Academic Journal Pricing and Market Power Arne Jakobsson University of Oslo Library Library of Medicine and Health Sciences

Academic Journal Pricing and Market Power Mark J. McCabe - Academic Journal Pricing and Market Power: A Portfolio Approach. School of Economics, Georgia Institute of Technology, Pub.PDF Pub.PDF Published in the American Economic Review, Vol. 92, No. 1, March, 2002.

The effective cost of journals! Professors worry about their job security (publish well, or perish), others -- their librarians -- are charged with maintaining “free” access to all relevant journals

Aggressive price increases Over the past decade or more, commercial publishers have raised their prices aggressively at a rate disproportionate to any increase in costs or quality. This appears to be especially true of the largest commercial companies What role has the exercise of market power by publishers played?

Underlying demand behaviour of libraries Library demand for academic journals is unique. Although individual users are interested in only a handful of STM journals, libraries maximize the usage of broadly defined collections, e.g. all biomedical journals, subject to budget constraint. The result is demand for a portfolio of titles. Libraries avoid cancelling a subscription once started

Publishers pricing strategies Publishers’ pricing strategies are determined by the distribution of budgets and a title’s relative quality. Budget distribution influences whether, for example, high quality titles choose “low” prices and sell to most libraries or set “high” prices and sell only to those institutions with the largest budgets.

Pricing strategies The pricing model predicts that in some cases publishers controlling larger portfolios of journals have an incentive to charge higher prices, all else being equal. Past publishing mergers may account for some of the observed price increases

Pricing strategies If one or more of the publishers raise the price of their titles, then the remaining publishers can increase their prices almost as much, without being overly concerned about cancellations.

Two types of journal publishing companies Non-commercial publishers are mostly interested in disseminating knowledge Commercial publishers are primarily interested in profits

Market power in the academic publishing market Profit-maximizing companies normally operate in the elastic region, so how can we account for this apparent contradiction of economic theory? One possibility is that budgets for journals are sufficiently “soft” from year to year for price increases to be generally accommodated, i.e. demand is inelastic for observed prices. Each year publishers set new (higher) prices and libraries, trying to preserve their existing collections, respond by increasing journals budgets.

Market power in the academic publishing market The results indicate: that the demand for journals is highly inelastic that quality- and cost-adjusted price increases have been substantial over the past decade that past mergers have contributed to these price increases.

Effects of two mergers Reed/Elsevier and Pergamon Elsevier price increase 5,2% Pergamon price increase 27% Kluwer and Lippincott Lippincott price increase 30% Kluwer prices dropped slightly

Antitrust decisions 1998 the proposed merger between Reed Elsevier and Wolters Kluwer collapsed To avoid future antitrust scrutiny the Elseviers of the journal publishing world are likely to grow by adding relatively small numbers of journals at frequent intervals. If pursued diligently, this stealthy strategy can be just as successful as any blockbuster merger.

McCabe states in his findings that: Demand for journals is highly inelastic Prices are indeed positively related to a publisher’s portfolio size Mergers result in significant price increases This was true even though many of the publishers had relatively modest numbers of journals

Reed Elsevier Academic Press Beilstein BioMed Net Butterworth Cahners Cell Press Chilton Churchill Livingstone CIS Elsevier Science Engineering Information Harcourt, Holt LexisNexis JAI Press Martindale Hubbell Mosby Pergamon Press Rinehart & Winston Saunders

Reed Elsevier Result 2004 Reed Elsevier Listed on the London and Amsterdam Stock Exchanges Sales: 7 074m Euro Employees: Operating margin: 24% Operating margin in Science & Medicine : 34 % Profit: 1 704m Euro Dividends: 454m Euro Dividend per share: up from 0.30 Euro to 0.33 Euro 2004 Acquisition spend: 970m Euro Free cash flow: 546m Euro Institutional budgetary pressure; in part countered by widening distribution

Wolters Kluwer Aspen Publishing CCH Lippincott Williams and Wilkins, Ovid SilverPlatter Waverly

Taylor & Francis Today one of the three biggest publishers in the world: Brunner-Routledge Carfax CRC Press Europa Publications Frank Cass Martin Dunitz Psychology P Routledge RoutledgeCurzon, RoutledgeFalmer Scandinavian University Press Spon Press

Springer In 2003 Springer merged its business with Kluwer Academic Publisher Spinger is owned by Candover and Cinven a venture capital invester

Conclusion We experience astronomical price increases for journals in science and medicine When the demand is elastic, and the prices increase, revenues decrease, as customers respond to these price increases When demand is inelastic, however, and the prices increase, revenues increase, since customers continue to buy regardless of price Libraries and librarians have provided the publishers with an inelastic demand for journals