Textbooks and the Free Market

Whatever you think of the “magic of the free market”, there are a few situations in which it indisputably breaks down (or would break down) if left entirely to its own devices. Mail delivery to Gnome, Alaska. Medical care for indigents. College textbook prices.

When it comes to both the availability and the pricing of a product, the Law of Supply and Demand works best (from the customer’s perspective) when (a) those creating the demand are also the ones paying the price, (b) when the demand is elastic — that is, when an unreasonable increase in price leads to a sharp drop in demand and thus in the supplier’s profits, and (c) the profit potential is sufficient to motivate a supplier to provide, or continue providing, an essential product or service even when the market is small.

With textbooks, the demand is created by instructors who assign the reading for a class of anywhere between 10 and 400 students. But it is the students who pay. The demand is rigid — most instructors don’t assign the textbook based on price but rather based on pedagogical suitability for their course, and students have to buy it. And for many advanced courses, there may be only one suitable textbook on the market. So that textbook, within its particular narrow niche, enjoys no less of a de facto monopoly than Microsoft enjoys in the computer world.

To illustrate my point, let’s take J.D. Jackson’s Classical Electrodynamics. It has been around for 45 years (it is now in its third edition). It is one of the most widely used advanced physics textbooks ever and has undoubtedly sold many tens of thousands of copies, if not more.

The list price for Jackson is $96, and the current discounted price from Amazon is $76. Even used copies are selling for upwards of $56, and this despite an ample supply, as there are currently 75 used copies available via Amazon!

Now compare Classical Electrodynamics, with its 808 pages and current rank of around #13,000 in Amazon sales, with W.L. Shirer’s Rise and Fall of the Third Reich, with its 1,264 pages and sales rank of around #15,000. Jackson was first published in 1962; Shirer in 1960. In short, comparable age, comparable sales in recent years, and Shirer has 50% more pages to boot.

The list price of Rise and Fall is $25.00; the Amazon discount price is $16.50.

How do we explain the fact that Jackson is four times as expensive as Shirer?

It’s not marketing cost. Every physics professor in the world already knows Jackson. I’m not a physics professor and even I know about it! Presumably, just about every physics professor has already made up their mind whether Jackson is the textbook of choice for their course.

Even if Jackson were still being actively marketed today (which I doubt), instructors are vastly less expensive to identify and reach than the general public. All you have to do is send them a free examination copy. If an instructor likes it and adopts it for their course, voila! You’ve got dozens, if not hundreds or thousands, of guaranteed sales over the next few years.

It’s not distribution cost, which should be about the same regardless of the subject matter. And it’s not author royalties — in neither case, in fact, is it likely that the author royalties account for more than 10-20% of gross receipts. It’s not layout, design, and typesetting costs — these are one-time expenses that were probably recouped within the first year of printing.

What about paper, printing, and binding cost? Contrary to common perception, retail prices for books have almost nothing to do with their manufacturing cost. When many thousands of copies per year are being sold, the printing/binding cost of even the fanciest color textbook with accompanying CD is almost certainly well under $10 per copy. For a simpler, text-only paperback of the type frequently used in language and literature courses, the manufacturing cost is probably closer to $2 per copy. Hardcover binding is perhaps a dollar more — that’s right, a dollar!

Most likely, there are two factors at work here: (a) perceived value — a hardcover book with lots of complicated equations looks more expensive than a softcover with just text and a few photos; and (b) the fact that Jackson is usually purchased by students who have no choice.

My point is this: the prices for many, if not most, textbooks are artificially inflated relative to other books, sometimes by ridiculous amounts. Publishers charge a lot simply because they can. Most instructors either don’t consider price when assigning a textbook or else don’t feel they have acceptable lower-cost alternatives to choose from.

In order to control textbook costs, which are now a major factor in the rising cost of a college education, the academic community needs to figure out the following:

1) How to give instructors a reasonable incentive to factor cost into their textbook decisions without penalizing them for sound pedagogical choices; and

2) How to effectively exert pressure on publishers to hold down prices despite the shortcircuiting of traditional market forces.

I don’t claim to have the solution. But awareness of the problem may be an important first step.

It is worth mentioning in passing, however, that instructors may have more leverage with publishers than they realize. One publisher sales rep once worked hard to persuade me to adopt a popular $60 textbook for a freshman course with a projected enrollment of 350. I said I would consider it if she would make it available through the University Bookstore at 20% off the retail price. To my surprise, she agreed! (To her surprise, I still didn’t adopt the book.)

Incidentally, an analogous distortion of market forces is at work with library journal subscriptions, whose cost has far outstripped inflation in recent decades. But that is a topic is for another day.

-G

This entry was posted in College costs, Instruction. Bookmark the permalink.

5 Responses to Textbooks and the Free Market

  1. G says:

    Soon after I posted the above article, an alert reader (my wife) pointed out what I had missed: that the issue of textbook prices has very recently gotten a fair amount of attention in our local press:

    http://badgerherald.com/news/2007/12/04/regents_examine_book.php
    http://www.dailycardinal.com/article/1420
    http://www.news.wisc.edu/14503
    http://www.stateline.org/live/details/story?contentId=235596

    All of the above correctly identify the symptom, and some discuss bandaid solutions, but none, in my opinion, shows any recognition of the underlying disease, which is what I tried to examine with my article.

    Waiving sales tax, for example, can only have a marginal impact on total cost, and it offers no disincentive to publishers to simply fill whatever small breathing space is temporarily created.

  2. G says:

    Again, I’m chagrined over having missed much of the discussion elsewhere prior to writing my article. This is the big disadvantage of letting busy professors try to moonlight as pundits.

    Vice Provost Aaron Brower was kind enough to point me to a link to the completed report of the UW-Madison Committee on Textbook Costs:

    http://www.news.wisc.edu/news/docs/UW-MadisonTextbookCost.pdf

    Here is the associated press release:

    http://www.news.wisc.edu/releases/14154

    My initial reaction is that the report makes a number of useful observations and suggestions, but that these suggestions, if implemented, will have only a marginal impact on textbook costs.

    For example, I do not believe that giving students an extra 2-3 weeks to shop for textbooks will allow them to find many bargains. The total supply-demand equation is not changed by this, it is merely spread over a larger window in time and space. Worldwide variations in book prices are not really all that great, and shipping costs are very high for books purchased from abroad. While such a policy might indeed put downward pressure on local bookstore prices, it will exert significant upward pressure on the prices of online vendors of new and used books. As I pointed out in my article above, there were 75 copies of Jackson available for purchase “new and used” through Amazon Marketplace, and none was under $56. This is still approximately 10 times the cost of the physical printing and binding of the book. And because it is the copyrighted content that is being paid for, not the paper and ink, a greater reliance on e-books will also do little to solve the problem.

    There are two fundamental facts that MUST be explicitly acknowledged and exploited, in my opinion, in order to have a meaningful impact on textbook prices:

    1. publishers have a HUGE incentive to get their books adopted by instructors of courses;

    2. publishers have HUGE latitude in how they price those books.

    The textbook trade operates under very different conditions than the general book trade: risk is low, discounts to college bookstores are small (25% vs. 55%), returns are low, marketing costs are low, and downward pressure on prices is low. All these together mean that profit margins (for publishers) on successful titles are very high in the current environment. The two key facts highlighted above are the direct result. We need to find a way to pressure publishers to accept a smaller profit margin for textbooks.

    Note also that, precisely because wholesale discounts to college bookstores are typically small (25%), it is the publisher, not the retail outlets, who has the greatest control over prices. Downward pressure on prices from retailers worldwide can only achieve so much if they’re all getting a particular title from the same source. In this respect, textbook prices fall in the same category as gasoline prices and prescription drug prices.

  3. JCS says:

    It borders on being off-topic, but there’s truly no need to apologize about the ‘moonlighting’: A big part of the value of this blog is in providing a forum for getting this kind of info into broader circulation. And ultimately, as you point out, none of these reports really address the core problem.

    On a really off-topic but more positive note, hurrah to the Morgridges for putting real money into a place where it’s badly needed. To quote from here: “wow!”

  4. G says:

    I didn’t realize that others had written on this specific topic before, but I found a Wikipedia page that makes some of same points: http://en.wikipedia.org/wiki/Textbook#The_.22Broken_Market.22

  5. G says:

    And here’s more discussion from various points of view: http://www.city-data.com/forum/colleges-universities/741965-why-textbooks-so-expensive-failure-free.html

    Needless to say, I think some of the posters there have a less-than-complete understanding of how textbook pricing works.

Comments are closed.