Big Deals and the Terrible Fix:How can Librarians Ever say “Nix”

The Librarians’ Shopping Problems

Problem 1: Delegation Like physicians choosing drugs, and college

professors selecting textbooks, librarians make choices for consumers who aren’t spending their own money.– Physicians choose treatments for patients and

insurance companies pay.– Professors choose texts for college students and

parents pay.– Librarians choose journals for professors and “the

university” pays.

Problem 2: Unreliable signals Faculty arguments for purchases are fervid, but not always entirely credible.

Problem 3) Complexity The major publishers have contrived to offer all-

or-nothing deals of mind-boggling complexity.Elsevier packages more than 2,000 journals.

Springer 1,900. Wiley 1400Packages contain journals in more than 100

distinct disciplines. Who can say what the package is worth?

Problem 4) Monopoly Probs 1-3, delegation, unreliable signalling, and

complexity lead to price inelastic demand. Markets with price inelastic demand are a

monopolists’ paradise.

Monopoly

Examples• Prescription drug industry, monopoly sustained by patents, delegated

purchases, complex evaluation. • College textbooks. Consolidation to three major publishers, delegated

purchases, inelastic demand. (College degree offers huge consumer surplus. Publishers grab a bit.)

•California electrical power. The state agreed to guarantee a price ceiling on electricity. The state would buy electricity at whatever it cost and sell to Californians at a price no higher than the ceiling.

Enter ENRON.

The Big Deal, Round 1

Price Discrimination• Academic Press and then 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%.

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.

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.

Bundling deters entry

• Libraries who bought the first Big Deal were obliged to increase their payments to Elsevier by 7% per year.

• Payments to Elsevier are about half of UC 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.

What happens when 5-year Big Deal contract expires?

• Faculty addicted to online access.

• Must negotiate new contract.

“We can’t just say no.” (unnamed librarian)

Economic prescription?

• If you want to allocate resources efficiently, use the price system.

• Let users pay for what they get. They will economize if its their own money.

• Complexity is not a problem, since nobody makes a central decision about who should have what.

• Commercial publishers already offer pay-per-view. Let subscribers use it.

Is this the right advice?

• On target for California power.• Less obvious for medical treatment and textbooks,

since consumers may not be as well-informed as experts who decide for them.

• How about academic researchers? • Who is better able to decide values of article access

than they?

–Librarians and university budget officers?–Maybe not…

An economic case for subsidizing academic journals

• Technology: Journal publishers have fixed costs. Recruiting editors, harassing referees, typesetting, copy-editing, setting up server.

• Marginal cost of allowing acess to one more user is almost zero.

• Efficient outcome is either to allow user access at zero cost

• Or not to publish the journal at all if setup costs exceed value to users.

Competitive prediction

• If journal supply were truly competitive and users paid the subscription costs, free entry and competition would drive prices down to just cover average costs.

• Journal supply is not competitive. Copyright law and coordination costs assure this.

• Even with no library subscriptions, there would be profits in journal publishing.

• But demand would be much more price-elastic and prices would be lower.

Limited role for central purchase

• Most (but not all) non-profit professional society journals sell at a small mark-up over average cost.

• Median price per article of for-profits in most fields is 3 to 4 times that of non-profits.

• Libraries could subscribe to journals that cost no more than, say, 1.5 times as much as average non-profit and let their patrons access these journals for free.

• This allows efficiencies of marginal-cost pricing.

What would happen to commercial publishing?

• Currently, commercial publishers charge about $35 per article for downloads.

• If informed users spend their own money for downloads, demand will become much more price elastic.

• When demand becomes price elastic, monopolists cut their prices.

• Double whammy. Authors would know that overpriced journals will have fewer readers. Will prefer publishing in cheaper journals.

Is this pie-in-the-sky talk?

• What can a single library do?• One library’s actions won’t have much effect on

publisher pricing behavior. • Faculty will scream if they have to pay full cost of

downloads from expensive journals.

An interim strategy

• Drop Big Deal subscriptions to overpriced journals.• Maintain subscriptions and free access to journals

priced near average cost.• Offer modest subsidy (not full cost) to library

patrons who access non-subscribed journals via pay-per-view.

I'm jist a girl who cain't say no,

I'm in a turrible fix I always say "come on, le's go"

Jist when I orta say nix!