College and Research Libraries The Economics of Professional Journal Pricing Michael A. Stoller, Robert Christopherson, and Michael Miranda The problems of excessive inflation and price discrimination in journal pricing continue to plague libraries. In analyzing the causes of the cur- rent crisis, the authors review and evaluate previous contributions to the literature on journal pricing with particular emphasis on the three types of price discrimination practiced by journal publishers. The authors sug- gest that the monopoly power of commercial publishers, combined with a third-party payment system, are at the heart of the problem. They suggest solutions that involve providing appropriate incentives to jour- nal users, adoption of more equitable pricing systems, and employing the potential monopoly purchasing power of library associations to lower prices. 11 fter more than two decades of extraordinary inflation, pro- f~ssiona~ journal prices con- tinue to mcrease at rates sev- eral times as high as the American economy's overall inflation rate and far higher than the rate of cost increase in the journal publishing industry.14 Academic economists, marketing researchers, librar- ians, And paid economic consultants have undertaken economic analyses of journal markets in order to explain the high rates of price increase and the great extent of price discrimination against libraries and United States buyers in general. Some of the researchers subsequently recom- mended solutions to library administra- tors, and many of their suggestions are sound and practical.5-~ However, a nurn- ber of the studies are fraught with ana- lytical errors and recommendations that were either economically illogical, im- practical, or both. The authors intend to summarize the literature in this area, cor- rect the analysis, and provide practical policy recommendations for library ad- ministrators based on what the applica- tion of economic principles really tells us about the journal market situation. The Natural Monopoly Misconception Several researchers have analyzed the academic journal industry and labeled it a natural monopoly. Despite the research- ers' claims, the academic journal indus- try is not a natural monopoly. 10-12 A natu- ral monopoly is an industry in which the cost structure is such that the average pro- Michael A. Stoller is a Professor of Economics at the State University of New York at Plattsburgh; e-mail: Stollema@splava.cc.Plattsburgh .edu. Robert Christopherson is an Assistant Professor of Economics at the State University of New York at Plattsburgh; e-mail: Christrl@splava.cc.Plattsburgh .edu . Michael Miranda is an Associate Librarian at the Feinberg Library, State Universihj of New York at Plattsburgh. 9 10 College & Research Libraries January 1996 FIGURE 1 Natural Monopoly-Declining per Unit Production Costs AC Quantity duction cost per unit of the product con- tinues to fall throughout as the firm's pro- . ductionincreases (see figure 1). Therefore, one firm can produce the entire industry output more cheaply than having a group of competing firms. Because large firms usually have production cost advantages over small ones, it becomes difficult for small firms to compete and for new firms to enter the industry successfully. The type of price discrimination practiced by journal publishers is perfectly legal because it is not aimed at putting anyone out of business or disadvantaging a particular group of buyer-resellers through a limited discounting program. Public utilities, such as electric, natu- ral gas, and local telephone firms, are the classic examples of natural monopolies. The existence of natural monopolies is the justification for federal, state, and local governments granting public utilities franchised monopolies on the grounds that having more than one local electric, water, telephone, or natural gas supplier would be uneconomical. Competition in these industries would require duplica- tion of transport and connection facilities throughout the service area and would be unnecessarily costly. Hence, state and local governments grant monopoly fran- chises to utilities and then regulate their prices because there is no competition to keep the prices low. Certainly there are economies of scale that cause the average cost of journal pro- duction to fall as output increases, mostly because of the high initial setup (i.e., first copy) or fixed costs. That is also true for the automobile industry, all of the other publishing industries, or any manufactur- ing industry for that matter. Typically, cost per unit will fall as the firm expands, but only up to a particular output level. Be- yond that production lev~l, per unit cost does not continue to fall and may even- tually even increase. There is not a con- tinuously declining cost curve that man- dates that there can be only one efficient producer of the product, as would exist in a natural monopoly industry, hence the name "natural" monopoly. Firms simply must be large enough to produce effi- ciently, and in the journal industry, as in most manufacturing industries, the state of technology is such that many firms can operate efficiently, each producing a small percentage of industry output at the mini- mum average cost (i.e., cost per unit). However, the fact that the technological conditions for a natural monopoly do not exist in the journal publishing industry should not be interpreted to mean that there is no monopoly power in this in- dustry. It is simply not a "natural" condi- tion that is dictated by the state of tech- nology. Price Discrimination in the Journal Publishing Industry A number of researchers have investi- gated the issue of price discrimination or dual pricing in academic journals. 13· 17 Price discrimination, in its simplest form, is charging different prices to different buyers for the same good or service. Jour- nal pricing, however, is fraught with price discrimination of at least three different varieties, two of them more complex than the simplest form: 1. Commercial and noncommercial journal publishers usually charge academic libraries considerably higher prices (often three times or more as high) than they do indi- vidual subscribers for the same quantity of an identical product, i.e., a one-year journal subscription. 18 2. Western European journal publish- ers usually charge American buy- ers considerably higher prices than they do European subscribers for the same quantity of an identical product, after allowing for differ- ences in shipping costs and the risks of exchange rate fluctuations. 19· 21 3. Publishers, particularly commer- cial firms, charge far higher prices for natural science and en- Journal Pricing 11 gineering journals than for jour- nals in other fields, on a per page basis after allowing for any dif- ferences in production and ship- ping costs and costs associated with variation in the frequency of publication. 22-24 Not surprisingly, economists are inter- ested in these phenomena. In fact, that interest in price discrimination led at least one of this paper's authors to begin do- ing research on the topic of journal pric- ing. The authors will explore why price discrimination occurs in journal markets, and why it persists to such a great degree when it does not exist at all or in such a blatant manner in other goods markets. Several articles in library science jour- nals simply restate the standard econom- ics textbook list of conditions that are con- ducive to the existence of long-term price discrimination.25 The authors assume that all of these conditions are met by the aca- demic journal industry, without studying the situation in depth, because of the long history of price discrimination in this in- dustry. These conditions include the fol- lowing: 1. There are different markets with sub- stantially different price elasticities of demand (i.e., different degrees of responsiveness to changes in price) that may be identified and kept seg- regated by the seller (for example, libraries versus individual subscrib- ers or North American customers versus European customers). 2. There are no effective markets for low-price buyers to resell to high- price buyers. 3. Competitors must not be able to un- dersell the price discriminator in the market segment that is being charged the higher price (i.e., the seller must have monopoly power). 4. The seller's cost of segregating the market must not be greater than the extra revenue generated from price discrimination. 12 College & Research Libraries 5. The practice of price discrimination must not breed ill will among con- sumers. 6. The discrimination must not be illegal. Certainly most of these conditions must exist to some extent because price dis- crimination persists, but it is worth study- ing these conditions individually to see whether there is a possible chink in the publishers' armor through which those being discriminated against may be able to lessen the extent of price discrimina- tion. Some libraries are finding effective ways to deal with this problem (e.g., forming purchasing consortiums or rais- ing their elasticities of demand by shar- ing journals or purchasing copies of in- dividual articles rather than subscribing to a journal). The assumption that there is no ill will from price discrimination is certainly questionable. The question is whether such ill will can be transformed into an effective weapon against price discrimination. Edward Dyl implies that price dis- crimination, as practiced by journal pub- lishers, may be illegal under the prohibi- tions of the Robinson-Patman Antitrust Act, and he notes that the federal govern- ment has never tested this law's provi- sions on the academic journal industry. 26 In fact, the Robinson-Patman Act could not possibly apply to journal price dis- crimination because it is a piece of depres- sion era legislation aimed at protecting small competitors from large ones (most notably from A&P, the retail giant of the 1930s). It outlaws price discrimination only to the extent that large buyers can- not be offered discounts that are not avail- able to smaller buyers. The type of price discrimination practiced by journal pub- lishers is perfectly legal because it is not aimed at putting anyone out of business or disadvantaging a particular group of buyer-resellers through a limited dis- counting program. There is nothing ille- gal in price discriminating against a January 1996 group of customers under the Robinson- Patman Act, and it is a very common prac- tice. For example, consider the variety of ticket prices charged by airlines or movie theaters for equal-quality seats. The Equity Question: Is Price Discrimination Fair? Publishers might argue that price dis- crimination in journal pricing is fair based on the fact that library copies of journals are read much more frequently than in- dividuals' copies and that photocopying from library copies is quite common, with no remuneration to the publisher. Welfare economists, aiming for efficient use of re- sources, normally are most concerned about prices reflecting, and preferably equaling, the market value of the re- sources that go into the production of a product; or more simply stated, they think that price should equal marginal production cost. However, many other in- dividuals would no doubt be sympathetic to the concept of price reflecting the value of the product to the users, and they might argue that the total value of a li- brary copy of a journal that is read by many readers is greater than the value of a personal copy that is read only by an individual subscriber. Therefore, they would claim that the library copy ought to sell for a higher price. This argument gains more strength if the readers of the library copy are able to make inexpensive personal photocopies of journal articles. If one agrees with the latter point of view and employs it as a justification for price discrimination, the logical extension is that a journal pricing system based on expected usage should exist. Publishers could charge college and university li- braries according to the number of ex- pected users. This number could be esti- mated easily from the undergraduate and graduate enrollments, with graduate en- rollments weighted more heavily in a simple pricing formula. One can argue the fine points of such a pricing system (e.g., should university or program en- rollments be employed?), but enrollment data are normally available to library administrators who could then supply them to publishers. Although such a sys- tem would not be perfectly fair, it would be considerably more equitable than the current two-price system which greatly disadvantages small college libraries with limited budgets that make more limited use of library journals than large research libraries which pay the same price. Sim- ply basing journal prices on readily avail- able total institutional enrollments (per- haps using enrollment intervals) would be more equitable than the current two- price system, for which there is little eq- uity-based justification. Indeed, the ad- vent of the electronic journal, with the possibility that its pricing will eventually be based strictly according to usage, may lead to the most equitable pricing system as well as the most efficient use of society's resources. Subscribers can be charged for and will receive only the ar- ticles they plan to read, saving resources for both producer and consumer. Charges will reflect the number of readers because each reader will be charged individually. Extensive pay-per-use operations are al- ready in place in many libraries. Industry Structure and Unique Industry Characteristics Given the preceding criticism of much of the economic analysis that researchers have carried out to date on the journal industry, the next logical step is to de- scribe the actual economic structure of this industry. More to the point, what is there in the structure and conduct of this industry that makes it perform the way it does? First, there appears to be a great deal of monopoly power in this industry, al- though it is not a natural monopoly. 27• 28 Given the uniqueness of individual jour- nal articles and the existence of copyright laws, there appears to be no direct com- petition among publishers of different journals in the same academic field. Ev- Journal Pricing 13 ery issue of every journal is unique. Be- cause authors of research articles are nor- mally expected to read and cite all articles relevant to their research topics, they can- not omit reading an article in favor of a close substitute. There are no substitutes, unlike the magazine market, for example. Whereas Newsweek, Time, and U.S. News compete with and are considered to be substitutes for each other by most news magazine subscribers, the American Eco- nomic Review and the Journal of Political Economy are not really competitors. Li- braries must buy both journals, and eco- nomic researchers must read the relevant articles in both. Therefore, every pub- lisher of a major journal should be con- Monopoly and third-party payment are the two key characteristics that explain pricing behavior and the apparently high price levels in the academic journal industry. sidered a monopolist. In this sense, the journal publishing industry is truly unique. There is a captive audience for all major journals. A second important and somewhat unique characteristic of the industry is that, to the extent that journal marketing is primarily directed at librarians, the de- mander and ultimate user is neither or- dering nor paying for the product; those activities rest with the library. 29 The im- portance of this characteristic can be seen by looking at a similar industry-phar- maceuticals. Many, if not most, people who use prescription drugs do not pay directly for them; insurance companies do. It is no coincidence that prescription drug prices are high; the rate of drug price inflation persistently has been above the United States's average rate of inflation, and the drug industry consistently has had average profits two to three times the rate of return of the average American manufacturing industry. Demand for a product will always be greater when the 14 College & Research Libraries user is spending someone else's money. AlthQugh this point is not made in many standard economics texts, it is acknowl- edged widely by economists. Professional journals and pharmaceuticals are two of the few industries in which this purchas- ing situation exists, along with other sec- tors of the health care industry. Monopoly and third-party payment are the two key characteristics that ex- plain pricing behavior and the apparently high price levels in the academic journal industry. A third unique characteristic is that the industry contains many non- profit producers who ''bundle" journals along with other products as part of mem- bership packages in a manner that law enforcement agencies might consider to be an antitrust violation in profit-oriented industries. Membership and the purchase of several journals become essentially an ali-or-nothing proposition, hence the term bundling . This practice also makes it dif- ficult for researchers to determine the in- dividual journal prices. The American Economic Association, for example, in- cludes three major journals (thirteen is- sues) as part of an annual association membership for fees ranging between $47 and $66 in 1994 (depending on the member's income level) . Members can save six dollars by refusing one of the journals, but they cannot save more than six dollars, although the association claims that 30 percent of the membership fee goes to pay for each of the three jour- nals. The Effect of Structural Characteristics on Performance Given these unique structural character- istics, the authors next attempted to de- termine what effect they have on perfor- mance in the academic journal industry. The authors know that price discrimina- tion requires the presence of monopoly power, or otherwise competitors will un- dercut the high prices charged to the buy- ers who are being discriminated against-in this case, libraries. The exist- January 1996 ence of monopoly power also means that if the price discrimination does breed ill will, there may be little that the buyers can do. This is especially true if the buy- ers (i.e., libraries) are not the ones request- ing and using the product. In this mar- ket, ill will clearly exists, but it rarely af- fects the pricing behavior of the sellers un- less it is accompanied by hostile actions on the part of libraries. Therefore, it should not be surprising that there has been a persistent tendency for the most expensive journals to have the largest- percentage price increases.30 As several writers note, the monopoly power of journal publishers leads to highly inelastic demand from research libraries, in part because faculty demand, and will not accept substitutes for, spe- cific journals which the faculty do not pay for and for which they rarely know the price. 31 -34 Meanwhile, individual sub- scriber demand is much more elastic re- garding purchasing personal subscrip- tions because individual subscribers can photocopy articles at little or no cost in their libraries or obtain copies through in- terlibrary loan, whereas personal sub- scriptions usually must be paid for out of their own household budgets. Hence, a perfect scenario exists for publishers to implement price discrimi- nation. Publishers' claims that the large number of readers of library copies of journals justifies a higher price should be disregarded. One might draw a parallel between this situation and the American Medical Association's efforts to justify high prices charged by medical doctors on the basis that they must invest so many years in training. Such moral justification has nothing to do with the price level or pricing structure. A firm can only charge high prices and price-discriminate if mar- ket conditions allow. The equity-based ar- guments of the publishers, whether they provide moral justification for the pric- ing practices or not, are beside the point. Photocopy pricing and quality may be correlated over time with the extent of price discrimination in journal pricing as S.J. Leibowitz suggested, in that the avail- ability of inexpensive, good-quality pho- tocopies of library journal articles may keep personal journal subscription prices low. However, this cannot explain fully why price discrimination against librar- ies exists to the extent that it does in the journal publishing industry. 35 Similarly, much of the price differences among journals in different academic dis- ciplines appears to be the result of price discrimination by discipline rather than differences in production cost, although the supporting evidence for this state- ment is limited and further investigation is needed. 36,37 Journals in the natural sci- ences and engineering fields are far more expensive than journals in other fields . When seeking an explanation, one often hears that the printing cost of the math- ematical symbols and illustrations is the reason for the high price. Yet, the price differentials appear to be far higher than printing cost differentials would seem to justify, and art journals, with expensive illustrations, are not particularly high priced.38 The answer to the question on price differences by discipline may be much simpler and quite consistent with what economic theory would predict. Publish- ers charge more for natural science jour- nals because they are able to do so. As one commercial publisher marketing ex- ecutive (who prefers anonymity) of a major for-profit journal publisher stated in an interview, publishers charge higher prices for science journals because natu- ral science research is considered more urgent and is far better funded than other types of research. Scientists need these journals, and they have funds to pay for them. It is a simple case of maximizing profit by charging higher prices in mar- kets where demand is inelastic. It should also not be surprising that commercial publishers are more dominant in science and engineering than in other disciplines. One study found that commercial firms Journal Pricing 15 published over 63 percent of the chemis- try journals that a particular rna jor re- search library purchased, and these firms received almost 80 percent of the sub- scription money paid for chemistry jour- nals by that library.39 Although commercial publishers claim that their prices and profits are not ex- cessive, there is good reason to believe that the commercial journal publishing in- dustry is highly profitable and has be- come more profitable during the past two decades of rapid price increases and in- creasing price discrirnination.40 Economic Consulting Services (ECS) points to "the rapidly growing disparity between the costs of publishing and subscription prices charged to libraries." 41 The afore- mentioned journal marketing executive pointed out the ideal market situation in which commercial journal publishers ex- ist, despite facing rapidly rising costs. They not only have a monopoly, but their customer base is prepaid and virtually guaranteed for years into the future. The publishers know exactly how many cop- ies to print, incur no debt up front, receive no returns from bookstores, and never have to pay for a second press run~ In many ways, the journal publishing busi- ness is far more lucrative than the book An increasing number of institu- tions are ordering individual photocopies of articles from the more expensive joumals as needed, through services provided by CARL Uncover and First Article, among others. publishing business, he noted. A quote from an interview with the late Robert Maxwell, former owner of Pergamon Journals, in which Maxwell called his journal operations a "cash generator twice over," supports the view of the mar- keting executive.42 When asked to explain the disparity between library and individual subscrip- tion prices, the marketing executive's re- 16 College & Research Libraries sponse was simply that he believed com- mercial publishers charge the maximum that they can get. They know that indi- viduals will not pay the prices that librar- ies are charged. This is the same conclu- sion that noted economist Fritz Machlup reached regarding the pricing strategies of scholarly book publishers almost two decades ago.43 Policy Recommendations-What Libraries Should Do Economists offer a variety of recommen- dations to libraries based on their analy- ses. Unfortunately, not all of them are practical. Rather than criticize the imprac- tical recommendations of others, the au- thors will see what their analysis sug- gests. Because the journal pricing problem · stems from the existence of monopoly power, the authors first considered ways of dealing with such power. Society has several means of dealing with monopoly situations. Two of these, government ownership and economic regulation such as government-imposed price ceilings, are impractical because the federal gov- ernment is not about to take over journal publishing firms or begin regulating their prices. A third method of dealing with a mo- nopoly is to create competition for the monopolist by finding or creating a sub- stitute product. This could involve find- ing ways to meet the demand for particu- lar journal articles without having the li- brary buy the journals. A few colleges appear to be purchasing alternative jour- nals instead of those with the highest prices, but this is not a feasible solution for research libraries. An increasing num- ber of institutions are ordering individual photocopies of articles from the more ex- pensive journals as needed, through ser- vices provided by CARL Uncover and First Article, among others. However, commercial journal publishers could set the copying fees at levels that will maxi- mize their profits, making potential long- January 1996 term savings from this alternative prob- lematic. Publishers should be told when they lose customers as a result of their high prices. They must realize that, despite mo- nopoly power, demand is relatively elas- tic as prices rise. If a subscription is can- celled because of price or budgetary prob- lems, publishers should be informed as to the reason, even if it is done with a form letter. Some researchers believe that pub- lishers may finally be starting to receive this message from the "massive serials cancellations programs undertaken by research libraries" in the United States over the past few years. 44 In a study commissioned by the Asso- ciation of Research Libraries (ARL), ECS suggested that professional associations create new journals as nonprofit alterna- tives to commercial publishers and that these associations and the ARL should also encourage low-price profit-seeking publishers to create additional jour- nals.45A6 Others have called for universi- ties as well as learned professional asso- ciations to enter the journal publishing business.47 Many economists believe that in a free market system, in an industry where excessive profits are being made, new firms will be drawn into the indus- try because of the strong profit incentives, even if they must overcome the consider- able monopoly power of the highly prof- itable existing firms. That is usually true, but sometimes it takes several decades for the new entrants to gain a foothold. The authors therefore encourage the ARL to facilitate this process, and the best pros- pects for entry may be small established American commercial publishers who are willing to work with professional asso- ciations that can guarantee a market for their products. ARL has, thus far, taken a slightly dif- ferent approach to the journal pricing problem. In a recent collaborative effort, the Association of American Universities (AAU) and the ARL set up three task forces to: (1) study acquisition and distri- bution of foreign language and area stud- ies materials; (2) develop a national strat- egy for managing scientific and techni- cal information; and (3) study intellectual property rights in an electronic environ- ment. Those task forces, recognizing the growing monopoly power of a few Euro- pean publishers and the extent to which they have a captive university market, concluded that additional competition must be "injected" into the journal mar- ket.48 Task force members believe that the advent of electronic journals and data- bases provides new opportunities for low-cost journal market entry by profes- sional societies and university presses with electronic links to regional and na- tional distribution centers where all scholars may access any journals from their desktop computers.49 Closely tied to these suggestions, the task forces noted, is the need to change copyright practices so that the federal government, universities, and faculty members somehow retain copyright con- trol over the work that they either fund or do themselves. This is in contrast to the current practice of signing over copy- right ownership to the journal publish- ers. The task forces recognized that, as noted above, the lower costs of electronic publishing will not be passed on as lower prices to subscribers by commercial pub- lishers unless the competitive situation is changed. However, as the task forces also noted, such changes will require coopera- tion among scholars, universities, and the federal government, who will have to present a united front in order to force publishers to give up copyright control of journal articles. These changes may also require modification of university scholarship requirements for tenure and promotion. Tenure and promotion com- mittees must be willing to recognize fully publications in the new journals, both electronic and print, that university presses and others are being encouraged to start. Gaining such total cooperation, if that is possible, would require a great Journal Pricing 17 deal of work by a powerful central coor- dinating organization, as the task forces recognized. This idea essentially encom- passes another economic solution to the monopoly problem-bilateral monopoly. Long employed by union organizers, bilateral monopoly consists of meeting monopoly power with opposing mo- nopoly power. Industrial organization economist H. Craig Petersen, in an excel- lent study of factors affecting journal pric- ing, states, "Another group that could in- fluence journal pricing is library associa- tions." 50 He then suggests that "at the very least, publishers whose prices are signifi- cantly higher than charges for compa- rable publications should be asked to jus- tify their pricing practices by providing detailed information on costs." 51 The au- thors concur, but take the suggestion fur- ther. As organizations representing the customers who are discriminated against, the ALA and ARL, with the help of the AAU, can act as monopoly buyers, devel- oping cooperative purchasing arrange- ments (which has begun to occur through other organizations), as suggested by Chressanthis and Chressanthis, or em- ploying threats of collective action such as boycotts against the publishers who are the greatest offenders in setting high or discriminatory prices that they cannot or will not attempt to justify. 52 The ECS study suggests that the ARL should act as a lob- byist to find new publication channels.53 That is not much different from putting the squeeze on offending publishers di- rectly. The ARL-AAU task force reports have similar implications. In essence, car- rying out the recommendations hinges on the coordination of a massive cooperative effort by scholars, government, universi- ties, and university presses that amounts to the formation of a united front or ef- fective monopoly to wrest control of copy- rights and scholarly publication from a small group of commercial publishers. This solution could work, but the ob- stacles are many, not the least of which is the magnitude of the necessary coordina- 18 College & Research Libraries tion effort and the need to change the aca- demic prestige and reward system to in- clude electronic, and other less expensive journals. As noted above, the second problem characteristic in the journal market is "third-party payment." The demanders and users are not paying for the journals that they request and use. In dealing with that problem, the following suggestion will have positive results ultimately. Give the researchers who request and use the journals an economic incentive to care about the prices and the library expendi- tures in this area. Force them to deal with the library's budget problems by provid- ing a budget for journals in their disci- plines and supplying them with a list of subscriptions and prices. Let them help to choose which journals they want within the library's budget constraint. If they refuse involvement, library admin- Price discrimination is not illegal, but neither are consumers' attempts to avoid or combat it. Price discrimi- nation and rapidly rising prices are breeding ill will among library administrators, and it might be helpful to their cause if such feelings were shared by the faculty who read and publish in the journals. istrators will make the decisions and fac- ulty members will have few grounds for complaint. The tighter the budget con- straints, the more interested they should be in dealing with the problem as sub- scriptions are cancelled. Once again, note Petersen's findings that "rapid price in- creases are not inevitable .... ," and "If prices of certain journals become too high, scholars could use their professional as- sociations to establish other, less expen- sive publications. The problem is that scholars have little incentive to do so." 54 Jean Walstrom Haley and James Talaga, in a survey of libraries' efforts to deal with the journal price inflation problem, found January 1996 that university librarians reported that shifting journal selection to faculty, can- celling subscriptions in protest of price in- creases, and filing individual complaints with publishers were thought to be the most successful remedies by those who had employed them, but few libraries had done so. 55 Haley and Talaga also sug- gested attempting to negotiate prices with publishers and sharing resources among libraries. ECS suggested involving university leaders and professional societies in this effort. 56 The key is to provide the right in- centives to all parties, the demanders as well as the publishers. Journal users must think they have a real stake in the out- come of the process. Although the effect of involving these additional parties can- not be forecast precisely, providing the correct incentives will usually result in positive outcomes, whether they be new, less expensive journals, as Petersen, ECS, and AA U-ARL suggested, or lower prices for existing journals. In addition, consumer groups can try to counter price discrimination by chang- ing one or more of the aforementioned six conditions ·necessary to its mainte- nance. Perhaps effective reseller markets may be established. Despite publishers' printed statements that individual sub- scribers may not pass their journals on to libraries for other readers, that proscrip- tion is of dubious legal validity and pub- lishers have never tested it in court. The authors believe publishers are not anx- ious to test it. Illegal duplication of a prod- uct for profit is one matter. Selling or let- ting others use a product that you pur- chased is certainly another matter, and this practice has never been illegal in the United States. Price discrimination is not illegal, but neither are consumers' attempts to avoid or combat it. Price discrimination and rapidly rising prices are breeding ill will among library administrators, and it might be helpful to their cause if such feel- ings were shared by the faculty who read and publish in the journals. To that end, the ARL should continue to publish price indices and publicize the price differen- tials between low-priced and high-priced publishers. Ironically, some publishers claim, and researchers acknowledge, that subscrip- tion cancellations, which appear to have sharply accelerated recently, force them to raise prices further to maintain profit margins. 57-59 Although such actions are neither unheard of nor unjustified, they only succeed if the remaining demand is inelastic so that further price increases do not lead to additional cancellations. 60 Such inelasticity is a further indication of monopoly power, thereby leading to the conclusion that journal publishers think that they have considerable monopoly power despite the subscription cancella- tions. Summary and Conclusions An economic analysis of the journal in- dustry indicates that high and discrimi- natory prices result from the existence of monopoly power among publishers. Uni- versity and library administrators canal- leviate this problem in several ways: (1) by providing journal users with an incen- tive for keeping prices lower; (2) by en- couraging library organizations and uni- versity consortia to exploit their poten- tial monopsony (i.e., a buying monopoly) power into a bilateral monopoly situa- tion; and (3) by attempting to create and Journal Pricing 19 demonstrate high elasticity of demand for journals in any way possible. Even if some degree of price discrimination is jus- tified by consumer equity considerations, the current pricing situation is far from equitable and can be improved if publish- ers can be coerced to change their pricing practices. Meanwhile, efficiency and re- source allocation considerations, which are usually of the utmost importance to "normative" economists (i.e., those inter- ested in efficient use of society's re- sources), appear to favor holding journal prices to libraries down to levels close to marginal production cost (including a reasonable profit) in order to promote the shared usage that takes place in libraries as opposed to printing an individual copy . for each user. Journal price inflation has exceeded greatly the rate of increase in the consumer price index in the past quar- ter century. There is evidence that the greatest extent of high markups and price discrimination is centered in a few com- mercial publishing firms, primarily lo- cated in Western Europe, and in a few dis- ciplines.61-65 The pricing practices and profitability of these firms need to be ex- plored further to determine whether there is any cost-based justification for their high prices and to develop a more com- plete understanding of the journal price problem, for recent data show that the problem is not simply going to disap- pear.66 Nor should society expect that to happen. Notes 1. Kenneth E. Marks and Steven P. Nielsen, "A Longitudinal Study of Journal Prices in a Research Library," Serials Librarian 19 (1991): 105-35. 2. Lee Ketcham and Kathleen Born, "Projecting Serials Costs: Banking on the Past to Buy for the Future, Periodical Price Survey, 1994," Library Journal119 (Apr. 15, 1994): 44-50. 3. Association of Research Libraries, Report of the ARL Serials Prices Project (Washington, D.C.: ARL, 1989). 4. Economic Consulting Services, Inc., "A Study of Trends in Average Prices and Costs of Certain Serials over Time," in Report of the ARL Serials Prices Project (Washington, D.C.: ARL, 1989). 5. David W. Lewis, "Economics of the Scholarly Journal," College & Research Libraries 50 (Nov. 1989): 674-88. 6. Bruce R. Kingma and Philip B. Eppard, "Journal Price Escalation and the Market for Infor- mation: The Librarians' Solution," College & Research Libraries 53 (Nov. 1992): 523-35. 7. ECS, "A Study of Trends in Average Prices and Costs of Certain Serials over Time." 20 College & Research Libraries January 1996 8. Marks and Nielsen, "A Longitudinal Study of Journal Prices in a Research Library" 9. H. Craig Petersen, "The Economics of Economics Journals: A Statistical Analysis of Pricing Practices by Publishers," College & Research Libraries 53 (Mar. 1992): 176-81. 10. Lewis, "Economics of the Scholarly Journal" 11. ECS, "A Study of Trends in Average Prices and Costs of Certain Serials over Time." 12. Kingma and Eppard, "Journal Price Escalation and the Market for Information" 13. Fritz Machlup, "Publishing Scholarly Books and Journals: Is It Economically Viable?" Journal of Political Economy 85 (Feb. 1977): 217-25. 14. Charles Hamaker and Deana Astle, "Recent Price Patterns in British Journal Publishing," Library Acquisitions: Practice and Theory 8 (1984): 225-32. 15. Patrick Joyce and Thomas Merz, "Price Discrimination in Academic Journals," Library Quarterly 55 (July 1985): 273-83. 16. Jean Walstrom Haley and James Talaga, "Academic Library Responses to Journal Price Discrimination," College & Research Libraries 53 (Jan. 1992): 61-70. 17. George A. Chressanthis and June D. Chressanthis, "Publisher Monopoly Power and Third- Degree Price Discrimination of Scholarly Journals," Technical Services Quarterly 11, no. 2 (1993): 13-36. 18. Joyce and Merz, "Price Discrimination in Academic Journals" 19. Deana Astle and Charles Hamaker, "Pricing by Geography: British Journal Pricing 1986, Including Developments in Other Countries," Library Acquisitions: Practice and Theory 10 (1986): 165-81. 20. H. Craig Petersen, "University Libraries and Pricing Practices by Publishers of Scholarly Journals," Research in Higher Education 31 (1990): 307-314. 21. Chressanthis and Chressanthis, "Publisher Monopoly Power and Third-Degree Price Dis- crimination of Scholarly Journals" 22. Joyce and Merz, "Price Discrimination in Academic Journals" 23. H. Craig Petersen, "Variations in Journal Prices: A Statistical Analysis," Serials Librarian 17 (1989): 1-9. 24. Petersen, "University Libraries and Pricing Practices by Publishers of Scholarly Journals" 25. One example of such an article is James Talaga and Jean Walstrom Haley, "Marketing Theory Applied to Price Discrimination in Journals," Journal of Academic Librarianship 16 (Jan. 1991): 348-51. 26. Edward A. Dyl, "A Note on Price Discrimination by Academic Journals," Library Quar- terly 53 (Apr. 1983): 161-68. 27. Richard Dougherty and Brenda Johnson, "Periodical Price Escalation: A Library Response," Library Journal113 (May 15, 1988): 27-29. 28. Association of American Universities in collaboration with the Association of Research Libraries, Reports of the AAU Task Forces on Acquisition and Distribution of Foreign Language and Area Studies Materials, A National Strategy for Managing Scientific and Technological Informa- tion and Intellectual Property Rights in an Electronic Environment, (Washington, D .C.: ARL, 1994). 29. Machlup, "Publishing Scholarly Books and Journals." 30. Anthony M. Cummings, MarciaL. Witte, William G. Bowen, Laura 0. Lazarus, and Rich- ard H . Ekman, University Libraries and Scholarly Communication, (Washington, D.C.: ARL, 1992). 31. Richard De Genaro, "Escalating Journal Prices: Time to Fight Back," American Libraries 8 (Feb. 1977): 69-74. 32. James C. Thompson, "Journal Costs: Perception and Reality in the Dialogue," College & Research Libraries 49 (Nov. 1988): 481-82. 33. Christian M. Boissonnas, "ALA/ ACRL Journal Prices in Academic Libraries Discussion Group. Copyright: The TRLN Document, 'University Policy Regarding Faculty Publications in Scientific and Technical Scholarly Journals,"' Library Acquisitions: Practice and Theory 18 (spring 1994): 99-101. 34. AAU in collaboration with the ARL, Reports of the AAU Task Forces. . 35. S. J. Leibowitz, "Copying and Indirect Appropriability: Photocopying of Journals," Jour- nal of Political Economy 93 (1985) : 945-57. 36. Petersen, "Variations in Journal Prices," 1-9. 37. Ketcham and Born, "Projecting Serials Costs." 38. Petersen, "University Libraries and Pricing Practices by Publishers of Scholarly Journals." 39. John 0 . Christiansen, "Cost of Chemistry Journals to One Academic Library," Serials Re- view 18 (fall1992): 19-36. 40. For examples of such claims, see John Tagler, "Counterpoint: A Publisher's Perspective," American Libraries 19 (Oct. 1988): 767. Journal Pricing 21 41. ESC, "A Study of Trends in Average Prices and Costs of Certain Serials over Time," 20. 42. Reprinted in James C. Thompson, "Journal Costs: Perception and Reality in the Dialogue." The citation for the quote from Robert Maxwell is Global Business, 41+ (spring 1988). 43. Machlup, "Publishing Scholarly Books and Journals." 44. Ketcham and Born, "Projecting Serials Costs." 45. ECS, "A Study of Trends in Average Prices and Costs of Certain Serials over Time." 46. Ibid. 47. Paul McCarthy, "Serial Killers: Academic Libraries Respond to Soaring Costs," Library Journal119 (June 15, 1994): 41-44. 48. AAU in collaboration with the ARL, Reports of the AAU Task Forces. 49.1bid. 50. Petersen, "The Economics of Economics Journals." 51. Ibid., 180. 52. George A. Chressanthis and June D . Chressanthis, "Publisher Monopoly Power and Third- Degree Price Discrimination of Scholarly Journals," 13-36. 53. ECS, "A Study of Trends in Average Prices and Costs of Certain Serials over Time." 54. Petersen, "The Economics of Economics Journals," 180. 55. Haley and Talaga, "Academic Library Responses to Journal Price Discrimination," 56. ECS, "A Study of Trends in Average Prices and Costs of Certain Serials over Time." 57. Janet H. Fisher, John Tagler, Beth J. Shapiro, and Mary Beth Vanderpoorten, "The Balance Point: Perspectives on Firm Serials Prices," Serials Review 19 (~vinter 1993): 63-72. 58. ECS, "A Study of Trends in Average Prices and Costs of Certain Serials over Time." 59. Ketcham and Born, "Projecting Serials Costs." 60. Petersen, "The Economics of Economics Journals," 176-81. 61. Astle and Hamaker, "Pricing by Geography." 62. ECS, "A Study of Trends in Average Prices and Costs of Certain Serials over Time." 63. Petersen, "Variations in Journal Prices." 64. Petersen, "The Economics of Economics Journals." 65. AAU in collaboration with the ARL, Reports of the AAU Task Forces. 66. Ketcham and Born, "Projecting Serials Costs." Elegant Solutions for PreseiVation Call for a complete catalog ,-----· --- -··-- ---·--- ARCHIVAL P R 0 D U C T S 1 L_________ . Protective Enclosures Pamphlet Binders Music Binders Bound Four Flap Enclosures Tan Archival Board Grey/White Archival Board Drop Spine Archival Boxes Academy Folder Manuscript Folder 2134 E Grand AveiULe Des Moines, Iowa 50305 P/1. 800.526.5640 FAX 515.262.6013 e-mail/NET: 706 70,2635@compusen:e.com A New Service on the Information Superhighway If you have been searching for an easy way to authority control your library's current cataloging, try LTI's Authority Express service . 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