Economics and Usage of Digital Libraries: Byting the Bullet

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.

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.

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.

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

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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

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.

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."

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.

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.

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.

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%.

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.

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.

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.

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

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.

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.