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    III. Digital Publishing Economics III. Digital Publishing Economics > 11. A Portfolio Approach to Journal Pricing

    11. A Portfolio Approach to Journal Pricing[†]

    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.

    11.2 Journal Demand

    From the perspective of a journal user, it might seem that demand for each unique journal title should be treated separately. For example, articles in Brain Research are distinct from and cannot easily substitute for articles in the New England Journal of Medicine, much less those in the American Economic Review. If demand for each unique title is independent, then the publishers of individual titles have the capacity to obtain monopoly returns. Mergers won't matter.

    The notion that the demands for individual titles are unrelated is incorrect because it misidentifies the purchaser. Libraries, not readers, buy most of the subscriptions, especially for expensive STM journals. Thus it is the demands by libraries for different titles that determine whether mergers will create additional market power. Discussions with dozens of librarians revealed the following: their purchase of academic journals is generally based on two factors: annual subscription price and expected usage. To assemble and maintain their collections, most libraries appear to construct a cost per use ratio for each title.[5] Given a budget for a relevant academic field, e.g., biomedicine, they then proceed to rank journals from lowest to highest in that field according to this ratio, and identify a cutoff above which titles are not subscribed.

    From year to year, as budgets and titles' usage change, collections are adjusted accordingly.[6] Over the past decade or so the general trend is for increases in library budgets to lag journal price inflation; a consequence is that many 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.

    The most interesting aspect of library demand for journals is that individual titles within a given field are considered simultaneously. That is, the content may be unique, but on a cost per use basis different titles are substitutes. Titles compete with each other for budget dollars across an entire field of users served by the library, rather than demand for each title being independent as the user perspective suggests. Demand by libraries, the actual purchasers of subscriptions, is for a portfolio of titles drawn from a rather broad set.

    11.3 For-Profit Journal Pricing

    Given this demand structure, how do for-profit publishers price their journals?[7] Commercial journal publishers, like firms in any industry, will take into account the structure of demand and the likely strategies of competitors when setting prices. As described earlier, libraries — which constitute the bulk of demand for STM journals — attempt to purchase the most usage given their serials budgets.

    To model how prices are set in this demand environment I assume that there are two types of library budgets, small and large.[8] I assume that each journal title is sold by a separate publisher. No price discrimination is allowed, i.e. annual subscriptions are sold for a unique price. Journal production includes two components: fixed, first copy costs, and a marginal cost. I assume the latter equals zero.

    I consider a two-stage game. In the first period, each of the firms consider whether to target (through choice of content) all libraries or just those with large budgets.[9] Once these sunk investments have been made, each firm takes into account the pricing strategies of firms that have made a similar marketing choice.

    Given these and some additional assumptions, we can show that firms owning high-use titles will target all libraries, and that the remaining firms will focus on the large-budget customers (an ordered equilibrium). The intuition for the ordered equilibrium is that differences in journal use offer a competitive (dis) advantage to (lower-) higher-use titles. All else equal, libraries will purchase higher-use titles. And if we assume that there is a sufficient number of small-budget libraries, firms owning the high-use titles will find it profit maximizing to sell to all libraries, while the remaining firms sell only to the large-budget customers. Although the latter could set a price low enough to attract large- and small-budget customers, it is not optimal for them to do so.

    Furthermore, journal pricing for each target population is similar: owners of high-use titles charge higher prices. On the other hand, journal prices decrease as the aggregate usage of competing titles increases. The explanation for the first result is straightforward: since libraries rank titles according to cost per use, firms that own high-use titles have an incentive to set prices that exceed those of lower-use titles. Aggregate use matters since budgets are finite in size, i.e. as total usage increases, the competition for a fixed number of budget dollars intensifies, forcing a title (whose usage is fixed) to lower its price.

    How do mergers affect outcomes in this simple model? There are a number of potential scenarios: mergers within budget classes, those across budget classes, and some combination of these first two cases. Consider the case of a within-class merger involving two high-use titles. What pricing strategy does the merged firm adopt? As we noted earlier, a journal's profitability decreases in aggregate class usage. This suggests that the merged firm might benefit from raising the price of one of its titles enough to cause the small-budget libraries to drop it and replace it with a lower-use title. This "jumping" between budget classes lowers the aggregate usage of titles sold to all libraries, and thus enhances the profitability of the merged firm's remaining general circulation title. The profitability of the "dropped" title may go up or down, depending on the model's parameters.[10] The sum of these two components will determine the post-merger pricing strategy. If the net effect is positive, then the merger is harmful: the average quality of library collections decreases.

    11.4 Testing the Portfolio Theory

    The Institute for Scientific Information (ISI) tracks citations in peer-reviewed titles for over 8,000 STM journals in various fields. Not surprisingly, the number of publishers, both commercial and non-profit, is large as well. With respect to biomedical journals, ISI tracks titles published by at least 70 companies. Over the past decade a flurry of merger activity has been observed in the STM publishing market, particularly in the past two years. Since the latter half of 1997 alone, at least six major commercial publishers have been purchased by competitors. In addition, numerous small-scale transactions involving one or two journal titles occur every year.

    Although these recent natural experiments will provide a rich empirical opportunity in the near future (once several years of post-merger data are available), two mergers that occurred in the early 1990s should shed some light on the likely impact of this ongoing merger wave. In 1991, Reed-Elsevier purchased Pergamon and its large portfolio of STM titles, including some 57 ISI-ranked biomedical journals. At the time, Elsevier's biomedical portfolio numbered 190 rankded titles. During the same period, Wolters-Kluwer added Lippincott's 15 ISI-ranked biomedical titles to its collection of 75 ranked biomed journals. Since that time both companies's portfolios have grown further. In 1998, according to ISI data, Elsevier's portfolio stood at 262 ranked titles; Kluwer controlled 112 ranked journals.

    Empirical Models

    Previous empirical studies of journal pricing have not attempted to assess the extent of market power in the academic publishing market. Chressanthis and Chressanthis (1994) specified a reduced form hedonic model to study the determinants of pricing for economics journals. Their results suggest that prices are related to journal characteristics (e.g., as journal quality and size increase, so does price). Lieberman et al. (1992) estimated a supply and demand system using data for 225 ISI-ranked science journals. They find that supply is downward-sloping, consistent with the notion that publishing is characterized by scale economies at the individual title level. Based on this evidence they indirectly argue that entry by new titles has lowered circulation for existing journals, forcing the latter to raise prices to cover fixed costs. However, their model is unable to explain a significant portion of the observed price increases.

    Results for two empirical models are reported here. First, to test whether libraries' acquisition strategies reflect a ranking of journals according to cost/use values, I estimated an exponential cumulative distribution function (cdf).[11] The expectation is that cost per use and journal demand are inversely related. Confirmation of this hypothesis provides support for the portfolio approach to demand.

    Second, I estimated a structural two-equation model of supply and demand that measures firm-specific demand elasticities and explicitly accounts for the possibility of increased market power due to past mergers. Recall that inelastic demand is a necessary condition for the exercise of market power by publishers. Evidence of merger-related price increases is consistent with a portfolio market definition as well as the type of strategic behavior implied by the pricing model.

    Data

    For the period 1988-98, the U.S. Department of Justice collected publisher and price data for some 3000 journals, and holdings information from various libraries. I supplement these data with additional information extracted from the ISI's Journal Performance Indicators database (JPIOD). This database allows me to calculate annual citation rates for individual journals;[12] JPIOD also includes the number of papers published annually by each journal during the sample period.

    My empirical analysis is focused on a subset of these journals, namely, biomedical titles. The reasons for this choice are several. First, based on my discussions with various librarians, biomedical libraries are most likely to evaluate their purchases using the portfolio approach described earlier; furthermore, these libraries typically make no distinctions among various biomedical disciplines, permitting us to consider all biomedical titles as part of a single, large portfolio.[13] Finally, practical considerations, including the fact that biomedical holdings data are reported in a relatively standard fashion, supported an initial focus on this subset of titles.[14]

    During the sample period, almost two thousand ISI-ranked biomedical journals were published; complete time series were available for about 1800 of these titles. Of this latter group, almost 1400 were published by organizations with at least three ISI-ranked titles. For the analysis presented here, only journals sold by commercial firms with portfolios consisting of ten or more titles were considered (thus excluding journals distributed by small private publishers as well as the non-profits), or about 900 titles. Complete holdings data for 194 U.S. medical libraries were collected, representing in aggregate some 60,000 subscriptions to ISI-ranked journals; the libraries were randomly selected from the approximately 1500 Medical Library Association members. Libraries of all sizes are represented in the sample, some holding less than ten subscriptions, while others report collections exceeding 1,300 titles.

    The sample period, 1988-1998, is useful in at least two respects. First, it is sufficiently long to assess whether price increases continue in the journal market. Second, as described above, the period contains a number of natural experiments, i.e., publishing mergers, that enables me to identify the impact of mergers on pricing. Growth via merger should be distinguished from internal growth arising from the introduction of new titles. The latter may produce benefits (such as coverage of emerging fields of study) that helps to offset any intentional competitive harm. Harm associated with acquisitions, on the other hand, is less likely to be balanced by substantial benefits. Journals are simply reshuffled and, based on the public statements made by merging firms, the fixed cost savings seem to be small.[15]

    Descriptive Statistics

    Using the ISI-defined biomedical portfolio and the corresponding library holdings, I calculate the actual size of various commercial publishers' journal portfolios as well as the number of titles subscribed to by the libraries in the sample (see Table 11.1)

    Table 11.1: ISI-Ranked Medical Titles from Major Commercial Publishers, 1998.
    # of titles published # of subscribed ISI titles** %
    Blackwell 112 99 0.88
    Churchill-Livingstone 17 12 0.71
    Elsevier 262 225 0.86
    Harcourt 118 109 0.92
    Karger 45 39 0.87
    Mosby 27 25 0.93
    Plenum 22 20 0.91
    Springer 99 87 0.88
    Taylor 19 16 0.84
    Thomson 41 36 0.88
    Waverly 37 35 0.95
    Wiley 78 70 0.90
    Wolters-Kluwer 112 98 0.88
    Totals 989 871 0.88
    *Major firms are those with at least 10 ISI-ranked biomedical journals.
    **Subscribed data based on holdings for 194 medical libraries, during 1988-98 period.

    It is clear from this table that significant variation in portfolio size exists in the industry. Note that, based on the ISI numbers, the proposed 1998 merger between Reed/Elsevier, Wolters/Kluwer and Thomson would have affected about 42% of the biomedical titles owned by large commercial publishers.

    In Table 11.2, I present information on average price, citations, cost per use (price/citation), and number of papers published for each publisher in the years 1988 and 1998.

    Though prices, citations and paper counts generally increased during the period, the rate of change for prices was far more striking, resulting in higher cost/use numbers by the end of the period. For example, Elsevier's average journal price more than tripled during the period, while the corresponding citation and paper counts increased less than 25%.

    I provide average circulation rates for titles by publisher in 1988 and 1998 in Table 11.3.[16] Given that nominal prices increased dramatically over the sample period, the apparent inelasticity of demand indicated by these numbers is notable. It suggests that library serials budgets increased sufficiently during the period to absorb most of the price increases.

    Table 11.2: Selected Descriptive Stats, Avg. Values by Publisher
    1988 1998
    Price ($) Cites Cost per Use Papers Price ($) Cites Cost per Use Papers
    Blackwell 193 1575 0.40 123 508 2652 0.55 156
    Churchill-Livingstone 183 1726 0.26 103 721 2821 0.62 146
    Elsevier 482 3477 0.36 179 1548 4222 0.78 204
    Harcourt 209 3713 0.18 164 518 5294 0.34 171
    Karger 321 893 0.59 86 711 935 1.01 79
    Mosby 100 4071 0.07 248 241 5369 0.15 269
    Plenum 233 1352 0.25 92 759 1733 1.86 121
    Springer 481 2268 0.44 141 1057 2386 0.84 153
    Taylor 259 759 0.48 74 658 572 1.67 55
    Thomson 207 1210 0.46 92 733 2788 0.45 140
    Waverly 119 3171 0.10 188 277 5770 0.16 237
    Wiley 333 2205 0.38 128 1409 3338 1.10 145
    Wolters-Kluwer 176 2535 0.19 154 504 3519 0.52 153
    Unweighted Averages 253 2227 0.32 136 742 3184 0.77 156
    NOTE: Numbers based on journals that commenced publication prior to 1989 and had >= 100 cites in 1988 or 1998.
    Cost per use ($/cite) is the average value of price/cites where the latter quantity is first calculated for each individual journal before averaging.
    Table 11.3: Avg. Circulation for ISI-Ranked Journals by Publisher
    1988 (# subscribers) 1998 (# subscribers)
    Blackwell 31.72 30.16
    Churchill- Livingstone 34.00 31.20
    Elsevier 30.08 27.92
    Harcourt 50.51 53.23
    Karger 28.81 22.77
    Mosby 94.50 96.55
    Plenum 27.61 22.89
    Springer 21.60 19.03
    Taylor 11.67 12.08
    Thomson 13.50 19.42
    Waverly 61.67 63.41
    Wiley 24.41 23.51
    Wolters-Kluwer 41.62 42.28
    Unweighted Avgs 36.28 35.73
    NOTE: All numbers based on holdings for 194 medical libraries, during 1988-98 period. All titles commenced publication prior to 1989.
    Estimation Results

    The results for the exponential cdf model are consistent with expectations. They suggest that higher cost/use journals are purchased by fewer libraries. For example, in 1991, the marginal journal for a $100,000 budget library has a cost/use value equal to about 0.22 and, using the parameter estimates, is held by about 30 of the 194 libraries in the sample. The marginal journal for a $200,000 budget library has a cost/use value equal to about 0.59, and is held by some 17 libraries.

    Turning to the structural model results, the estimates imply that, after controlling for changes in citation rates and costs, publishers increased annual journal prices some 140% over the 1988-98 period (over the same period the Consumer Price Index increased by 37%). In addition, as a journal's citation rate improves relative to the average value in the sample, demand increases. Demand is apparently very inelastic. No firm-specific demand elasticity was more than 0.50 in absolute value. These small elasticities imply that publishers have an incentive to more than exhaust existing library serial budgets and any anticipated increases. This observation is consistent with numerous librarians' experiences and with what some publishers have privately acknowledged.[17] However, these 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 serials budgets, publishers preserve future sales by pricing less aggressively today. Under such circumstances, the estimated, firm-specific demand elasticities should lie somewhere between zero and one, in absolute terms.[18] Note that this story can also account for the estimated annual price increases.

    Did the two publishing mergers earlier in the decade enhance the participating firms' market power? With respect to the Reed-Elsevier/Pergamon transaction the answer seems clear. Post-merger (1992-1998), Elsevier journal prices were unchanged but the former Pergamon titles experienced a 27% increase. This asymmetry is observed in the Kluwer-Lippincott merger as well. Post-merger, the former Lippincott titles experienced a 30% price increase while the Kluwer prices were unchanged. However, in this case the Lippincott price increase is not solely a consequence of enhanced market power. The results suggest that demand for Lippincott titles became slightly more inelastic in the post-merger period, contributing at least partially to the observed 30% price increase.

    11.5 Policy Implications and Future Directions

    Market Failure?

    Efficient pricing is not sustainable in the declining average cost environment of academic publishing. This begs the question of how the performance of commercial publishers compares to a second-best break-even standard. Our analysis suggests that prices far exceed marginal costs, but do they exceed average costs? One way to assess this question is to examine the pricing of comparable non-profit titles; presumably non-profit publishers set prices closer to if not equal to average costs. If the latter prove to be cheaper, then scholars have a real alternative for disseminating scholarly information in a more efficient fashion.

    Though a comprehensive analysis of non-profit journals is beyond the scope of the present paper it is useful to report some initial qualitative results.[19] In Table 11.4, I calculate average prices and citation rates for both commercial and non-profit ISI-ranked biomedical journals.

    Table 11.4: 1998 Statistics for ISI-Ranked Biomedical Titles, By Date of Initial Publication
    1978-1987 1938-1947
    Non-Profit Commercial Non-Profit Commercial
    Variable N Mean N Mean N Mean N Mean
    PRICE($) 27 287 343 736 17 379 28 838
    CITES 27 10304 343 2159 17 8946 28 7913
    1968-1977 1928-1937
    Non-Profit Commercial Non-Profit Commercial
    Variable N Mean N Mean N Mean N Mean
    PRICE($) 26 306 221 919 4 139 19 591
    CITES 26 13907 221 2720 4 3547 19 3695
    1958-1967 1918-1927
    Non-Profit Commercial Non-Profit Commercial
    Variable N Mean N Mean N Mean N Mean
    PRICE($) 17 446 101 1316 9 294 22 483
    CITES 17 14163 101 5067 9 6402 22 2949
    1948-1957 Before 1918
    Non-Profit Commercial Non-Profit Commercial
    Variable N Mean N Mean N Mean N Mean
    PRICE($) 11 289 58 625 16 292 69 702
    CITES 11 13445 58 3774 16 12593 69 3365

    Titles are aggregated according to the decade of initial publication, going backward from 1987.[20] The discrepancy in average prices and citations for the two groups is striking. For example, if we compare titles that originated at similar points in time, we find that the average non-profit subscription price is between fifty to seventy-five percent less than the commercial rates for titles of similar vintage. At the same time average citation rates for the non-profit journals greatly exceed those of the commercial publishers' in most instances, sometimes by a factor of five. Among commercial journals, prices and citations are positively correlated. Thus, the substantially lower prices of comparable non-profit titles suggests that commercial publishers are setting prices well in excess of average costs.[21] Despite this apparent superiority,[22] the population of ranked non-profit titles is far smaller than that of the commercial journals, 148 versus 1032. Has the lucrative journals market induced too much entry or have the non-profits been too slow to exploit emerging research areas? Although this question deserves further attention it seems clear that the two distinct publishing models exist, each successful in their own way.

    Antitrust Paradigms

    When the proposed 1998 merger between Reed Elsevier and Wolters Kluwer collapsed, opposition from antitrust authorities in Europe and the U.S. was cited as a primary cause. Although no formal complaints were filed by agencies on either side of the Atlantic, regulators had sent a variety of signals indicating their serious concerns. Negotiations with the European Union had progressed the farthest and it appeared that the proposed deal would proceed only if the parties agreed to significant divestitures. It was widely reported at the time that the EU's preferred set of divestitures upset the financial logic of the merger and resulted in its demise.

    What is interesting here is that the EU's main focus was not on academic journals, but rather legal publishing (in Europe), and that its theory of anti-competitive harm was based on a user-based approach to publishing mergers: excessive overlap in content (and therefore similar to the DOJ's approach to the 1996 merger of legal publishers Thomson and West). The U.S. focus was far different, in part because European legal publishing was not germane and because the model of harm relied upon was novel.

    Though one can only speculate on how a U.S. antitrust case might have proceeded, it is clear that the combined Reed-Elsevier/Wolters-Kluwer entity would have controlled large journal portfolios in a number of broad fields, including biomedicine. Assuming that these broad fields constituted antitrust markets, some of these portfolios would have crossed the U.S. government's concentration threshold (based on the Antitrust Guidelines) with shares in excess of 30-35%. Based on the results discussed here, such a merger may have resulted in substantial price increases over time. If the U.S. had filed a complaint and had been successful with this market definition, an important legal precedent would have been set, one that would have made it easier to employ a portfolio theory in mergers involving combined market shares less than the threshold, e.g. the subsequent merger of Wolters-Kluwer and Waverly, and/or a large firm buying a relatively small portfolio of journals. The recent reluctance of the Antitrust Division to oppose several mergers in the publishing industry can be partially attributed to insufficient market shares. However, since many future deals are likely to be relatively small in scope, opposition to journal mergers will need to adopt novel approaches in the definition of both markets and concentration thresholds.[23]

    A Digital Future

    Scholarly journals render at least three services: research communication, archiving, and quality certification. Digital technology offers the potential to transform the first two by providing instantaneous access to current and past research. With modest investments in computer hardware and software, global scientific communities can dramatically lower the costs of exchanging information.[24] Though these innovations might seem to threaten the future of the traditional journal, the latter's role as a quality filter may be sufficient to preserve its existence, albeit in modified form. Although it is possible to conceive of new mechanisms for evaluating journal quality, e.g. measuring the number of hits generated by a journal website, it seems likely that the existing expert-based system for assessing new research will survive.[25]

    Commercial publishers have begun to exploit these new opportunities by bundling their individual journal titles and providing libraries with electronic access to article databases.[26] In doing so, the economics of commercial publishing may change in (subtle) ways. Portfolio size will still matter, but the number of journals may matter less than the total article population. Digital technology will make it feasible to control, monitor and price access in new and myriad ways, suggesting that sophisticated price discrimination schemes could be observed someday. The prospect of bundling and price discrimination, of course, will inevitably raises antitrust issues. A few, large portfolios might reduce transactions costs for libraries yet have the potential for influencing new entry as well as pricing.[27]

    11.6 Conclusions

    This chapter offers a new framework for understanding the interaction between libraries and commercial publishers. A portfolio approach to journal demand is proposed that is consistent with the observed pattern of journal purchases. This approach to demand can be used to explain for-profit publisher pricing as well as the incentives for mergers in this market. Estimation of a structural model of supply and demand reveals 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. Together these theoretical and empirical results raise a number of policy questions regarding (1) the performance of commercial publishers, (2) the efficacy of current antitrust paradigms and (3) the possibility that electronic distribution may mitigate existing problems in the market for scholarly journals.

    Notes

    I would like to thank many of my former colleagues at the Department of Justice, including Craig Conrath, Renata Hesse, Aaron Hoag, Russ Pittman, David Reitman, Dan Rubinfeld, and Greg Werden, as well as Jonathan Baker, Cory Capps, George Deltas, Luke Froeb, Jeffrey MacKie-Mason, Roger Noll, Dan O'Brien, Richard Quandt, Lars-Hendrik Röller, Steve Salop and Margaret Slad; seminar participants at the Federal Trade Commission, Georgia Tech, SUNY Stony Brook, and Wissenschaft Zentrum Berlin; and participants at the meetings of the American Economic Association, the European Association of Research in Industrial Economics, the Southern Economics Association, and Western Economics Association. The Association of Research Libraries and its members, the National Library of Medicine, the Georgia Tech Library, and the Georgia Tech Foundation have provided invaluable assistance. Expert data support was provided by a large group of individuals, including Deena Bernstein, Claude Briggs, Pat Finn, Doug Heslep and Steve Stiglitz. Finally, I would like to thank the dozens of librarians and publishers who have provided me with important insights.return to textreturn to text

    1. Increasingly, journals are available in both print and electronic versions, and for some new titles only an electronic format is available. The advent of electronic journals is very recent, however, and is unlikely to have influenced behavior during the sample period analyzed in this paper. See Tenopir and King (2000), chapter 15, for a discussion of these changes.return to text

    2. See Tenopir and King (2000), Chapter 13, for a review of this literature. An alternative explanation for journal price inflation has been offered by Lieberman, Noll, and Steinmuller in their 1992 working paper, The Sources of Scientific Journal Price Increase, Center for Economic Policy Research, Stanford University. They argue that entry by new titles over time has lowered circulation for existing journals, forcing the latter to raise prices to cover fixed costs. They estimate a supply and demand system for a set of journals and find that supply is downward sloping, consistent with this notion that individual titles exhibit scale economies. However, after controlling for this and other factors there remains a significant inflation residual that is unexplained by the model.return to text

    3. See my working paper, Academic Journal Pricing and Market Power: A Portfolio Approach, November, 2000 for a complete exposition.return to text

    4. This data collection effort began in 1998 while I was still employed by the U.S. Justice Department's Antitrust Division. At that time, the Division was reviewing a number of proposed mergers between commercial publishers of STM journals, including (1) Reed-Elsevier, Wolters-Kluwer and Thomson; (2) Wolters-Kluwer and Waverly; and (3) Harcourt and Mosby.return to text

    5. This claim is generally true for medical libraries; though other types of academic libraries may not be as precise in their processes, they appear to behave in similar fashion. In any case, this is an empirical question that is tested using the holdings data.return to text

    6. Of course, this begs the question of how libraries measure usage for titles to which they do not currently subscribe. Presumably, evidence from interlibrary loans and citation data provide the basis for these measurements.return to text

    7. Commercial and non-profit journal publishers have different objectives. The latter are intent generally on disseminating knowledge, whereas the former are interested primarily in profits. I assume that the non-profit firms set prices to cover average costs and I ignore them in the analysis that follows.return to text

    8. I analyze this case, and also the case in which each library budget is unique (McCabe, 2000).return to text

    9. The choice of content will influence a journal's use in a library. So, for example, a general journal is likely to be used far more at a particular institution than a narrower, niche-oriented title.return to text

    10. Of course, a journal jump between budget classes influences the prices charged by other firms. In simulations of the merger scenario described above, the non-jumping journals experience modest price changes compared to the jump journals. The merged firm's high-use, jump journal exhibits large price increases; the non-merger, low-use, jump journal shows relatively large price decreases. This pattern persists as one increases the number of titles and budget classes. However, if the journal populations of particular budget classes are unchanged after a merger then the prices for those titles remain unchanged. Since it is likely that any observed merger will involve titles in different budget classes, it is possible that the merging firms' titles will jump in both directions, i.e. higher-use titles will jump "up" by increasing prices while lower-use titles will jump "down" by lowering their prices.return to text

    11. For those not familiar with the general concept of a cdf, consult any introductory probability textbook. Note that by specifying an exponential cdf I am assuming that cost per use and journal demand are inversely related. If this particular model "fits" the data, then there is support for the hypothesis.return to text

    12. The University of Wisconsin Libraries "Cost Per Use Statistics", previously available from http://www.wisc.edu/wendt/journals/costben.html (archived at http://wendt.library.wisc.edu/archive/journals/costben.html.return to text

    13. Note that confirmation of my portfolio hypothesis in the current context does not necessarily generalize to other acquisition environments in which cost per use is relied upon less or is more difficult to measure.return to text

    14. Unlike most fields, biomedical scholars enjoy the use of the National Library of Medicine's central database that contains information on several thousand medical collections. Although this data source offered substantial benefits with respect to the initial phase of data collection, the data were not ideally organized for analysis. One of the major difficulties was that many of the data — some 25% — were too idiosyncratic for data processing; as a consequence several hundred additional hours of manual effort were required to transform the data into usable form.return to text

    15. Furthermore, if publishing mergers do result in cost savings, economic theory implies that post-merger prices should decline, everything else equal.return to text

    16. These numbers exclude titles that commenced publication after 1988. Including these newer titles would tend to lower the reported 1988 figures relative to the later 1998 numbers.return to text

    17. According to one former publishing executive, "If we didn't raise our prices each year, our competitors would grab the surplus dollars available from our customers."return to text

    18. In a single period game, each publisher would attempt to forecast the size of journal budgets, and set prices so that its average absolute demand elasticity was close to one. However, in a multi-period context, with budgets increasing each period, a firm's pricing strategy changes. It is possible to show that firms will set prices so that absolute elasticities in each period lie between zero and one. The intuition is that lowering the price (and thus the absolute elasticity) in each period preserves future sales and, combined with budget growth, raises total profits.return to text

    19. The results described here are based on data for journals first published no later than 1988 and sold by publishers with at least three ISI-ranked titles.return to text

    20. Pre-1918 titles are considered together with the oldest titles dating from the 1820s. For younger titles, the average prices for the two groups are similar but the non-profit citation rates are about five times larger.return to text

    21. Since it is possible that smaller subscription bases may account for the commercial titles' higher prices, all else equal, a smaller subscription base raises average costs. I also calculated the average number of subscriptions for both types of publishers by decade. For some of these decade groupings, i.e. 1928-1937 and 1938-1947, the commercial titles actually exhibited larger subscription bases. In the other instances, commercial subscription bases were smaller than those for non-profit titles, but not enough, it would seem, to account for the observed price discrepancies. Except for the pre-1918 titles, commercial subscription bases were only 20 to 40% smaller than for the corresponding non-profit titles. In each of these cases, calculated revenues for commercial titles exceeded those of the non-profit titles. The average revenue level for commercial titles exceeded the corresponding non-profit values by 145%.return to text

    22. Some of this citation gap may be due to the more general subject matter of many non-profit titles, compared to the niche strategy of some commercial journals.return to text

    23. To avoid future antitrust scrutiny the large firms of the journal publishing world are likely to grow by adding relatively small numbers of journals at frequent intervals. If pursued diligently, this stealth strategy can be just as successful as any blockbuster merger.return to text

    24. The Los Alamos physics server is perhaps the best example to date of this digital future (http://xxx.lanl.gov/). This website, funded by US government sources, has become the standard method of exchange for physics working papers.return to text

    25. One important justification for this claim is that professional advancement within (academic) institutions relies on and supports the existing approach to quality assessment.return to text

    26. See the chapters by Gazzale and MacKie-Mason, and Hunter. For example, Elsevier's database product, ScienceDirect, www.sciencedirect.com, contains articles from its more than 1100 peer-reviewed journals in various disciplines. To gain access to the entire database or some customized subset, a library is required to maintain its Elsevier paper subscriptions. The access price is typically calculated as a percentage markup on the library's Elsevier "paper budget." Recently, Elsevier has begun to offer smaller bundles of titles that correspond to broad disciplinary markets, such as biomedicine.return to text

    27. For example, in the print context, cancellation of expensive journals has provided libraries with some modest ability to influence publisher pricing. If and when libraries begin to rely primarily on large, digital bundles for providing access to peer-reviewed research, the credibility of a threat to cancel an entire bundle will be far lower, reducing the effectiveness of this strategy. The impact of this change becomes particularly acute once a bundle grows beyond 50% of a specific market. It is easy to show that once this threshold is passed, perhaps due to a merger, that the profitability of the bundle is greatly enhanced.return to text