1. The Profit Motive and Academic Journals Ted Bergstrom UCSB

2. The curious market structure of academic publishing Private profit-maximizing firms and non- profit societies and academic presses both are significant players.Private profit-maximizing firms and non- profit societies and academic presses both are significant players. Most of the workforce--authors and referees--work for free.Most of the workforce--authors and referees--work for free.

3. Market Performance The 6 most-cited journals in economics are owned by non-profit groups.The 6 most-cited journals in economics are owned by non-profit groups. Average price to libraries is $180 per year.Average price to libraries is $180 per year. Only 5 of the 20 most-cited journals are owned by commercial publishers.Only 5 of the 20 most-cited journals are owned by commercial publishers. Average price to libraries is $1660 per year.Average price to libraries is $1660 per year.

4. Journal Prices by Discipline Ecology 1.010.190.730.05 Economics 0.830.172.330.15 Atmosph. Sci 0.950.150.880.07 Mathematics 0.700.271.320.28 Neuroscience 0.890.100.230.04 Physics 0.630.190.380.05 Costper page Cost per page For-profit Nonprofit Non-profitFor-profitNon-profit Cost per cite (In US $)

5. Costs of a Complete Economics Collection PublisherType Percent of Cost Percent of Cites Non-Profit9%62% For-Profit91%38%

6. Costs of Barshall’s Physics Collection PublisherType Percent of Cost Percent of Cites Non-Profit39%79% For-Profit61%21 %

7. Each type plays an important role Non-profits supply most of the citations.Non-profits supply most of the citations. For-profits collect most of the money.For-profits collect most of the money.

8. Elsevier’s Market Share in Physics PublisherType Percent of Cost Percent of Cites Non-Profit39%79% Elsevier46%15% Others 6 %

9. Elsevier’s Market Share in Economics PublisherType Percent of Cost Percent of Cites Non-Profit9%62% Elsevier34%23% Others57%15%

10. A bit of history In 1960 there were ~30 econ journals, all non- profit, all cheap.In 1960 there were ~30 econ journals, all non- profit, all cheap. In 1980,~120 econ journals, half for-profit, half non-profit.In 1980,~120 econ journals, half for-profit, half non-profit. In 2000,~300 econ journals, 2/3 for-profit.In 2000,~300 econ journals, 2/3 for-profit. Between 1985 and 2000, top ten for-profits almost doubled their pages, top ten non- profits increased ~20%.Between 1985 and 2000, top ten for-profits almost doubled their pages, top ten non- profits increased ~20%.

11. Entrepreneurship In the 1970’s the economics profession was growing rapidly and society journals were not growing as fast.In the 1970’s the economics profession was growing rapidly and society journals were not growing as fast. Specialized field journals were not common.Specialized field journals were not common. North-Holland (and other companies now merged into Elsevier) started about 30 new journals.North-Holland (and other companies now merged into Elsevier) started about 30 new journals. About 12 of these could now be called leading field journals.About 12 of these could now be called leading field journals.

12. Rewards to innovation In 1985, the new commercial journals cost about 3 times as much per page as their non- profit counterparts.In 1985, the new commercial journals cost about 3 times as much per page as their non- profit counterparts. Now about 6 times as much and increasing by 6.5% per year.Now about 6 times as much and increasing by 6.5% per year. Elsevier reports 33% profits on sales in science and health division.Elsevier reports 33% profits on sales in science and health division.

13. Why didn’t economics societies start more journals and add more pages? Confidence that private sector would do as well as non-profit.Confidence that private sector would do as well as non-profit. Elitist views of old-guard leadership.Elitist views of old-guard leadership.

14. Pages published by U.S. Societies Discipline Society members Pages published Microbiology42,00053,000 Physics-APS40,00096,600 Math-AMS30,00012,000 Optics-OSA13,00019,000 Econ-AEA18,8004,300 Entomology6,5004,100 Polit. Science14,0002,000

15. Pricing of Electronic Journals Electronic distribution allows new pricing methods not available with paper.Electronic distribution allows new pricing methods not available with paper. –University-wide site licenses –Price discrimination by size of university –Bundling of Journals with all-or-nothing pricing –Consortium pricing

16. What is left for libraries to do? With paper journals, libraries had an obvious role.With paper journals, libraries had an obvious role. –Location for shared access With electronic journals, library serves no “physical” purpose.With electronic journals, library serves no “physical” purpose. Only a “fiscal” role: toll collector and gatekeeper for site licenses.Only a “fiscal” role: toll collector and gatekeeper for site licenses. Who benefits from this?Who benefits from this?

17. Who gains? An Example There are 3 types of scientists.There are 3 types of scientists. There are 100 universities. Each has 1 scientist of each type.There are 100 universities. Each has 1 scientist of each type. Willingness to pay for an electronic subscription: Willingness to pay for an electronic subscription: –Type A: $300 –Type B: $200 –Type C: $100

18. Costs and Publisher Types Electronic Journal has production cost of $32000 per year.Electronic Journal has production cost of $32000 per year. Marginal costs for an extra subscriber are 0.Marginal costs for an extra subscriber are 0. Consider two types of publisher: Consider two types of publisher: –Profit-maximizer –Non-profit subscription maximizer

19. Profit-maximizing publisher: No site licenses Since m.c. is zero, publisher wants to maximize revenue.Since m.c. is zero, publisher wants to maximize revenue. Revenue maximized at price of $200 with 200 subscriptions.Revenue maximized at price of $200 with 200 subscriptions. Profits are $40,000-32,000=$8,000.Profits are $40,000-32,000=$8,000. Type A’s get consumers’ surplus of $(300-200)=$100 each.Type A’s get consumers’ surplus of $(300-200)=$100 each. Type B’s and C’s get zero surplus.Type B’s and C’s get zero surplus.

20. Profit-maximizing publisher and site licenses Total willingness to pay at each university is $300+200+100=$600.Total willingness to pay at each university is $300+200+100=$600. Publisher can charge about $600 and sell to all universities. Publisher can charge about $600 and sell to all universities. Profits are $60,000-32,000=$28,000.Profits are $60,000-32,000=$28,000. All scientists have access.All scientists have access. There is no zero surplus for any scientist.There is no zero surplus for any scientist.

21. What happened? University site licenses allow publisher to make greater profits than it would with individual subscriptions.University site licenses allow publisher to make greater profits than it would with individual subscriptions. Although site licenses allow everybody access to the journal, nobody is better off and Type A’s are worse off than with individual subscriptions.Although site licenses allow everybody access to the journal, nobody is better off and Type A’s are worse off than with individual subscriptions.

22. First Moral of the Story We are protected from worst effects of monopoly by fact that monopolist doesn’t know who has high and who has low willingness to pay.We are protected from worst effects of monopoly by fact that monopolist doesn’t know who has high and who has low willingness to pay. Site licenses aggregate consumers and reduce the variance of demand.Site licenses aggregate consumers and reduce the variance of demand. This increases monopoly profit and reduces consumers’ surplus.This increases monopoly profit and reduces consumers’ surplus. Similar effects come from bundling across commodities.Similar effects come from bundling across commodities.

23. Non-profit publisher: No Site Licenses Publisher must recover costs and sell as many units as possible.Publisher must recover costs and sell as many units as possible. –Costs are $32,000. Best publisher can do is price at $160 and sell to 200 A’s and B’s.Best publisher can do is price at $160 and sell to 200 A’s and B’s. –For C’s to buy, price needs to be $100. Then revenue would be only $100x300=$30,000.

24. Non-profit publisher: No Site Licenses (cont’d) At price $160, consumers’ surplus:At price $160, consumers’ surplus: –Type A’s $300-160=$140. –Type B’s $200-160=$40. –Type C’s do not buy and get $0. Total consumers’ surplus is $140x100+$40x100=$18,000.Total consumers’ surplus is $140x100+$40x100=$18,000.

25. Non-profit publisher: with Site Licenses Publisher can cover costs at price $320.Publisher can cover costs at price $320. All 100 universities subscribe. Worth $600 to each university.All 100 universities subscribe. Worth $600 to each university. All 300 scientists have access.All 300 scientists have access. Consumers’ surplus at each university is $600-320=$280.Consumers’ surplus at each university is $600-320=$280. Total consumers’ surplus is $28,000.Total consumers’ surplus is $28,000. This exceeds c.s. with no site licenses.This exceeds c.s. with no site licenses.

26. A Second Moral With non-profit publishers, site licenses improve efficiency: allow access to all.With non-profit publishers, site licenses improve efficiency: allow access to all. Libraries have a useful role to play as revenue collectors that cover costs without shutting out users.Libraries have a useful role to play as revenue collectors that cover costs without shutting out users. Remember that when the cost of allowing access to another user is zero, it is wasteful not to allow access to all.Remember that when the cost of allowing access to another user is zero, it is wasteful not to allow access to all.

27. Price Discrimination Paper journals cost same to all institutions.Paper journals cost same to all institutions. With electronic access, commercial publishers and many societies price discriminate by “size”.With electronic access, commercial publishers and many societies price discriminate by “size”. Elsevier negotiates separate contracts with each big university---Offer price is a multiple of previous expenditures on paper.Elsevier negotiates separate contracts with each big university---Offer price is a multiple of previous expenditures on paper. Contract is “secret”.Contract is “secret”.

28. A Publisher’s View “So, we should have models where we make a deal with the university, the consortia or the whole country, where for this amount we will allow all your people to use our material, unlimited… And, basically the price then depends on a rough estimate of how useful is that product for you; and we can adjust it over time. It is a principle, which, in my view, is not immoral.” From a speech by Derk Haank, CEO, Elsevier Science

29. The Big Deal Elsevier offers an all-or-nothing contract.Elsevier offers an all-or-nothing contract. Electronic site licenses to every journal published by Elsevier for a lump sum price.Electronic site licenses to every journal published by Elsevier for a lump sum price. About $10 million for UC system.About $10 million for UC system.

30. A Librarian’s View “In the Big Deal, libraries agree to buy electronic access to all of a commercial publisher's journals for a price based on current payments to that publisher, plus some increment. Academic library directors should not sign on to the Big Deal or any comprehensive licensing agreements with commercial publishers… You read that right. Don't buy the Big Deal…the Big Deal serves only the Big Publishers. “ Deal serves only the Big Publishers. “ Ken Frazier, head librarian, University of Wisconsin.

31. Bundling and Entry Deterrence Elsevier’s bundling policy deters potential entrants.Elsevier’s bundling policy deters potential entrants. Elsevier prices rise about 7% per year. Library budgets grow less rapidly.Elsevier prices rise about 7% per year. Library budgets grow less rapidly. This leaves no room in budget for new cheap journals unless library drops entire Elsevier collection.This leaves no room in budget for new cheap journals unless library drops entire Elsevier collection.

32. Takers and Leavers Harvard, Cornell, and the Research Triangle universities have rejected the Big Deal.Harvard, Cornell, and the Research Triangle universities have rejected the Big Deal. So have Wisconsin, Minnesota, Maryland, MIT.So have Wisconsin, Minnesota, Maryland, MIT. What about secrecy of contract terms?What about secrecy of contract terms? If terms are secret, universities should be able to bargain for a share of the surplus.If terms are secret, universities should be able to bargain for a share of the surplus. The UC negotiated hard and was prepared to walk. They got a lower price than they were paying in their previous 5 year contract—Terms are not secret.The UC negotiated hard and was prepared to walk. They got a lower price than they were paying in their previous 5 year contract—Terms are not secret.

33. Benefits of Price Discrimination and Bundling Price discrimination allows more access for small colleges and poor countries.Price discrimination allows more access for small colleges and poor countries. Bundling allows big universities to get everything a publisher produces.Bundling allows big universities to get everything a publisher produces. Since cost of access for an extra subscriber is nearly zero, this raises efficiency.Since cost of access for an extra subscriber is nearly zero, this raises efficiency.

34. Benefits for Whom? Price discrimination allows publishers to raise price to big universities—releases the restraint previously imposed by threat of losing subscriptions at midsize universities.Price discrimination allows publishers to raise price to big universities—releases the restraint previously imposed by threat of losing subscriptions at midsize universities. Publishers can charge close to total willingness to pay of users at universities, leaving no net benefit to subscribers.Publishers can charge close to total willingness to pay of users at universities, leaving no net benefit to subscribers. This is worse for the academic community than the outcome if libraries refused to deal buy site licenses at monopoly prices.This is worse for the academic community than the outcome if libraries refused to deal buy site licenses at monopoly prices.

35. Social cost of overpriced journals? Wealth transfer from universities to executives and stockholders.Wealth transfer from universities to executives and stockholders. – UC $20 million journals budget. Half goes to Elsevier, who provide ¼ of the usage. –Elsevier Science & Medical $2 billion in sales (overpriced by factor of 5?). Excess burden from reduced access.Excess burden from reduced access. –Typical journal costs 5 times as much, has half as many subscriptions. Rent dissipationRent dissipation –Huge lobbying staffs, executive bonuses

36. Case Study in Rent-Seeking? Elsevier claims profits of 33% of revenue.Elsevier claims profits of 33% of revenue. Optical Society of America admits to profits of 50% of revenue.Optical Society of America admits to profits of 50% of revenue. OSA price per page is 1/3 to 1/2 that of Elsevier journals in same field.OSA price per page is 1/3 to 1/2 that of Elsevier journals in same field. If Elsevier’s cost per page were same as OSA’s, they would be making profits of between 3/4 and 5/6 of revenue.If Elsevier’s cost per page were same as OSA’s, they would be making profits of between 3/4 and 5/6 of revenue. Where did these profits go?Where did these profits go?

37. Enough for now.

38. References Free Labor for Costly Journals, by Ted Bergstrom— JEP, Fall 2001. Comments on above article JEP Fall 2002. Benefits and Costs of Site Licenses to Academic Journals, by Carl Bergstrom and Ted Bergstrom Proceedings of National Academy of Science, Jan 20, 2004. –The Librarian’s Dilemma, by Kenneth Frazier, from D-Lib Magazine –Is Electronic Publishing Being Used in the Best Interest of Science: The Publisher's view Speech by Derk Haank.

39. What should scholars do? Refuse to referee for overpriced journals.Refuse to referee for overpriced journals. Encourage cheap journals.Encourage cheap journals. –Referee for them. –Cite them. –Publish in them. Encourage professional societies to expand their journals and start new ones.Encourage professional societies to expand their journals and start new ones. Keep copyright on your own work and keep your papers on the web.Keep copyright on your own work and keep your papers on the web.

40. What should libraries do? Pay attention to prices per page and per cite when deciding what to subscribe to.Pay attention to prices per page and per cite when deciding what to subscribe to. Encourage departments to trade overpriced journals for cheaper new ones.Encourage departments to trade overpriced journals for cheaper new ones. Encourage or start new electronic journals.Encourage or start new electronic journals. Resist the Big Deal for overpriced journals. If you can’t resist, bargain hard and be “ready to walk”.Resist the Big Deal for overpriced journals. If you can’t resist, bargain hard and be “ready to walk”.

41. Favorable signs Journal of European Econ AssocJournal of European Econ Assoc Economic BulletinEconomic Bulletin Journal of Public Economic TheoryJournal of Public Economic Theory ELSSS Review of Economic TheoryELSSS Review of Economic Theory BE PressBE Press Review Economic Studies plans to increase pages by 50%.Review Economic Studies plans to increase pages by 50%. AER increased by ~25% in 2002AER increased by ~25% in 2002