A R T M E N T
J E F F R E Y E . T H O M P S O N , *
D R . T H E O D O R E C . B E R G S T R O M , * *
O F B U S I N E S S & E C O N O M I C S , C A L I F O R N IA S T A T E U N I V E R S I T Y , F U L L E R T O N ,
F U L L E R T O N , C A , 9 2 8 3 1
O F E C O N O M I C S , U N I V E R S I T Y O F C A L I F O R N I A , S A N T A B A R B A R A , C A L I F O R NI A
9 3 1 0 6
ABSTRACT
METHODOLGY
Profits Table
Constant Price Model
Price
Qty
Declining Price Model
Profit
Price
Qty
Profit
The preliminary results attained by comparing our two basic models are reported in the following table:
Year 1
$129.30
248
$21,570
$129.30
248
$21,570
Year 2
$129.30
47
$4,088
$96.97
117
$7,339
Year 3
$129.30
40
$3,479
$64.65
166
$6,389
335
$29,137
531
$35,298
Total
CONCLUSION
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.
ACKNOWLEDGMENTS
I would like to thank the GRIP (Graduate Research Internship Program) NSF-AGEP Grant #: 8 - 487610 – 26406. I would also like to thank the GRIP
advisors, Dr. Ted Bergstrom, and everyone who made this project successful.