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    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.