1 A book writer is paid royalty, that is, a percentage of price of each book sold. A newspaper or magazine writer is paid by the number of articles or by the number of words written, i.e. at piece rate Firm

2 (a) How would you explain the difference in payment methods of books writers and newspaper writers ?

3 In general, Both publication of books or magazines -risk of income loss Cheung’s: Both publishers & writers -adopt contracts that enable risk dispersion -subject to transaction cost →postulate of risk dispersion

4 Risk of income loss in publishing books & adoption of share contract Sale of Books -more uncertain than magazines -difficult to know if that book will sell -Risk of income loss ↑in book publication -adopt a contractual arrangement with risk dispersion

5 Percentage royalty contract →share rate contract -enable risk dispersion -share the loss if books does not sell Piece rate contract - risk dispersion -since author’s income is certain →all risk is borne by the publisher →Percentage royalty contract is preferred in publication of book

6 Risk of income loss in publishing magazines & adoption of piece rate contract Sale of magazines -more certain than books -Since past data can be used →forecast future sales -↓degree of uncertainty -↓risk of income loss →Little gain in percentage royalty contract

7 -Transaction cost of adopting percentage royalty contract is higher than piece rate contract Percentage royalty contract -publisher ↑ incentive of cheating author →under-stating the sales volume -author ↑cost to monitor the publisher →piece rate contract is adopted to lower transaction cost

8 (b) Royalty rates are different among book writers; piece rates are different among newspaper writers. For which of these payment methods would be a larger difference in the rates among them?

9 Royalty (%) rates will have a larger difference than piece (p.) rates in the rates among them. Reasons: % rates: larger difference in the prices of the books in the market p. rates: the market price varies among writers %: the % shared by the writer and the publisher is very different → great difference in income

10 p.: though the $ received are different among the writers %: the influence of the writer’s popularity is larger - the interest of the buyer depend on this writer only - the writer’s income is only a very small part of the sales revenue of the newspaper → little difference in total income - it depends on the no. word and articles - ↑ popularity → ↑ sales revenue / income → great difference in total income

11 p.: the influence of the writer’s popularity is smaller - the interest of the buyer depend on the whole newspaper /magazine besides, there are more factors affecting the income of the book writers - E.g. the production costs, the nature, the size of the books → great difference in the total income → the newspaper publisher will offer less to every writer → less difference in the total income

12 (C) Why do publishers of books pay writers in form of royalty and not in lump-sums to buy the copyright outright ?

13 There are 3 reasons : 1.Uncertainty (Risky shared ) 2.Lower the transaction cost (monitor the author) 3.Cheating

14 1. uncertainty the sale of books : uncertain ∵ we cannot determine the sale of book beforehand ∴ we do not know whether is GAIN or LOSS.

15 2. Lower the transaction cost Under the percentage royalty → the writer need to bear the risk → the sale of books are directly affect the income of the writer. if the writer wants to earn more → pay more incentive to the quality of the book. save the transaction cost of monitoring the writer.

16 1. Pay writer in the form of royalty 2. In lump- sums payment 1. Risk bearing SharedBear by the publisher Well- known author Risk for the publisher↓ Writer ↓ Risk for the publisher ↑ Writer ↓ Not well known author Risk for the publisher ↑ Writer ↑ Risk for the publisher ↑ Writer ↓

17 3. Cheating Under lump-sum payment : The author can get a stable income whatever the sale is good or not Under percentage payment : The publisher may not tell the truth to the writer about the actual sale of the book So that the publisher may pay less to the writer

18 1.Pay writer in the form of royalty 2.In lump-sums payment ˇ To evaluate:

19 THE END Group Member: Chloe Choi Michelle Lai Carmen Lam Yvonne Leung