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    11.1 Introduction

    In recent years access to print journals has been threatened.[1] Beset by persistent journal price inflation (especially in the so-called STM fields, or science, technology and medicine) and stagnant budgets, many university libraries have been forced to re-allocate dollars from monographs to journals, to postpone the purchase of new journal titles, and in some cases, to cancel titles. As a consequence, libraries have often relied on interlibrary loans to satisfy faculty demands. This situation and its possible causes has been studied at great length in the library science literature. With few exceptions, a consensus has evolved which focuses on the growing importance of commercial publishers in the market for scholarly journals: Over the past decade or more, commercial firms have aggressively raised prices at a rate disproportionate to any increase in costs or quality. This appears to be especially true for the largest commercial firms.[2]

    The research discussed in this paper is the first to assess the merits of this consensus from an economic perspective.[3] Have changes in journal costs and quality accounted for most of the price inflation or has the exercise of market power by publishers played an important role? In addressing this question, I offer both theoretical and empirical support for the latter alternative. A model of journal pricing is proposed that reflects the underlying demand behavior of libraries. Although individual users are interested in just a handful of STM journals, libraries maximize the usage of broadly-defined collections, e.g. all biomedical journals, subject to a budget constraint. The result is demand for a portfolio of titles. In practice this means that libraries rank titles according to cost/use from lowest to highest and then select the largest set of low-ranked titles that they can afford. In other words, unlike most markets involving differentiated products, it is not appropriate to model demand as a discrete choice process. Rather, the typical library attempts to provide access to as many STM journals as possible through a combination of subscriptions and interlibrary exchanges.

    Given this portfolio demand, publisher pricing strategies are determined by the distribution of budgets and a title's relative quality. Since all journals in a particular demand portfolio compete for the same budget dollars, relative quality determines demand for individual titles (if prices are equal, higher quality journals experience greater demand.). In turn, the 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 the largest-budget institutions. Furthermore, the pricing model predicts that in some cases firms controlling larger portfolios of journals have an incentive to charge higher prices, all else equal. Thus, past publishing mergers may account for some of the observed price increases.

    To evaluate this and other conjectures, a unique data set was assembled that includes cost, US price, and quality of information for 900 biomedical titles as well as holdings information for these same journals at almost 194 biomedical libraries.[4] These data are used to estimate a structural model to identify the separate impacts of journal costs, quality, and publisher market power. The results indicate that the firm-level demand for journals is highly inelastic, that quality- and cost-adjusted price increases have been substantial over the past decade, and that past mergers have contributed to these price increases. The fact that firm-level journal demand is inelastic, e.g. demand for a firm's titles decreases less than 1% when its prices increase 1%, is a sufficient condition for the exercise of market power. But the econometric estimates suggest that firms are not profit-maximizing, at least not in a short-term sense. One possible explanation is that, in anticipation of future growth in library budgets, publishers preserve future sales by pricing less aggressively today. This story can also account for the estimated annual price increases. The third result is that merger-related price increases for the acquired firms' titles were substantial, about 25%. Yet US antitrust authorities expressed no concerns about the respective mergers.

    These results raise a number of policy questions: (1) Since STM journal content is a public good (funded in most cases by tax dollars), does the performance of commercial STM publishing constitute a market failure? If so, do better alternatives exist? (2) Do antitrust authorities need a new paradigm for academic publishing and other portfolio-type markets? (3) How will the growing transition to electronic distribution affect the status quo? I briefly address these questions at the conclusion of the paper.

    The chapter is organized as follows. I first discuss journal demand. Next, I describe the journal pricing model. I then discuss the empirical model, describe the data, and present the estimation results. Finally, I conclude by discussing the policy issues mentioned above.