Economics and Usage of Digital Libraries: Byting the Bullet

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)

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.

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.