Books cost too much! (so I wrote a blog post)

Academic textbooks are really expensive. The current version of Mankiw’s principles text is $186 in hardcover.  I’ll go out on a limb and conservatively guess that the marginal cost of producing another copy is no more than $25. Of course there are substantial fixed costs but…

Here’s what I think is going on.

Textbooks are a type of network good. The more people use a given text, the more others will also want to use it. So the market approaches winner take all with just a few books selling well and making profits. This is probably true of all kinds of books.

Weirdly, the books that don’t sell well (the losers) almost have to price high as they are trying to cover their fixed costs over a small sales volume.

The winners don’t have to price high to break even, but given that demand is high and relatively inelastic, why shouldn’t they? Indeed they do, and with gusto.

So the losers price high to try and stay in business and the winners price high because the network good nature of the market gives them a serious degree of market power. In a market like this, a loser cutting price is quite unlikely to receive much of an increase in market share

So how to fix the problem?

Doubly weird is the tried and true idea of “more competition” in form of a larger number of texts on the market probably isn’t really going to help as will just create more losers struggling to stay alive. Competition here is “for the market” rather than “in the market” to use the terms of Cowen and Tabarrok’s expensive text.

Another market solution is resale, which happens on a very large scale already. Amazingly, new text prices would likely be even higher without this form of competition, where old copies of the winning books compete against new ones. Naturally, publishers don’t like resale and respond by pumping out new editions on an inefficiently fast schedule. But resale definitely is a check on new text prices already. If we want them lower, it’s not a new tool to use. It’s also true that resale doesn’t only work to lower new prices. The fact that there is a resale market for a product likely would increase the demand and raise the price for that product. So, it’s complicated.

If increased competition in terms of more textbooks is unlikely to help, and resale has already done what it can do, then what?

Well, Facebook is a network good and it’s free to the end users, so maybe allow textbooks to contain paid ads? There’s a free market solution for you folks!

There’s another type of industry with high fixed costs and low marginal costs; natural monopolies like utility companies. We generally regulate them with the alleged aim of getting the outcome to be close to average cost pricing. Maybe the same should happen in the textbook market?

If we don’t like a regulatory response, then it’s going to take a big decline in demand to get prices down. There is some evidence that some schools, community colleges in particular are going to open source texts or even abandoning the use of textbooks at all. This kind of makes sense as their customers are the most price elastic ones.

Oh pity the poor publishers. If only they could price discriminate better!

So don’t worry, Mankiw’s days at the top are numbered (anybody remember Lotus 1-2-3?), but the new best seller probably won’t be any cheaper.